NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Resources Corporation (ARC or the Company) operates through subsidiaries that were acquired in 2016 and 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 and six months ended June 30, 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 has 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.
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 as a component of other income/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 June 30, 2019 and December 31, 2018 was $58,247 and $85,786, respectively. A lender of the Company also required a reserve account to be established. The balance as of June 30, 2019 and December 31, 2018 was $286,784 and $273,784, respectively. The total balance of restricted cash also includes amounts held under the management agreement in the amount of $19,955 and $79,662, respectively. See note 5 regarding the management agreement.
The balance as of June 30, 2019 and December 31, 2018 was $364,985 and $411,692, respectively.
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 six months ended June 30, 2019 and June 30, 2018.
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Cash
|
|
$
|
1,129,790
|
|
|
$
|
692,837
|
|
Restricted Cash
|
|
|
364,985
|
|
|
|
246,328
|
|
Total cash and restricted cash presented in the consolidated statement of cash flows
|
|
$
|
1,494,775
|
|
|
$
|
939,165
|
|
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 June 30, 2019 and 2018 amounted to $398,700 and $0, respectively. Amortization expense for this asset for the 6 months ended June 30, 2019 and 2018 amounted to $531,600 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
|
|
|
|
Acquired 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 periods ending June 30, 2019 and 2018, $- and $- were incurred for loss on settlement on ARO, respectively.
The table below reflects the changes to our ARO:
Balance at December 31, 2018
|
|
$
|
18,538,009
|
|
Accretion – six months June 30, 2019
|
|
|
642,799
|
|
Reclamation work – six months June 30, 2019
|
|
|
-
|
|
Balance at June 30, 2019
|
|
$
|
19,180,605
|
|
Leases:
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02
, Leases
(“ASU 2016-02”)
.
ASU 2016-02, along with related amendments issued from 2017 to 2018 (collectively, the “New Leases Standard”), requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet. The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach and elected the option to not restate comparative periods in transition and also elected the package of practical expedients for all leases within the standard, which permits the Company not to reassess its prior conclusions about lease identification, lease classification and initial direct costs.
Beneficial Conversion Features of Convertible Securities:
Conversion options that are not bifurcated as a derivative pursuant to ASC 815 and not accounted for as a separate equity component under the cash conversion guidance are evaluated to determine whether they are beneficial to the investor at inception (a beneficial conversion feature) or may become beneficial in the future due to potential adjustments. The beneficial conversion feature guidance in ASC 470-20 applies to convertible stock as well as convertible debt which are outside the scope of ASC 815. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment date. In addition, our preferred stock issues contain conversion terms that may change upon the occurrence of a future event, such as antidilution adjustment provisions. The beneficial conversion feature guidance requires recognition of the conversion option’s in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as a dividend over either the life of the instrument, if a stated maturity date exists, or to the earliest conversion date, if there is no stated maturity date. If the earliest conversion date is immediately upon issuance, the dividend must be recognized at inception. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on occurrence.
The Company has a loan, convertible into common shares at $5.25 per share, with a beneficial conversion feature added through a loan modification on February 4
th
, 2019. At the time of the modification the loan had a maturity date of three months, and the conversions may occur any time from the time of the modification.
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 June 30, 2019 and December 31, 2018 amounted to $0, for both periods. Allowance for other accounts receivables as of June 30, 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 June 30, 2019 and December 31, 2018.
Reclassifications:
Reclassifications of prior periods have been made to conform with current year presentation.
NOTE 2 - PROPERTY AND EQUIPMENT
At June 30, 2019 and December 31, 2018, property and equipment were comprised of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Processing and rail facility
|
|
$
|
11,630,171
|
|
|
$
|
11,630,171
|
|
Underground equipment
|
|
|
9,452,724
|
|
|
|
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
|
|
|
(9,652,446
|
)
|
|
|
(6,691,259
|
)
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment, Net
|
|
$
|
57,246,228
|
|
|
$
|
32,571,920
|
|
Depreciation expense amounted to $804,889 and $615,390 for the three month periods June 30, 2019 and June 30, 2018, respectively. Depreciation expense amounted to $1,621,805 and $1,230,799 for the six month periods June 30, 2019 and June 30, 2018, respectively.
The estimated useful lives are as follows:
Processing and Rail Facilities
|
20 years
|
Surface Equipment
|
7 years
|
Underground Equipment
|
5 years
|
Mining Rights
|
5-25 years
|
Coal Refuse Storage
|
25 years
|
NOTE 3 - NOTES PAYABLE
During the six-month period ended June 30, 2019, principal payments on long term debt totaled $2,314,680. During the six-month period ended June 30, 2019, increases to long term debt totaled $6,799,980, primarily from cash received in the form of $3,500,000 from the ARC development loan, $2,500,000 from seller financing for the acquisition of Empire and $500,000 from an inventory line of credit.
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. The inventory line of credit was dated May 30, 2019, is due July 30, 2019 and carries a $50,000 interest payment upon maturity. The company also issued 25,000 shares as consideration for the inventory line of credit.
During the six-month period ended June 30, 2018, principal payments on long term debt totaled $1,147,974. During the six-month period ended June 30, 2018, increases to long term debt totaled $4,281,965.
During the six-month period ended June 30, 2019, proceeds from the factoring agreement totaled $16,710,921 and repayments totