Quarterly Report (10-q)

Date : 05/16/2019 @ 10:14PM
Source : Edgar (US Regulatory)
Stock : American Resources Corporation (AREC)
Quote : 0.6649  0.0 (0.00%) @ 9:00AM

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2019

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File Number: 000-55456

 

American Resources Corporation

(Exact name of registrant as specified in its charter)

 

Florida

 

46-3914127

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

9002 Technology Lane

Fishers, IN 46038

(Address and Zip Code of principal executive offices)

 

Registrant’s telephone number, including area code: ( 317) 855-9926

 

Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of the “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller Reporting Company

x

Emerging growth company

x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common

AREC

NASDAQ Capital Market

 

As of May 15, 2019, the registrant had 23,316,197 shares of Class A common stock issued and outstanding.

 

 
 
 
 

 

AMERICAN RESOURCES CORPORATION

 

TABLE OF CONTENTS

 

 

PAGE

 

PART I. FINANCIAL INFORMATION

 

3

 

Item 1.

Consolidated Financial Statements

 

3

 

Consolidated Balance Sheets (Unaudited)

 

4

 

Consolidated Statements of Operation (Unaudited)

 

5

 

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Three Months ended March 31, 2019 and 2018 (unaudited)

6

 

Consolidated Statements of Cash Flows (Unaudited)

 

7

 

Notes to Unaudited Consolidated Financial Statements

 

8

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

28

 

Item 4.

Controls and Procedures

 

28

 

PART II. OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

29

 

Item 1A.

Risk Factors

 

29

 

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

 

29

 

Item 3.

Defaults upon Senior Securities

 

29

 

Item 4.

Mine Safety Disclosures

 

29

 

Item 5.

Other Information

 

29

 

Item 6.

Exhibits

 

30

 

SIGNATURES

 

32

 

 
2
 
 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

AMERICAN RESOURCES CORPORATION

 

CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

 

For the three months ended

March 31, 2019

 

 
3
 
Table of Contents

 

AMERICAN RESOURCES CORPORATION

CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

 

March 31,

2019

 

 

December 31,

2018

 

ASSETS

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash

 

$ 7

 

 

$ 2,293,107

 

Accounts Receivable

 

 

624,045

 

 

 

1,318,680

 

Inventory

 

 

738,054

 

 

 

163,800

 

Prepaid fees

 

 

483,000

 

 

 

147,826

 

Accounts Receivable - Other

 

 

292,608

 

 

 

319,548

 

Total Current Assets

 

 

2,137,714

 

 

 

4,262,961

 

 

 

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

 

 

 

Cash - restricted

 

 

471,640

 

 

 

411,692

 

Processing and rail facility

 

 

11,630,171

 

 

 

11,630,171

 

Underground equipment

 

 

9,438,673

 

 

 

8,717,229

 

Surface equipment

 

 

3,101,518

 

 

 

3,101,518

 

Mine development

 

 

40,307,068

 

 

 

14,907,068

 

Less Accumulated Depreciation

 

 

(8,044,966 )

 

 

(6,691,259 )

Land

 

 

2,407,193

 

 

 

907,193

 

Note Receivable

 

 

4,117,139

 

 

 

4,117,139

 

Total Other Assets

 

 

63,428,436

 

 

 

37,100,751

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$ 65,566,150

 

 

$ 41,363,712

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$ 6,248,566

 

 

$ 8,139,662

 

Accounts payable – related party

 

 

579,123

 

 

 

474,654

 

Accrued interest

 

 

1,312,562

 

 

 

1,118,736

 

Funds held for others

 

 

139,864

 

 

 

79,662

 

Due to affiliate

 

 

124,000

 

 

 

124,000

 

Current portion of long term-debt (net of unamortized discount of $- and $134,296)

 

 

14,934,884

 

 

 

14,169,139

 

Current portion of reclamation liability

 

 

2,327,169

 

 

 

2,327,169

 

Total Current Liabilities

 

 

25,666,168

 

 

 

26,433,022

 

 

 

 

 

 

 

 

 

 

OTHER LIABILITIES

 

 

 

 

 

 

 

 

Long-term portion of note payable (net of issuance costs of $425,820 and $428,699)

 

 

9,803,829

 

 

 

7,918,872

 

Reclamation liability

 

 

16,532,541

 

 

 

16,211,640

 

Total Other Liabilities

 

 

26,336,370

 

 

 

24,130,512

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

52,002,538

 

 

 

50,563,534

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

AREC - Class A Common stock: $.0001 par value; 230,000,000 shares authorized, 23,316,197 and 17,763,469 shares issued and outstanding

 

 

2,331

 

 

 

1,776

 

AREC - Series A Preferred stock: $.0001 par value; 5,000,000 shares authorized, 0 and 481,780 shares issued and outstanding

 

 

-

 

 

 

48

 

AREC - Series C Preferred stock: $.0001 par value; 20,000,000 shares authorized, 0 and 50,000 shares issued and outstanding

 

 

-

 

 

 

5

 

Additional paid-in capital

 

 

75,742,084

 

 

 

42,913,532

 

Accumulated deficit

 

 

(62,180,803

)

 

 

(52,115,183 )

Total Stockholders’ Equity (Deficit)

 

 

13,563,612

 

 

 

(9,199,822 )

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

$ 65,566,150

 

 

$ 41,363,712

 

 

The accompanying footnotes are integral to the unaudited consolidated financial statements

 

 
4
 
Table of Contents

 

AMERICAN RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

For the three months ended

 

 

 

March 31,

2019

 

 

March 31,

2018

 

 

 

 

 

 

 

 

Coal Sales

 

$ 6,994,276

 

 

$ 7,305,860

 

Processing Services Income

 

 

-

 

 

 

19,516

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

 

6,994,276

 

 

 

7,325,376

 

 

 

 

 

 

 

 

 

 

Cost of Coal Sales and Processing

 

 

(6,644,087 )

 

 

(5,473,428 )

Accretion Expense

 

 

(321,701

)

 

 

(341,581 )

Depreciation

 

 

(816,916 )

 

 

(615,389 )

Amortization of Mining Rights

 

 

(536,791 )

 

 

-

 

General and Administrative

 

 

(1,372,588

)

 

 

(476,589 )

Professional Fees

 

 

(4,333,896 )

 

 

(274,603 )

Production Taxes and Royalties

 

 

(1,259,586 )

 

 

(949,793 )

Development Costs

 

 

(1,600,117 )

 

 

(1,687,173 )

 

 

 

 

 

 

 

 

 

Total Operating expenses

 

 

(16,885,682

)

 

 

(9,818,556 )

 

 

 

 

 

 

 

 

 

Net Loss from Operations

 

 

(9,891,406

)

 

 

(2,493,180 )

 

 

 

 

 

 

 

 

 

Other Income and (expense)

 

 

 

 

 

 

 

 

Loss on payable settlement

 

 

(22,660 )

 

 

-

 

Other Income

 

 

266,425

 

 

 

128,514

 

Amortization of debt discount and debt issuance costs

 

 

(134,296 )

 

 

-

 

Interest Income

 

 

41,171

 

 

 

41,171

 

Interest expense

 

 

(324,854 )

 

 

(247,154 )

Total Other income (expense)

 

 

(174,214 )

 

 

(77,469 )

 

 

 

 

 

 

 

 

 

Net Loss

 

 

(10,065,620

)

 

 

(2,570,649 )

 

 

 

 

 

 

 

 

 

Less: Series B dividend requirement

 

 

-

 

 

 

(70,157 )

 

 

 

 

 

 

 

 

 

Less: Net income attributable to Non Controlling Interest

 

 

-

 

 

 

(128,514 )

 

 

 

 

 

 

 

 

 

Net loss attributable to American Resources Corp. Shareholders

 

$

(10,065,620

)

 

$ (2,769,320 )

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.48

)

 

$ (2.96 )

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding- basic and diluted

 

 

20,798,065

 

 

 

892,044

 

 

The accompanying footnotes are integral to the unaudited consolidated financial statements

 

 
5
 
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AMERICAN RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE PERIOD FROM JANAURY 1, 2019 THROUGH MARCH 31, 2019 AND JANAURY 1, 2018 THROUGH MARCH 31, 2018

UNAUDITED

 

Additional

Accumulated

Non

Common shares

Preferred Series A

Preferred Series B

Preferred Series C

Paid- In

Deficit

controlling

Shares

Par Value

Shares

Par Value

Shares

Par Value

Shares

Par Value

Capital

Accumulated

Interest

Total

Balance December 31, 2018

17,763,469

$ 1,776

481,780

$ 48

-

$ -

50,000

$ 5

$ 42,913,532

$ (52,115,183 )

$ -

$ (9,199,822 )

 

Issuance of common shares for cash, net

1,170,200

117

-

-

-

-

-

-

4,253,883

-

-

4,254,000

 

Issuance of common shares for services

159,000

16

-

-

-

-

-

-

1,672,184

-

-

1,672,200

 

Issuance of common shares for asset acquisition

2,000,000

200

-

-

-

-

-

-

24,399,800

-

-

24,400,000

 

Issuance of common shares for conversion of debt and accounts payable

4,417

-

-

-

-

-

-

-

49,161

-

-

49,161

 

Issuance of warrants to consultants

-

-

-

-

-

-

-

-

2,385,000

-

-

2,385,000

 

Stock option expense

-

-

-

-

-

-

-

-

68,693

-

-

68,693

 

Issuance of common Shares for warrant Exercise

599,427

60

-

-

-

-

-

-

(60 )

-

-

-

 

Conversion of Series A into common stock

1,605,934

161

(481,780 )

(48 )

-

-

-

-

(113 )

-

-

-

 

Conversion of Series C into common stock

13,750

1

-

-

-

-

(50,000 )

(5 )

4

-

-

-

 

Net loss

-

-

-

-

-

-

-

-

-

(10,065,620 )

-

(10,065,620 )

 

Balance March 31, 2019

23,316,197

$ 2,331

-

$ -

-

$ -

-

$ -

75,742,084

$ (62,180,803 )

-

$ 13,563,612

 

Balance, December 31, 2017

892,044

$ 89

4,817,792

$ 482

850,000

$ 850

-

$ -

$ 1,527,254

$ (39,091,757 )

$ 397,856

(37,165,226 )

 

Series B preferred dividend requirement

-

-

-

-

-

-

-

-

-

(70,157 )

-

(70,157 )

 

Net loss

-

-

-

-

-

-

-

-

-

(2,699,163 )

128,514

(2,570,649 )

 

Balance, March 31, 2018

892,044

$ 89

4,817,792

$ 482

850,000

$ 850

-

$ -

1,527,254

$(41,861,077)

526,370

$(39,806,032)

 

The accompanying footnotes are integral to the unaudited consolidated financial statements

 

 
6
 
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AMERICAN RESOURCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

For the three months ended

 

 

 

March 31,

2019

 

 

March 31,

2018

 

Cash Flows from Operating activities:

 

 

 

 

 

 

Net loss

 

$ (10,065,620 )

 

$ (2,570,649 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

816,916

 

 

 

615,389

 

Amortization of mining rights

 

 

536,791

 

 

 

-

 

Accretion expense

 

 

321,701

 

 

 

341,581

 

Warrant expense

 

 

2,385,000

 

 

 

-

 

Issuance of common shares for services

 

 

1,672,200

 

 

 

-

 

Stock compensation expense

 

 

68,693

 

 

 

-

 

Amortization of issuance costs and debt discount

 

 

134,296

 

 

 

37,841

 

Recovery of previously impaired receivable

 

 

(50,806 )

 

 

(50,806 )

Change in current assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

792,381

 

 

 

(399,047 )

Prepaid expenses and other assets

 

 

(335,174 )

 

 

(443,482 )

Inventory

 

 

(574,254 )

 

 

297,974

 

Funds held for others

 

 

60,202

 

 

 

(70,772 )

Accounts payable

 

 

(1,804,045 )

 

 

1,057,923

 

Accounts payable – related party

 

 

104,467

 

 

 

-

 

Accrued interest

 

 

193,826

 

 

 

124,763

 

Cash used in operating activities

 

 

(5,743,426 )

 

 

(1,059,285 )

 

 

 

 

 

 

 

 

 

Cash Flows from Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advances made in connection with management agreement

 

 

-

 

 

 

(7,000 )

Advance repayment in connection with management agreement

 

 

-

 

 

 

79,219

 

Cash paid for PPE, net

 

 

(721,444 )

 

 

-

 

Cash provided by (used in) investing activities

 

 

(721,444 )

 

 

72,219

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long term debt

 

 

(1,373,024 )

 

 

(191,517 )

Proceeds from long term debt

 

 

2,000,000

 

 

 

1,000,000

 

Payments on factoring agreement, net

 

 

(649,258 )

 

 

(112,290 )

Proceeds from sale of common stock, net

 

 

4,254,000

 

 

 

-

 

Cash provided by financing activities

 

 

4,231,718

 

 

 

696,193

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and restricted cash

 

 

(2,233,152 )

 

 

(290,873 )

 

 

 

 

 

 

 

 

 

Cash and restricted cash, beginning of period

 

 

2,704,799

 

 

 

385,665

 

 

 

 

 

 

 

 

 

 

Cash and restricted cash, end of period

 

$ 471,647

 

 

$ 94,792

 

 

 

 

 

 

 

 

 

 

Supplemental Information

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment for notes payable

 

$ -

 

 

$ 481,660

 

Preferred Series B Dividends

 

$ -

 

 

$ 70,157

 

Shares issued in asset acquisition

 

$ 24,400,000

 

 

$ -

 

Assumption of net assets and liabilities for asset acquisitions

 

$ 2,500,000

 

 

$ -

 

Conversion of trade payable to equity

 

$ 49,161

 

 

$ -

 

Cashless exercise of options into common shares

 

$ 60

 

 

$ -

 

Conversion of Preferred Series A Shares to common shares

 

$ 161

 

 

$ -

 

Conversion of Preferred Series C Shares to common shares

 

$ 1

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ 131,028

 

 

$ 66,672

 

Cash paid for income taxes

 

$ -

 

 

$ -

 

  

The accompanying footnotes are integral to the unaudited consolidated financial statements

 

 
7
 
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AMERICAN RESOURCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

American Resources Corporation (ARC or the Company) was formed in June 2015 for the purpose of acquiring, rehabilitating and operating various natural resource assets including coal, oil and natural gas.

 

Basis of Presentation and Consolidation:

 

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Quest Energy Inc, (QEI), Deane Mining, LLC (Deane), Quest Processing LLC (Quest Processing), ERC Mining Indiana Corp (ERC), McCoy Elkhorn Coal LLC (McCoy), Wyoming County Coal LLC (WCC), Knott County Coal LLC (KCC), Empire Kentucky Land, Inc and Colonial Coal Company, Inc. (Empire) All significant intercompany accounts and transactions have been eliminated.

 

On February 12, 2019, ARC Acquisition Corporation (ARCAC) was formed as a wholly owned subsidiary of ARC. On February 12, 2019, ARCAC merged with Empire Kentucky Land, Inc which is the 100% owner of Colonial Coal Company, Inc. ARC Acquisition Corporation was subsequently renamed Empire Kentucky Land, Inc.

 

The accompanying Consolidated Financial Statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

 

Interim Financial Information

 

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted. In the opinion of management, these interim unaudited Consolidated Financial Statements reflect all normal and recurring adjustments necessary for a fair presentation of the results for the periods presented. Results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or any other period. These financial statements should be read in conjunction with the Company’s 2018 audited financial statements and notes thereto which were filed on form 10-K on April 3, 2019.

 

Going Concern: The Company has suffered recurring losses from operations and currently a working capital deficit. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. We plan to generate profits by expanding current coal operations as well as developing new coal operations. However, we will need to raise the funds required to do so through sale of our securities or through loans from third parties. We do not have any commitments or arrangements from any person to provide us with any additional capital. If additional financing is not available when needed, we may need to cease operations. We may not be successful in raising the capital needed to expand or develop operations. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern; no adjustments to the financial statements have been made to account for this uncertainty.

 

Convertible Preferred Securities: We account for hybrid contracts that feature conversion options in accordance with generally accepted accounting principles in the United States. ASC 815, Derivatives and Hedging Activities (“ASC 815”) requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

 
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We also follow ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) in its evaluation of the accounting for a hybrid instrument. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception (b) variations in something other than the fair value of the issuer’s equity shares or (c) variations inversely related to changes in the fair value of the issuer’s equity shares. Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a liability at fair value at each balance sheet date with remeasurements reported in interest expense in the accompanying Consolidated Statements of Operations.

 

Cash is maintained in bank deposit accounts which, at times, may exceed federally insured limits. To date, there have been no losses in such accounts.

 

Restricted cash: As part of the Kentucky New Markets Development Program (See Note 3) an asset management fee reserve was set up in the amount of $116,115. The funds are held to pay annual asset management fees to an unrelated party through 2021. The balance as of March 31, 2019 and December 31, 2018 was $57,992 and $85,786, respectively. The total balance of restricted cash also includes amounts held under the management agreement. See note 5.

 

The following table sets forth a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheet that agrees to the total of those amounts as presented in the consolidated statement of cash flows for the three months ended March 31, 2019 and March 31, 2018:

 

 

 

March 31,

2019

 

 

March 31,

2018

 

Cash

 

$ 7

 

 

$ 9,006

 

Restricted Cash

 

 

471,640

 

 

 

85,786

 

Total cash and restricted cash presented in the consolidated statement of cash flows

 

$ 471,647

 

 

$ 94,792

 

 

Asset Acquisition:

 

On February 12, 2019, through a share exchange, ARC merged with Empire Kentucky Land, Inc, its wholly-owned subsidiary Colonial Coal Company, Inc and purchased assets of Empire Coal Holdings, LLC in exchange for a cash payment of $500,000 which was carried as a seller note until paid on February 21, 2019, a seller note of $2,000,000 payable in the form of a royalty from production off of the property and 2,000,000 common shares of ARC’s stock valued at $24,400,000. The acquired assets have an anticipated life of 25 years. Capitalized mining rights will be amortized based on productive activities over the anticipated life of 25 years. Amortization expense for this asset for the 3 months ended March 31, 2019 and 2018 amounted to $132,900 and $0, respectively. The assets will be measured for impairment when an event occurs that questions the realization of the recorded value.

 

The stock and assets acquired do not represent a business as defined in FASB AS 805-10-20 due to their classification as a single asset. Accordingly, the assets acquired are initially recognized at the consideration paid, which was the liabilities assumed, including direct acquisition costs, of which there were none. The cost is allocated to the group of assets acquired based on their relative fair value. The assets acquired and liabilities assumed of Empire Coal were as follows at the purchase date:

 

Assets

 

 

 

Mine Development - Mining Rights

 

$ 25,400,000

 

Land

 

 

1,500,000

 

Liabilities

 

 

 

 

Seller Note

 

$

2,500,000

 

 

Asset Retirement Obligations (ARO) – Reclamation: At the time they are incurred, legal obligations associated with the retirement of long-lived assets are reflected at their estimated fair value, with a corresponding charge to mine development. Obligations are typically incurred when we commence development of underground and surface mines, and include reclamation of support facilities, refuse areas and slurry ponds or through acquisitions.

 

Obligations are reflected at the present value of their future cash flows. We reflect accretion of the obligations for the period from the date they incurred through the date they are extinguished. The asset retirement obligation assets are amortized using the units-of-production method over estimated recoverable (proved and probable) reserves. We are using a discount rate of 10%. Federal and State laws require that mines be reclaimed in accordance with specific standards and approved reclamation plans, as outlined in mining permits. Activities include reclamation of pit and support acreage at surface mines, sealing portals at underground mines, and reclamation of refuse areas and slurry ponds.

 

We assess our ARO at least annually and reflect revisions for permit changes, change in our estimated reclamation costs and changes in the estimated timing of such costs. During the period ending March 31, 2019 and 2018, $- and $- were incurred for loss on settlement on ARO, respectively.

 

 
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The table below reflects the changes to our ARO:

 

Balance at December 31, 2018

 

$ 18,538,009

 

Accretion – 3 months March 31, 2019

 

 

321,701

 

Reclamation work – 3 months March 31, 2019

 

 

-

 

Balance at March 31, 2019

 

$ 18,859,710

 

  

Allowance For Doubtful Accounts: The Company recognizes an allowance for losses on trade and other accounts receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an analysis of historical bad debt experience, current receivables aging and expected future write-offs, as well as an assessment of specific identifiable amounts considered at risk or uncollectible.

 

Allowance for trade receivables as of March 31, 2019 and December 31, 2018 amounted to $0, for both periods. Allowance for other accounts receivables as of March 31, 2019 and December 31, 2018 amounted to $0 and $0, respectively.

 

Trade and loan receivables are carried at amortized cost, net of allowance for losses. Amortized cost approximated book value as of March 31, 2019 and December 31, 2018.

 

Reclassifications: Reclassifications have been made to conform with current year presentation.

 

NOTE 2 - PROPERTY AND EQUIPMENT

 

At March 31, 2019 and December 31, 2018, property and equipment were comprised of the following:

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Processing and rail facility

 

$ 11,630,171

 

 

$ 11,630,171

 

Underground equipment

 

 

9,438,673

 

 

 

8,717,229

 

Surface equipment

 

 

3,101,518

 

 

 

3,101,518

 

Mine Development

 

 

40,307,068

 

 

 

14,907,068

 

Land

 

 

2,407,193

 

 

 

907,193

 

Less: Accumulated depreciation

 

 

(8,044,966 )

 

 

(6,691,259 )

 

 

 

 

 

 

 

 

 

Total Property and Equipment, Net

 

$ 58,839,657

 

 

$ 32,571,920

 

 

Depreciation expense amounted to $816,916 and $615,389 for the periods March 31, 2019 and March 31, 2018, respectively.

 

The estimated useful lives are as follows:

 

Processing and Rail Facilities

7-20 years

Surface Equipment

7 years

Underground Equipment

5 years

Mine Development

5-25 years

 

 
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NOTE 3 - NOTES PAYABLE

 

During the three-month period ended March 31, 2019, principal payments on long term debt totaled $1,373,024. During the three-month period ended March 31, 2019, increases to long term debt totaled $4,500,000, primarily from cash received in the form of $2,000,000 from the ARC development loan and $2,500,000 from seller financing for the acquisition of Empire. The ARC development loan carries annual interest at 5%, is due on April 1, 2020 and is secured by all company assets. The acquisition loan totaling $2,500,000 is due with $500,000 upfront and $2,000,000 due through a $1 per ton royalty off the coal sold from the acquired property and is secured by the underlying property.

 

During the three-month period ended March 31, 2018, principal payments on long term debt totaled $191,517.  During the three-month period ended March 31, 2018, increases to long term debt totaled $1,481,660. 

 

During the three-month period ended March 31, 2019 proceeds from the factoring agreement totaled $10,472,108, and repayments according to the factoring agreement totaled $11,121,366.

 

During the three-month period ended March 31, 2018 proceeds from the factoring agreement totaled $6,714,836 and repayments according to the factoring agreement totaled $6,827,126

  

NOTE 4 - RELATED PARTY TRANSACTIONS

 

The Company leases property from a related entity named Land Resources & Royalties (LRR). Until July 1, 2018, LRR was consolidated as a VIE resulting in transaction between the two companies to be eliminated upon consolidation. Upon deconsolidation, amounts paid and owed to LRR have been disclosed discreetly in the consolidated financial statements. For the three-month period ending March 31, 2019, royalty expense incurred with LRR amounted to $104,469 and amounts advanced from LRR amounted to $0 and amounts repaid to LRR amounted to $0. As of March 31, 2019, total amounts owed LRR amounted to $579,123.

 

NOTE 5 – MANAGEMENT AGREEMENT

 

On April 13, 2015, ERC entered into a mining and management agreement with an unrelated entity, to operate a coal mining and processing facility in Jasonville, Indiana. Under the management agreement funds advanced for the three-month period ended March 31, 2019 and 2018 are $0 and $7,000, respectively and the amounts repaid totaled $0 and $79,219, respectively.

 

NOTE 6 – EQUITY TRANSACTIONS

 

There were no common or other Series A Preferred transactions for the three-month period ending March 31, 2018.

 

Employee stock compensation expense for the three-month period ending March 31, 2019 and 2018 amounted to $68,693 and $0 respectively. 

 

On January 16, 2019, an affiliate of the Company converted its remaining 29,051 shares of Series A Preferred into 96,837 common shares.

 

On January 17, 2019, a non-affiliated shareholder partially exercised 300,000 shares of a warrant they held in the Company. The exercise was cashless, and the shareholder received 299,713 shares of common stock as a result of the conversion.

 

 
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On January 25, 2019, the Company extended its consulting agreement with Redstone Communications, LLC for an additional six-month term, and as a result, we issued 105,000 restricted common shares to Redstone Communications LLC and 45,000 restricted common shares to Mr. Marlin Molinaro, another five-year warrant to purchase up to 175,000 common shares of our Company at an exercise price of $1.50 per share and issued to Mr. Marlin Molinaro another five-year warrant option to purchase up to 75,000 common shares of our Company at an exercise price of $1.50 per share as compensation for the second six months of an agreement. Should Redstone Communications, LLC and Mr. Molinaro. If the warrants received under the second six months of engagement, the Company will receive up to $262,500 and $112,500, respectively. The common shares were valued at $10.50 on January 25, 2019 and resulted in an expense of $1,575,000 which was recorded in full on January 25, 2019.  The corresponding expense of the issued warrants was recorded in full in the amount of $$2,385,000. 

 

On January 27, 2019, the Company issued 1,000 shares of common shares to an unrelated party for the consideration of $5,000 cash to the Company.

 

On January 28, 2019, the Company issued a total of 400 shares of common shares to two unrelated parties for the total consideration of $2,000 cash to the Company.

 

On January 30, 2019, the Company entered into an Investor Relations Agreement with American Capital Ventures, Inc. (“American Capital”) whereby American Capital will provide, among other services, assistance to the Company in planning, reviewing and creating corporate communications, press releases, and presentations and consulting and liaison services to the Company relating to the conception and implementation of its corporate and business development plan. The term of the agreement is six months and American Capital was immediately issued 9,000 shares of common shares as compensation under the agreement. The common shares were valued at $10.80 on January 30, 2019 and resulted in an expense of $97,200 which was recorded in full on January 30, 2019.

 

On January 31, 2019, the Company issued a total of 3,917 shares of common shares, priced at $6 per share, to an unrelated party for the settlement of trade payables in the total amount of $23,502. If at the time of potential sale of the shares, the listed price per share is below $6, the Company is required to purchase the shares back at $6 per share which results in a contingent liability of $23,502. The common shares were valued at $11.00 on January 31, 2019 and resulted in a loss on settlement of $19,585.

 

On February 1, 2019, the Company issued a total of 1,000 shares of common shares to two unrelated parties for the total consideration of $5,000 cash to the Company.

 

On February 6, 2019, a non-affiliated shareholder partially exercised 300,000 shares of a warrant they held in the Company. The exercise was cashless, and the shareholder received 299,714 shares of common stock as a result of the conversion.

 

On February 4 through February 8, 2019, the Company issued a total of 17,800 shares of common shares to sixteen unrelated parties for the total consideration of $89,000 cash to the Company.

 

On February 10, 2019, $3,000 worth of trade payables were settled with 500 common shares of the company. The common shares were valued at $12.15 on February 10, 2019 and resulted in a loss on settlement of $3,075.

 

On February 12, 2019, the Company executed a contract with an unrelated party for the acquisition of stock and assets of entities with non-operating assets consisting of surface and mineral ownership and other related agreements. Consideration is in the form of 2,000,000 common shares, priced at the closing market price of $12.20 per share of common share, as well as $500,000 cash and a promissory note totaling $2,000,000 with a maturity of less than 1 year. The note is secured by a land contract on the acquired property.

 

On February 14, 2019, 452,729 Series A preferred shares were converted into 1,509,097 common shares of the company in a cashless conversion under the terms of the agreement. This resulted in no more Series A Preferred stock being outstanding as of this date.

 

On February 20, 2019, the Company issued 1,000,000 shares of Class A Common Stock at a price of $4 per share in conjunction with its effective S-1/A Registration Statement. Net proceeds to the Company amounted to $3,695,000. As part of the underwriter agreement, 70,000 warrants to purchase Class A Common Stock were issued to the underwriter. These warrants expire on February 15, 2021 and carry an exercise price of $4.40 per share. The warrants had a value of $123,000 was recorded as an increase and decrease in additional paid in capital. Offering costs totaled $447,000, which has been recorded as a reduction of equity.

 

On February 21, 2019, 50,000 Series C Preferred shares were converted into 13,750 shares of Class A Common Stock in a cashless conversion under the terms of the agreement.  This resulted in no more Series C Preferred stock being outstanding as of this date.

 

 
12
 
Table of Contents

 

On March 7, 2019, the Company issued an additional 150,000 shares of Class A Common Stock at a price of $4 per share as the over-allotment from the effective S-1/A Registration Statement. The net proceeds to the company amounted to $558,000. As part of the underwriter agreement, 10,500 warrants to purchase Class A Common Stock were issued to the underwriter. These warrants expire on February 15, 2021 and carry an exercise price of $4.40 per share. The warrants had a value of $23,100 was recorded as an increase and decrease in additional paid in capital.

 

 

 

March 31,

2019

 

 

March 31,

2018

 

Expected Dividend Yield

 

 

0 %

 

 

0 %

Expected volatility

 

87.97-109

 

 

13.73 %

Risk-free rate

 

2.40-2.33

 

1.47-1.62

%

Expected life of warrants

 

1.62-6.20 years

 

 

2-3 years

 

 

Company Warrants:

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

Warrants

 

 

Price

 

 

Life in Years

 

 

Value

 

Exercisable - December 31, 2017

 

 

5,364,230

 

 

$

2.638

 

 

 

2.8354

 

 

$

138,069

 

Granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited or Expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding - March 31, 2018

 

 

5,364,230

 

 

$ 2.638

 

 

 

2.835

 

 

$ 138,069

 

Exercisable (Vested) - March 31, 2018

 

 

5,364,230

 

 

$ 2.638

 

 

 

2.835

 

 

$ 138,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable (Vested) – December 31, 2018

 

 

5,545,227

 

 

$ 2.745

 

 

 

1.704

 

 

$ 42,063,228

 

Granted

 

 

330,500

 

 

$ 2.206

 

 

 

4.106

 

 

$ 1,026,255

 

Forfeited or Expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

600,000

 

 

$ 0.010

 

 

 

1.688

 

 

$ 4,869,250

 

Outstanding - March 31, 2019

 

 

5,275,727

 

 

$ 2.867

 

 

 

1.620

 

 

$

13,945,162

 

Exercisable (Vested) - March 31, 2019

 

 

5,275,727

 

 

$ 2.867

 

 

 

1.620

 

 

$

13,945,162

 

 

 
13
 
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Company Options:

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

Options

 

 

Price

 

 

Life in Years

 

 

Value

 

Outstanding - December 31, 2017

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited or Expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding – March 31, 2018

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercisable (Vested) - March 31, 2018

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding – December 31, 2018

 

 

681,830

 

 

$ 1.413

 

 

 

6.447

 

 

$ 405,000

 

Exercisable (Vested) – December 31, 2018

 

 

70,000

 

 

$ 4.214

 

 

 

4.247

 

 

$ 405,000

 

Granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited or Expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Outstanding - March 31, 2019

 

 

681,830

 

 

$ 1.330

 

 

 

6.200

 

 

$

80,998

 

Exercisable (Vested) - March 31, 2019

 

 

70,000

 

 

$ 4.214

 

 

 

4.000

 

 

$

80,998

 

 

Total preferred dividend requirement for the three month period ending March 31, 2019 and 2018 amounted to $0 and $70,157, respectively.

 

NOTE 7 - CORRECTION OF PRIOR YEAR INFORMATION

 

During the audit of the Company’s consolidated financial statements for the year ended December 31, 2018, the Company identified an error in the formula used to calculate the initial asset retirement obligation of Deane, McCoy and KCC. The formulaic error initially resulted in the overstated long-term assets and long term liabilities for the year ended December 31, 2015, 2016 and 2017. During the year ended December 31, 2016 and 2017, accretion and depreciation expenses were overstated causing an understatement of retained earnings.

 

This resulted in an adjustment to the previously reported amounts in the financial statements of the Company for the three-month period ended March 31, 2018. In accordance with the SEC’s Staff Accounting Bulletin Nos. 99 and 108 (SAB 99 and SAB 108), the Company evaluated this error and, based on an analysis of quantitative and qualitative factors, determined that the error was immaterial to the prior reporting periods affected.

 

However, if the adjustments to correct the cumulative effect of the above error had been recorded in the three months ended March 31, 2018, the Company believes the impact would have been significant and would impact comparisons to prior periods. Therefore, as permitted by SAB 108, the Company corrected, in the current filing, previously reported results of the Company as of March 31, 2018.

 

 
14
 
Table of Contents

 

The following table presents the impact of the correction in the financial statements as of March, 31, 2018:

 

Balance Sheet

 

As of March 31, 2018

 

 

 

As Previously

 

 

 

 

 

 

 

 

 

Reported

 

 

Adjustment

 

 

As Adjusted

 

Assets

 

 

 

 

 

 

 

 

 

Total Current Assets

 

$ 3,068,478

 

 

$ -

 

 

$ 3,068,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash - restricted

 

 

85,786

 

 

 

-

 

 

 

85,786

 

Processing and Rail Facility

 

 

2,914,422

 

 

 

(279,647 )

 

 

2,634,775

 

Underground Equipment

 

 

8,887,045

 

 

 

(1,633,897 )

 

 

7,253,148

 

Surface Equipment

 

 

4,439,263

 

 

 

(1,126,208 )

 

 

3,313,055

 

Less Accumulated Depreciation

 

 

(5,300,140 )

 

 

933,850

 

 

 

(4,366,290 )

Land

 

 

178,683

 

 

 

-

 

 

 

178,683

 

Accounts Receivable - Other

 

 

111,003

 

 

 

-

 

 

 

111,003

 

Note Receivable

 

 

4,117,139

 

 

 

-

 

 

 

4,117,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$ 18,501,679

 

 

$ (2,105,902 )

 

$ 16,395,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities

 

$ 37,459,392

 

 

$ -

 

 

$ 37,459,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term portion of note payables

 

 

5,782,253

 

 

 

-

 

 

 

5,782,253

 

Reclamation liability

 

$ 17,964,267

 

 

 

(5,004,103 )

 

 

12,960,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

$ 61,205,912

 

 

 

(5,004,103 )

 

$ 56,201,809

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A Common stock

 

 

89

 

 

 

-

 

 

 

89

 

Series A Preferred stock

 

 

482

 

 

 

-

 

 

 

482

 

Series B Preferred stock

 

 

850

 

 

 

-

 

 

 

850

 

APIC

 

 

1,527,254

 

 

 

-

 

 

 

1,527,254

 

Accumulated Deficit

 

 

(44,759,278 )

 

 

2,898,201

 

 

 

(41,861,077 )

Total American Resources Corporation Shareholders’ Equity

 

 

(43,230,603 )

 

 

2,898,201

 

 

 

(40,332,402

)

Non Controlling Interest

 

 

526,370

 

 

 

-

 

 

 

526,370

 

Total Liabilities and Shareholders’ Deficit

 

 

18,501,679

 

 

$ (2,105,902 )

 

 

16,395,777

 

  

 
15
 
Table of Contents

 

Income Statement

 

As of March 31, 2018

 

As Previously

 

Reported

 

Adjustment

 

As Adjusted

 

Revenue

 

Total Revenue

 

$

7,325,376

 

$

-

 

$

7,325,376

 

Cost of Coal Sales and Processing

 

(5,473,428

)

 

-

 

(5,473,428

)

Accretion Expense

 

(447,762

)

 

106,181

 

(341,581

)

Depreciation

 

(479,571

)

 

(135,818

)

 

(615,389

)

General and Administrative

 

(476,589

)

 

-

 

(476,589

)

Professional Fees

 

(274,603

)

 

-

 

(274,603

)

Production Taxes and Royalties

 

(949,793

)

 

-

 

(949,793

)

Development Costs

 

(1,687,173

)

 

-

 

(1,687,173

)

 

Net Loss from Operations

 

$

(2,463,543

)

 

$

(29,637

)

 

$

(2,493,180

)

 

Other Expense, net

 

(77,469

)

 

-

 

(77,469

)

 

Net Loss

 

$

(2,541,012

)

 

$

(29,637

)

 

$

(2,570,649

)

 

Less:  Preferred dividend requirement

 

(70,157

)

 

-

 

(70,157

)

Less:  Net income attributable to Non Controlling Interest

 

(128,514

)

 

-

 

(128,514

)

 

Net loss attributable to American Resources Corporation Shareholders

 

$

(2,739,683

)

 

$

(29,637

)

 

$

(2,769,320

)

 

 

 
16
 
Table of Contents

 

Statement of Cash Flow

 

As of March 31, 2018

 

As Previously

 

Reported

 

Adjustment

 

As Adjusted

 

Cash Flows from Operating activities:

 

Net loss

 

$

(2,541,012

)

 

$

(29,637

)

 

$

(2,570,649

)

Adjustments to reconcile net loss to net cash

 

Depreciation

 

479,571

 

135,818

 

615,389

 

Accretion expense

 

447,762

 

(106,181

)

 

341,581

 

Amortization of debt discount and issuance costs

 

37,841

 

-

 

37,841

 

Recovery of advances receivable

 

(50,806

)

 

-

 

(50,806

)

 

$

(1,626,644

)

 

$

-

 

$

(1,626,644

)

 

Change in current assets and liabilities

 

567,359

 

-

 

567,359

 

Cash used in operating activities

 

$

(1,059,285

)

 

-

 

$

(1,059,285

)

 

Cash provided by investing activities

 

72,219

 

-

 

72,219

 

Cash provided by financing activities

 

696,193

 

-

 

696,193

 

Decrease in cash and restricted cash

 

(290,873

)

 

-

 

(290,873

)

 

Cash and restricted cash, beginning of year

 

385,665

 

-

 

385,665

 

Cash and restricted cash, end of year

 

$

94,792

 

$

-

 

$

94,792

 

 
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NOTE 8 - CONTINGENCIES

 

In the course of normal operations, the Company is involved in various claims and litigation that management intends to defend. The range of loss, if any, from potential claims cannot be reasonably estimated. However, management believes the ultimate resolution of matters will not have a material adverse impact on the Company’s business or financial position.

 

In the course of normal operations, the Company is involved in various claims and litigation that management intends to defend. The range of loss, if any, from potential claims cannot be reasonably estimated. However, management believes the ultimate resolution of matters will not have a material adverse impact on the Company’s business or financial position.

 

On August 21, 2018, Deane and an unrelated vendor entered into a settlement agreement for past payables. Pursuant to the settlement agreement, Deane will pay the full outstanding unpaid balance in accordance with the agreed to schedule, with the full amount being due on January 3, 2019. Deane is currently in default of this agreement.

 

On April 3, 2019 KCC partially settled a case relating to a reclamation issue while the property was under former ownership. The settled amount is $100,000 which will be paid out of a prior insurance policy. The remaining portion of the case is still in pending settlement talks.

 

The company leases various office space some from an entity which was consolidated as a variable interest entity until June 30, 2018 (see note 4). The rental lease for the Company’s principal office space expired in December 31, 2018 and is continuing on a month-to-month basis. The future annual rent is $6,000 through 2021. Rent expense for three-month period ending March 31, 2019 and 2018 amounted to $9,000 and $9,000 each period, respectively.

 

NOTE 9 - SUBSEQUENT EVENTS

 

On April 23, 2019, the Company drew the final $1,500,000 from the customer development loan.

 

On April 30, 2019, McCoy entered into a settlement agreement for some previously leased equipment. The settlement calls for monthly cash payments of $10,000 for a total $160,000. If a monthly payment is missed, the missed balance will accrue interest at 6%. In addition, under the settlement agreement, the Company is to issue 50,000 common shares. For a six-month period, post issuance, the Company has the option to repurchase the previously issued shares for $100,000.

 

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Form 10-Q and other reports filed by Registrant from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward looking statements and information that are based upon beliefs of, and information currently available to, Registrant’s management as well as estimates and assumptions made by Registrant’s management. When used in the filings the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to Registrant or Registrant’s management identify forward looking statements. Such statements reflect the current view of Registrant with respect to future events and are subject to risks, uncertainties, assumptions and other factors relating to Registrant’s industry, Registrant’s operations and results of operations and any businesses that may be acquired by Registrant. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

 

Although Registrant believes that the expectations reflected in the forward-looking statements are reasonable, Registrant cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Overview

 

When we formed our company, our focus was to (i) construct and/or purchase and manage a chain of combined gasoline, diesel and natural gas (NG) fueling and service stations (initially, in the Miami, FL area); (ii) construct conversion factories to convert NG to liquefied natural gas (LNG) and compressed natural gas (CNG); and (iii) construct conversion factories to retrofit vehicles currently using gasoline or diesel fuel to also run on NG in the United States and also to build a convenience store to serve our customers in each of our locations. These operations represent historical operations of the company and do not represent the company’s current operations and business plan.

 

On January 5, 2017, American Resources Corporation (ARC or the Company) executed a Share Exchange Agreement between the Company and Quest Energy Inc. (Quest Energy), a private company incorporated in the State of Indiana on May 2015 with offices at 9002 Technology Lane, Fishers, IN 46038, and due to the fulfillment of various conditions precedent to closing of the transaction, the control of the Company was transferred to the Quest Energy shareholders on February 7, 2017. This transaction resulted in Quest Energy becoming a wholly-owned subsidiary of ARC. Through Quest Energy, ARC was able to acquire coal mining and coal processing operations, substantially all located in eastern Kentucky.

 

Quest Energy currently has seven coal mining and processing operating subsidiaries: McCoy Elkhorn Coal LLC (doing business as McCoy Elkhorn Coal Company) (McCoy Elkhorn), Knott County Coal LLC (Knott County Coal), Deane Mining LLC (Deane Mining), Wyoming County Coal LLC (Wyoming County), Empire Kentucky Land, Inc (Empire), and Quest Processing LLC (Quest Processing) located in eastern Kentucky and western West Virginia within the Central Appalachian coal basin within the Central Appalachian coal basin, and ERC Mining Indiana Corporation (ERC) located in southwest Indiana within the Illinois coal basin. The coal reserves under control by the Company are generally comprise of metallurgical coal (used for steel making), pulverized coal injections (used in the steel making process) and high-BTU, low sulfur, low moisture bituminous coal used for a variety of uses within several industries, including industrial customers, specialty products and thermal coal used for electricity generation.

 

We have not classified, and as a result, do not have any “proven” or “probable” reserves as defined in United States Securities and Exchange Commission Industry Guide 7, and as a result, our company and its business activities are deemed to be in the exploration stage until mineral reserves are defined on our properties.

 

McCoy Elkhorn Coal LLC

 

General:

 

Located primarily within Pike County, Kentucky, McCoy Elkhorn is currently comprised of two active mines (Mine #15 and the Carnegie Mine), one mine in “hot idle” status (the PointRock Mine), two coal preparation facilities (Bevins #1 and Bevins #2), and other mines in various stages of development or reclamation. McCoy Elkhorn sells its coal to a variety of customers, both domestically and internationally, primarily to the steel making industry as a high-vol “B” coal or blended coal, and high-grade thermal coal to utilities.

 

 
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Mines:

 

Mine #15 is an underground mine in the Millard (also known as Glamorgan) coal seam and located near Meta, Kentucky. Mine #15 is mined via room-and-pillar mining methods using continuous miners, and the coal is belted directly from the stockpile to McCoy Elkhorn’s coal preparation facility. Mine #15 is currently a “company run” mine, whereby the Company manages the workforce at the mine. The coal from Mine #15 is stockpiled at the mine site and belted directly to the Company’s nearby coal preparation facilities. Production at Mine #15 re-commenced under Quest Energy’s ownership in September 2016.

 

The Carnegie Mine is an underground mine in the Alma and Upper Alma coal seams and located near Kimper, Kentucky. In 2011, coal production from the Carnegie Mine in the Alma coal seam commenced and then subsequently the mine was idled. Production at the Carnegie Mine was reinitiated in early 2017 under Quest Energy’s ownership and is currently being mined via room-and-pillar mining methods utilizing a continuous miner. The coal is stockpiled on-site and trucked approximately 7 miles to McCoy Elkhorn’s preparation facilities. The Carnegie Mine is currently operated as a modified contractor mine, whereby McCoy Elkhorn provides the mining infrastructure and equipment for the operations and pays the contractor a fixed per-ton fee for managing the workforce, procuring the supplies, and maintaining the equipment and infrastructure in proper working order.

 

The PointRock Mine is a surface mine in a variety of coal seams, primarily in the Pond Creek, the Lower Alma, the Upper Alma, and Cedar Grove coal seams and located near Phelps, Kentucky. Coal has been produced from the PointRock Mine in the past under different operators. Quest Energy acquired the PointRock Mine in April 2018 and is currently performing reclamation work in advance of re-starting production, which is expected in 2019. PointRock is anticipated to be mined via contour, auger, and highwall mining techniques. The coal will be stockpiled on-site and trucked approximately 23 miles to McCoy Elkhorn’s preparation facilities. The PointRock Mine is anticipated to be operated as a modified contractor mine, whereby McCoy Elkhorn provides certain mining infrastructure and equipment for the operations and pays a contractor a fixed per-ton fee for managing the workforce, procuring other equipment and supplies, and maintaining the equipment and infrastructure in proper working order. The PointRock Mine has the estimated capacity to produce up to approximately 15,000 tons per month of coal and has not yet started coal production under McCoy Elkhorn’s ownership.

 

Processing & Transportation:

 

The Bevins #1 Preparation Plant is an 800 ton-per hour coal preparation facility located near Meta, Kentucky, across the road from Mine #15. Bevins #1 has raw coal stockpile storage of approximately 25,000 tons and clean coal stockpile storage of 100,000 tons of coal. The Bevins #1 facility has a fine coal circuit and a stoker circuit that allows for enhance coal recovery and various coal sizing options depending on the needs of the customer. The Company acquired the Bevins Preparation Plants as idled facilities, and since acquisition, the primary work completed at the Bevins Preparation Plants by the Company includes rehabilitating the plants’ warehouse and replacing belt lines.

 

The Bevins #2 Preparation Plant is on the same permit site as Bevins #1 and is a 500 ton-per-hour processing facility with fine coal recovery and a stoker circuit for coal sizing options. Bevins #2 has raw coal stockpile storage of 25,000 tons of coal and a clean coal stockpile storage of 45,000 tons of coal. We are currently utilizing less than 10% of the available processing capacity of Bevins #1 and Bevins #2.

 

Both Bevins #1 and Bevins #2 have a batch-weight loadout and rail spur for loading coal into trains for rail shipments. The spur has storage for 110 rail cars and is serviced by CSX Transportation and is located on CSX’s Big Sandy, Coal Run Subdivision. Both Bevins #1 and Bevins #2 have coarse refuse and slurry impoundments called Big Groundhog and Lick Branch. While the Big Groundhog impoundment is nearing the end of its useful life, the Lick Branch impoundment has significant operating life and will be able to provide for coarse refuse and slurry storage for the foreseeable future at Bevins #1 and Bevins #2. Coarse refuse from Bevins #1 and Bevins #2 is belted to the impoundments. Both Bevins #1 and Bevins #2 are facilities owned by McCoy Elkhorn, subject to certain restrictions present in the agreement between McCoy Elkhorn and the surface land owner.

 

Both Bevins #1 and Bevins #2, as well as the rail loadout, are operational and any work required on any of the plants or loadouts would be routine maintenance. The allocated cost of for this property at McCoy Elkhorn Coal paid by the company is $95,210.

 

Due to additional coal processing storage capacity at Bevins #1 and Bevins #2 Preparation Plants, McCoy Elkhorn has the ability to process, store, and load coal for other regional coal producers for an agreed-to fee.

 

 
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Additional Permits:

 

In addition to the above mines, McCoy Elkhorn holds 11 additional coal mining permits that are idled operations or in various stages of reclamation. For the idled coal mining operations, McCoy Elkhorn will determine which coal mines to bring back into production, if any, as the coal market changes, and there are currently no other idled mines within McCoy Elkhorn that are slated to go into production in the foreseeable future. Any idled mines that are brought into production would require significant upfront capital investment, and there is no assurance of the feasibility of any such new operations.

 

Knott County Coal LLC

 

General:

 

Located primarily within Knott County, Kentucky (but with additional idled permits in Leslie County, Perry County, and Breathitt County, Kentucky), Knott County Coal is comprised of 1 active mine (the Wayland Surface Mine) and 22 idled mining permits (or permits in reclamation) and permits for one preparation facility: the idled Supreme Energy Preparation Plant. The idled mining permits are either in various stages of reclamation or being maintained as idled, pending any changes to the coal market that may warrant reinitiating production. The idled mines at Knott County Coal are primarily underground mines that utilize room-and-pillar mining.

 

Mines:

 

The Wayland Surface Mine is a surface waste-rock reprocessing mine in a variety of coal seams (primarily the Upper Elkhorn 1 coal seam) located near Wayland, Kentucky. The Wayland Surface Mine is mined via area mining through the reprocessing of previously processed coal, and the coal is trucked approximately 22 miles to the Mill Creek Preparation Plant at Deane Mining, where it is processed and sold. The Wayland Surface Mine is currently a “company run” mine, whereby the Company manages the workforce at the mine and pays all expenses of the mine. During June 2018, production at the Wayland Surface Mine commenced under Quest Energy’s ownership which occurred during May 2018.

 

Other potential customers of Knott County Coal include industrial customers, specialty customers and utilities for electricity generation.

 

Processing & Transportation:

 

The idled Supreme Energy Preparation Plant is a 450 ton-per-hour coal preparation facility located in Kite, Kentucky. The Bates Branch rail loadout associated with the Supreme Energy Preparation Plant is a batch-weigh rail loadout with 110 rail car storage capacity and serviced by CSX Transportation in their Big Sandy rate district. The Supreme Energy Preparation Plant has a coarse refuse and slurry impoundment called the King Branch Impoundment.

 

The Supreme Energy Preparation Plant is owned by Knott County Coal, subject to certain restrictions present in the agreement between Knott County Coal and the surface land owner, Land Resources & Royalties LLC.

 

The Company acquired the Supreme Energy Preparation Plants as an idled facility, and since acquisition, no work has been performed at the facility other than minor maintenance. Both the Supreme Energy Preparation Plant and the rail loadout are idled and would require an undetermined amount of work and capital to bring them into operation. The allocated cost of for the property at Knott County Coal paid by the Company is $286,046.

 

Additional Permits:

 

In addition to the above mines, Knott County Coal holds 20 additional coal mining permits that are in development, idled or in various stages of reclamation. Any idled mines that are brought into production would require significant upfront capital investment and there is no assurance of the feasibility of any such new operations.

 

Deane Mining LLC

 

General:

 

Located within Letcher County and Knott County, Kentucky, Deane Mining is comprised of one active underground coal mine (the Access Energy Mine), one active surface mine (Razorblade Surface) and one active coal preparation facility called Mill Creek Preparation Plant, along with 12 additional idled mining permits (or permits in reclamation). The idled mining permits are either in various stages of development, reclamation or being maintained as idled, pending any changes to the coal market that may warrant re-starting production.

 

 
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Mines:

 

Access Energy is an underground mine in the Elkhorn 3 coal seam and located in Deane, Kentucky. Access Energy is mined via room-and-pillar mining methods using continuous miners, and the coal is belted directly from the mine to the raw coal stockpile at the Mill Creek Preparation Plant across the road from Access Energy. Access Energy is currently a “company run” mine, whereby the Company manages the workforce at the mine and pays all expenses of the mine.

 

Razorblade Surface is a surface mine targeting the Hazard 4 and Hazard 4 Rider coal seams and located in Deane, Kentucky. Deane Mining commenced mining activity at Razorblade Surface during the spring of 2018. Coal produced from Razorblade Surface is trucked approximately one mile to the Mill Creek Preparation Plant.  Razorblade Surface is currently run as a contractor model for which the contractor is paid a fixed per-ton fee for the coal produced. 

 

Processing & Transportation:

 

Coal from Access Energy is processed at Deane Mining’s Mill Creek Preparation Plant, an 800 ton-per hour coal preparation facility with a batch-weight loadout and rail spur for loading coal into trains for rail shipments. The spur has storage for 110 rail cars and is serviced by CSX Transportation and is located on both CSX’s Big Sandy rate district and CSX’s Elkhorn rate district. The Mill Creek Preparation Plant has a coarse refuse and slurry impoundment called Razorblade Impoundment.

 

Both the Mill Creek Preparation Plant and the rail loadout are operational, and any work required on any of the plant or loadouts would be routine maintenance. The allocated cost of for the property at Deane Mining paid by the Company is $1,569,641.

 

Additional Permits:

 

In addition to the above mines and preparation facility, Deane Mining holds 12 additional coal mining permits that are in development, idled or in various stages of reclamation. Any idled mines that are brought into production would require significant upfront capital investment and there is no assurance of the feasibility of any such new operations.

 

Wyoming County Coal LLC

 

General:

 

Located within Wyoming County, West Virginia, Wyoming County Coal is comprised of two idled underground mining permits and the three permits associated with the idled Pioneer Preparation Plant, the Hatcher rail loadout, and Simmons Fork Refuse Impoundment. The two idled mining permits are undisturbed underground mines that are anticipated to utilize room-and-pillar mining. The coal controlled at Wyoming County Coal (along with our other subsidiaries) has not been classified as either “proven” or “probable” as defined in the United States Securities and Exchange Commission Industry Guide 7, and as a result, do not have any “proven” or “probable” reserves under such definition and are classified as an “Exploration Stage” pursuant to Industry Guide 7.

 

Mines:

 

The mining permits held by Wyoming County Coal are in various stages of planning with no mines currently in production.

 

Potential customers of Wyoming County Coal would include steel mills in the United States or international marketplace although no definitive sales have been identified yet.

 

 
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Processing & Transportation:

 

The idled Pioneer Preparation Plant is a 350 ton-per-hour coal preparation facility located near Oceana, West Virginia. The Hatcher rail loadout associated with the Pioneer Preparation Plant is a rail loadout serviced by Norfolk Southern Corporation. The refuse from the preparation facility is trucked to the Simmons Fork Refuse Impoundment, which is approximately 1.0 mile from the Pioneer Preparation facility. The preparation plant utilizes a belt press technology which eliminates the need for pumping slurry into a slurry pond for storage within an impoundment.

 

The Company is in the initial planning phase of getting estimates on the cost to upgrade the preparation facility to a modern 350 ton per hour preparation facility, although no cost estimates have yet been received. The Company is also in the initial planning phase of getting estimates on the cost and timing of upgrading the rail load out facility to a modern batch weight load out system, although no cost estimates have yet been received.

 

The Company acquired the Pioneer Preparation Plants as an idled facility, and since acquisition, no work has been performed at the facility. Both the Pioneer Preparation Plant and the rail loadout are idled and would require an undetermined amount of work and capital to bring them into operation, which is currently in the initial phases of planning and no cost estimates have been received. The allocated cost for the property at Wyoming County Coal will pay by the Company is $22,326,101 of which $22,091,688 has been paid using shares of the Company’s Class A Common stock. The remaining portion is to be paid from cash.

 

Permits:

 

Wyoming County Coal holds two coal mining permits that are in the initial planning phase and three permits associated with the idled Pioneer Preparation Plant, the Hatcher rail loadout, and Simmons Fork Refuse Impoundment. Any mine that is brought into production would require significant upfront capital investment and there is no assurance of the feasibility of any such new operations.

 

Empire Kentucky Land, Inc

 

General:

 

Empire Kentucky Land, Inc., and its wholly-owned subsidiary, Colonial Coal Company, Inc., own approximately 3,000 acres of mineral and another approximately 3,000 acres of surface real estate, primarily located near Phelps, Pike County, Kentucky. There are currently no coal mining or coal processing permits owned by Empire. The coal owned at Empire (along with our other subsidiaries) has not been classified as either “proven” or “probable” as defined in the United States Securities and Exchange Commission Industry Guide 7, and as a result, do not have any “proven” or “probable” reserves under such definition and are classified as an “Exploration Stage” pursuant to Industry Guide 7.

 

Mines:

 

There are no permitted coal mines at Empire.

 

Processing and Transportation:

 

There is no permitted coal processing or loading infrastructure at Empire.

 

Permits:

 

Empire holds no permits and is not expected to hold any permits in the future.

 

 
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Quest Processing LLC

 

Quest Energy’s wholly-owned subsidiary, Quest Processing, manages the assets, operations, and personnel of the certain coal processing and transportation facilities of Quest Energy’s various other subsidiaries, namely the Supreme Energy Preparation Facility (of Knott County Coal LLC), the Raven Preparation Facility (of Knott County Coal LLC), and Mill Creek Preparation Facility (of Deane Mining LLC). Quest Processing LLC was the recipient of a New Markets Tax Credit loan that allowed for the payment of certain expenses of these preparation facilities. As part of that financing transaction, Quest Energy loaned ERC Mining LLC, an entity owned by members of Quest Energy, Inc.’s management, $4,120,000 to facilitate the New Markets Tax Credit loan, of which is all outstanding as of March 31, 2019. ERC Mining LLC is considered a variable interest entity and is consolidated into Quest Energy’s financial statements.

 

ERC Mining Indiana Corporation (the Gold Star Mine)

 

Quest Energy, through its wholly-owned subsidiary, ERC Mining Indiana Corporation (ERC), has a management agreement with an unrelated entity, LC Energy Operations LLC to manage an underground coal mine, clean coal processing facility and rail loadout located in Greene County, Indiana (referred to as the “Gold Star Mine”) for a monthly cash and per-ton fee. As part of that management agreement, ERC manages the operations of the Gold Star Mine, is the holder of the mining permit, provides the reclamation bonding, is the owner of some of the equipment located at the Gold Star Mine, and provides the employment for the personnel located at the Gold Star Mine. LC Energy Operations LLC owns the remaining equipment and infrastructure, is the lessee of the mineral (and the owner of some of the mineral and surface), and provides funding for the operations. Currently the coal mining operations at the Gold Star Mine are idled.

 

In addition to the current owned permits and controlled reserves, ARC may, from time to time, and frequently, acquire additional coal mining permits or reserves, or dispose of coal mining permits or reserves currently held by ARC, as management of the Company deems appropriate.

 

Mineral and Surface Leases

 

Coal mining and processing involves the extraction of coal (mineral) and the use of surface property incidental to such extraction and processing. All of the mineral and surface related to the Company’s coal mining operations is leased from various mineral and surface owners (the “Leases”). The Company’s operating subsidiaries, collectively, are parties to approximately 200 various Leases and other agreements required for the Company’s coal mining and processing operations. The Leases are with a variety of Lessors, from individuals to professional land management firms such as the Elk Horn Coal Company LLC and Alma Land Company. In some instances, the Company has leases with Land Resources & Royalties LLC (LRR), a professional leasing firm that is an entity wholly owned by Quest MGMT LLC, an entity owned by members of Quest Energy Inc.’s management.

 

Coal Sales

 

ARC sells its coal to domestic and international customers, some which blend ARC’s coal at east coast ports with other qualities of coal for export. Coal sales currently come from the Company’s McCoy Elkhorn’s Mine #15 and Carnegie 1 mines, Knott County Coal’s Wayland Surface mine, and Deane Mining’s Access Energy and Razorblade Surface mines. The Company may, at times, purchase coal from other regional producers to sell on its contracts.

 

Coal sales at the Company is primarily outsource to third party intermediaries who act on the Company’s behalf to source potential coal sales and contracts. The third-party intermediaries have no ability to bind the Company to any contracts, and all coal sales are approved by management of the Company.

 

 
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Competition

 

The coal industry is intensely competitive. The most important factors on which the Company competes are coal quality, delivered costs to the customer and reliability of supply. Our principal domestic competitors will include Alpha Natural Resources, Ramaco Resources, Blackhawk Mining, Coronado Coal, Arch Coal, Contura Energy, Warrior Met Coal, Alliance Resource Partners, and ERP Compliance Fuels. Many of these coal producers may have greater financial resources and larger reserve bases than we do. We also compete in international markets directly with domestic companies and with companies that produce coal from one or more foreign countries, such as Australia, Colombia, Indonesia and South Africa.

 

Legal Proceedings

 

From time to time, we are subject to ordinary routine litigation incidental to our normal business operations. We are not currently a party to, and our property is not subject to, any material legal proceedings.

 

Environmental, Governmental, and Other Regulatory Matters

 

Our operations are subject to federal, state, and local laws and regulations, such as those relating to matters such as permitting and licensing, employee health and safety, reclamation and restoration of mining properties, water discharges, air emissions, plant and wildlife protection, the storage, treatment and disposal of wastes, remediation of contaminants, surface subsidence from underground mining and the effects of mining on surface water and groundwater conditions. In addition, we may become subject to additional costs for benefits for current and retired coal miners. These environmental laws and regulations include, but are not limited to, the Surface Mining Control and Reclamation Act of 1977 (SMCRA) with respect to coal mining activities and ancillary activities; the Clean Air Act (CAA) with respect to air emissions; the Clean Water Act (CWA) with respect to water discharges and the permitting of key operational infrastructure such as impoundments; Resource Conservation and Recovery RCRA with respect to solid and hazardous waste management and disposal, as well as the regulation of underground storage tanks; the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) with respect to releases, threatened releases and remediation of hazardous substances; the Endangered Species Act of 1973 (ESA) with respect to threatened and endangered species; and the National Environmental Policy Act of 1969 (NEPA) with respect to the evaluation of environmental impacts related to any federally issued permit or license. Many of these federal laws have state and local counterparts which also impose requirements and potential liability on our operations.

 

Compliance with these laws and regulations may be costly and time-consuming and may delay commencement, continuation or expansion of exploration or production at our facilities. They may also depress demand for our products by imposing more stringent requirements and limits on our customers’ operations. Moreover, these laws are constantly evolving and are becoming increasingly complex and stringent over time. These laws and regulations, particularly new legislative or administrative proposals, or judicial interpretations of existing laws and regulations related to the protection of the environment could result in substantially increased capital, operating and compliance costs. Individually and collectively, these developments could have a material adverse effect on our operations directly and/or indirectly, through our customers’ inability to use our products.

 

Certain implementing regulations for these environmental laws are undergoing revision or have not yet been promulgated. As a result, we cannot always determine the ultimate impact of complying with existing laws and regulations.

 

Due in part to these extensive and comprehensive regulatory requirements and ever-changing interpretations of these requirements, violations of these laws can occur from time to time in our industry and also in our operations. Expenditures relating to environmental compliance are a major cost consideration for our operations and safety and compliance is a significant factor in mine design, both to meet regulatory requirements and to minimize long-term environmental liabilities. To the extent that these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, operating results will be reduced.

 

 
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In addition, our customers are subject to extensive regulation regarding the environmental impacts associated with the combustion or other use of coal, which may affect demand for our coal. Changes in applicable laws or the adoption of new laws relating to energy production, greenhouse gas emissions and other emissions from use of coal products may cause coal to become a less attractive source of energy, which may adversely affect our mining operations, the cost structure and, the demand for coal.

 

We believe that our competitors with operations in the United States are confronted by substantially similar conditions. However, foreign producers and operators may not be subject to similar requirements and may not be required to undertake equivalent costs in or be subject to similar limitations on their operations. As a result, the costs and operating restrictions necessary for compliance with United States environmental laws and regulations may have an adverse effect on our competitive position with regard to those foreign competitors. The specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, applicable legislation and its production methods.

 

The Mine Act and the MINER Act, and regulations issued under these federal statutes, impose stringent health and safety standards on mining operations. The regulations that have been adopted under the Mine Act and the MINER Act are comprehensive and affect numerous aspects of mining operations, including training of mine personnel, mining procedures, roof control, ventilation, blasting, use and maintenance of mining equipment, dust and noise control, communications, emergency response procedures, and other matters. The Mine Safety and Health Administration (MSHA) regularly inspects mines to ensure compliance with regulations promulgated under the Mine Act and MINER Act.

 

Due to the large number of mining permits held by the Company that have been previously mined and operated, there is a significant amount of environmental reclamation and remediation required by the Company to comply with local, state, and federal regulations for coal mining companies.

 

Property

 

Our principal offices are located at 9002 Technology Lane, Fishers, Indiana 46038. We pay $2,500 per month in rent for the office space and the rental lease expires in December 2018 and is continuing on a month-to-month basis. We also rent office space from a related entity at 11000 Highway 7 South, Kite, Kentucky 41828 and pay $500 per month rent and the rental lease expires October 30, 2021.

 

The Company also utilizes various office spaces on-site at its coal mining operations and coal preparation plant locations in eastern Kentucky, with such rental payments covered under any surface lease contracts with any of the surface land owners.

 

Employees

 

ARC, through its operating subsidiaries, employs a combination of company employees and contract labor to mine coal, process coal, and related functions. The Company is continually evaluating the use of company employees and contract labor to determine the optimal mix of each, given the needs of the Company. Currently, McCoy Elkhorn’s Mine #15, Wayland Surface Mine and Deane Mining’s Access Energy mine are primarily run by company employees, McCoy Elkhorn’s Carnegie Mine and Deane Mining’s Razorblade Surface mine are primarily run by contract labor, and the Company’s various coal preparation facilities are run by company employees.

 

The Company currently has approximately 235 employees, with a substantial majority based in eastern Kentucky. The Company is headquartered in Fishers, Indiana with six members of the Company’s executive team based at this location.

 

 
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Results of Operations

 

Our consolidated operations had operating revenues of $6,994,276 for the three-months ended March 31, 2019 and $7,325,376 operating revenue for the three-months ended March 31, 2018. We have incurred net loss attributable to American Resources shareholders in the amount of $10,065,620 and a net loss of $2,769,320 respectively for the same periods.

 

The primary driver for decrease in revenue was a decrease in coal production while the Access Energy and Mine #15 deep mines underwent further development.

 

From our inception to-date our activities have been primarily financed from the proceeds of our acquisitions, series B equity investments and loans.

 

For the three months ended March 31, 2019 and 2018, coal sales and processing expenses were $6,644,087 and $5,473,428 respectively, development costs, including loss on settlement of ARO were $1,600,117 and $1,687,173, respectively, and production taxes and royalties $1,259,586 and $949,793, respectively. Depreciation expense for the three months ended March 31, 2019 and 2018 were $816,916 and $615,389 respectively.

 

Liquidity and Capital Resources

 

As of March 31, 2019, and 2018, our available cash was $7 and $9,006. We expect to fund our liquidity requirements with cash on hand, future borrowings and cash flow from operations. If future cash flows are insufficient to meet our liquidity needs or capital requirements, we may reduce our mine development and/or fund a portion of our expenditures through issuance of debt or equity securities, the entry into debt arrangements for from other sources, such as asset sales. We do not have any credit lines currently available to fund our liquidity requirements, and currently there is uncertainty regarding our ability to execute on the above strategy.

 

For the three months ending March 31, 2019 our net cash flow used in operating activities was $5,743,426 and for the period ending March 31, 2018 the net cash flow used in operating activities was $1,059,285.

 

For the three months ending March 31, 2018 and 2017 net cash provided by (used in) investing activities were $721,444 and $72,219 respectively.

 

For the three months ending March 31, 2018 and 2017 net cash proceeds from financing activities were $4,231,718 and $696,193 respectively.

 

As a public company, we will be subject to certain reporting and other compliance requirements of a publicly reporting company. We will be subject to certain costs for such compliance which private companies may not choose to make. We have identified such costs as being primarily for audits, legal services, filing expenses, financial and reporting controls and shareholder communications and estimate the cost to be approximately $35,000 monthly if the activities of our Company remain somewhat the same for the next few months. We have included such costs in our monthly cash flow needs and expect to pay such costs from a combination of cash from operations.

 

Off Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that we are required to disclose pursuant to these regulations. In the ordinary course of business, we enter into operating lease commitments, purchase commitments and other contractual obligations. These transactions are recognized in our financial statements in accordance with generally accepted accounting principles in the United States.

 

Critical Accounting Policies

 

The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. The critical accounting policies affecting our financial reporting are summarized in Note1 to the financial statements included elsewhere in this report.

 

 
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Recent Accounting Pronouncements

 

Management has elected to early adopt ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business effective at inception.

 

ASU 2016-18, Statement of Cash Flows: Restricted Cash (Topic 230). Topic 230 addressed how restricted cash was presented in the statement of cash flows. We adopted Topic 230 as of January 1, 2018 resulting modifications as to the manner in which restricted cash transactions are presented in the statement of cash flows.

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in Topic 605 and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company’s primary source of revenue is from the sale of coal through both short-term and long-term contracts with utilities, industrial customers and steel producers whereby revenue is currently recognized when risk of loss has passed to the customer. During the fourth quarter of 2017, the Company finalized its assessment related to the new standard by analyzing certain contracts representative of the majority of the Company’s coal sales and determined that the timing of revenue recognition related to the Company’s coal sales will remain consistent between the new standard and the previous standard. The Company also reviewed other sources of revenue, and concluded the current basis of accounting for these items is in accordance with the new standard. The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective method, and there was no cumulative adjustment to retained earnings.

 

ASU 2016-02, Leases , effective for years beginning after December 15, 2018. The Company adopted this standard on January 1, 2019 using the modified retrospective approach. The Company has concluded that the adoption of this standard did not have a material impact on the Company’s consolidated financial position and results of operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Because we are a smaller reporting company, we are not required to include any disclosure under this item.

 

Item 4. Controls and Procedures

 

(a) Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures.

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

With respect to the period ending March 31, 2019, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934.

 

Based upon our evaluation regarding the period ending March 31, 2019, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, has concluded that its disclosure controls and procedures were not effective due to the Company’s insufficient number of staff performing accounting and reporting functions and lack of timely reconciliations. Through the use of external consultants and the review process, management believes that the financial statements and other information presented herewith are materially correct.

 

The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. However, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

(b) Changes in Internal Controls.

 

There have been no changes in the Company’s internal control over financial reporting during the period ended March 31, 2019 that have materially affected the Company’s internal controls over financial reporting.

 

 
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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the 3-month period ending March 31, 2019, sales of unregistered equity securities totaled 20,200. Proceeds of these sales amounted to $101,000 which were primarily used for working capital and development costs.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Quarterly Report.

 

Item 5. Other Information

 

None.

 

 
29
 
Table of Contents

 

Item 6. Exhibits

 

The following exhibits are filed herewith except as otherwise noted:

 

Exhibit

Number

 

Description

 

Location Reference

 

3.1

 

Articles of Incorporation of Natural Gas Fueling and Conversion Inc.

 

Incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, filed with the SEC on November 27, 2013.

3.2

 

Amended and Restated Articles of Incorporation of NGFC Equities Inc.

 

Incorporated herein by reference to Exhibit 3.1 to the Company’s 8k filed on February 25, 2015.

3.3

 

Articles of Amendment to Articles of Incorporation of NGFC Equities, Inc.

 

Incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K on February 21, 2017.

3.4

 

Articles of Amendment to Articles of Incorporation of American Resources Corporation dated March 21, 2017.

 

Incorporated herein by reference to Exhibit 3.4 to the Company’s Form 10-Q, filed with the SEC on February 20, 2018.

3.5

 

Bylaws of Natural Gas Fueling and Conversion Inc.

 

Incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, filed with the SEC on November 27, 2013.

3.6

 

Bylaws, of NGFC Equities Inc., as amended and restated.

 

Incorporated herein by reference to Exhibit 3.2 to the Company’s 8k filed on February 25, 2015.

3.7

 

Articles of Amendment to Articles of Incorporation of American Resources Corporation dated November 8, 2018.

 

Filed as Exhibit 99.1 to the Company’s 8k filed on November 13, 2018, incorporated herein by reference.

3.8

 

Bylaws of American Resources Corporation, as amended and restated

 

Incorporated herein by reference to Exhibit 99.2 to the Company’s 8k filed on November 13, 2018.

4.1

 

Common Stock Purchase Warrant “B-4” dated October 4, 2017

 

Incorporated herein by reference to Exhibit 4.1 to the Company’s 8k filed on October 11, 2017.

4.2

 

Common Stock Purchase Warrant “C-1” dated October 4, 2017

 

Incorporated herein by reference to Exhibit 4.2 to the Company’s 8k filed on October 11, 2017.

4.3

 

Common Stock Purchase Warrant “C-2” dated October 4, 2017

 

Incorporated herein by reference to Exhibit 4.3 to the Company’s 8k filed on October 11, 2017.

4.4

 

Common Stock Purchase Warrant “C-3” dated October 4, 2017

 

Incorporated herein by reference to Exhibit 4.4 to the Company’s 8k filed on October 11, 2017.

4.5

 

Common Stock Purchase Warrant “C-4” dated October 4, 2017

 

Incorporated herein by reference to Exhibit 4.5 to the Company’s 8k filed on October 11, 2017.

4.6

 

Promissory Note for $600,000.00 dated October 4, 2017

 

Incorporated herein by reference to Exhibit 4.6 to the Company’s 8k filed on October 11, 2017.

4.7

 

Promissory Note for $1,674,632.14 dated October 4, 2017

 

Incorporated herein by reference to Exhibit 4.7 to the Company’s 8k filed on October 11, 2017.

4.8

 

Loan Agreement for up to $6,500,000 dated December 31, 2018

 

Incorporated herein by reference to Exhibit 99.1 to the Company’s 8k filed on January 3, 2019.

4.9

 

Promissory Note for up to $6,500,000 dated December 31, 2018

 

Incorporated herein by reference to Exhibit 99.2 to the Company’s 8k filed on January 3, 2019.

10.1

 

Secured Promissory Note

 

Incorporated herein by reference to Exhibit 99.1 to the Company’s 8k filed on May 15, 2018.

10.2

 

Security Agreement

 

Incorporated herein by reference to Exhibit 99.2 to the Company’s 8k filed on May 15, 2018.

10.3

 

Pledge Agreement

 

Incorporated herein by reference to Exhibit 99.3 to the Company’s 8k filed on May 15, 2018.

10.4

 

Guaranty Agreement

 

Incorporated herein by reference to Exhibit 99.4 to the Company’s 8k filed on May 15, 2018.

10.5

 

Bill of Sale

 

Incorporated herein by reference to Exhibit 99.5 to the Company’s 8k filed on May 15, 2018.

10.6

 

Sublease Agreement Between Colonial Coal Company, Inc. and McCoy Elkhorn Coal LLC

 

Incorporated herein by reference to Exhibit 99.1 to the Company’s 8k filed on May 1, 2018

10.7

 

Interim Operating Agreement

 

Incorporated herein by reference to Exhibit 99.2 to the Company’s 8k filed on May 1, 2018

10.8

 

Consolidated and Restated Loan and Security Agreement dated October 4, 2017

 

Incorporated herein by reference to Exhibit 10.1 to the Company’s 8k filed on October 11, 2017

10.9

 

Asset Purchase Agreement between Wyoming County Coal LLC and Thomas Shelton dated November 7, 2018

 

Incorporated herein by reference to Exhibit 10.9 to the Company’s registration statement filed on December 11, 2018.

 

 
30
 
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10.10

 

Asset Purchase Agreement between Wyoming County Coal LLC and Synergy Coal, LLC dated November 7, 2018

 

Incorporated herein by reference to Exhibit 10.10 to the Company’s registration statement filed on December 11, 2018.

10.11

 

Security Agreement

 

Incorporated herein by reference to Exhibit 99.3 to the Company’s 8k filed on January 3, 2019.

10.12

 

Purchase Order

 

Incorporated herein by reference to Exhibit 99.4 to the Company’s 8k filed on January 3, 2019.

10.13

 

Employment Agreement with Mark C. Jensen

 

Incorporated herein by reference to Exhibit 10.13 to the Company’s registration statement filed on February 6, 2019.

10.14

 

Employment Agreement with Thomas M. Sauve

 

Incorporated herein by reference to Exhibit 10.14 to the Company’s registration statement filed on February 6, 2019.

10.15

 

Employment Agreement with Kirk P. Taylor

 

Incorporated herein by reference to Exhibit 10.15 to the Company’s registration statement filed on February 6, 2019.

10.16

 

Employee Stock Option Plan

 

Incorporated herein by reference to Exhibit 10.16 to the Company’s registration statement filed on February 6, 2019.

10.17

 

Letter of Intent

 

Incorporated herein by reference to Exhibit 10.17 to the Company’s registration statement filed on February 6, 2019.

10.18

 

Merger Agreement with Colonial Coal

 

Incorporated herein by reference to Exhibit 10.18 to the Company’s registration statement filed on February 14, 2019.

10.19

 

Share Exchange Agreement to replace Merger Agreement with Colonial Coal

 

Incorporated herein by reference to Exhibit 10.19 to the Company’s registration statement filed on February 14, 2019.

14.1

 

Code of Conduct

 

Incorporated herein by reference to Exhibit 99.2 to the Company’s 8k filed on November 13, 2018.

14.2

 

Financial Code of Ethics

 

Incorporated herein by reference to Exhibit 99.3 to the Company’s 8k filed on November 13, 2018.

31.1

 

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed Herewith

31.2

 

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed Herewith

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Filed Herewith

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Filed Herewith

95.1

 

Mine Safety Disclosure pursuant to Regulation S-K, Item 104

 

Filed Herewith

 

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 
31
 
Table of Contents

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

AMERICAN RESOURCES CORPORATION

 

Date: May 15, 2019

By:

/s/ Mark C. Jensen

 

Name:

Mark C. Jensen

 

Title:

CEO, Chairman of the Board

 

(Principal Executive Officer)

 

 

32

 

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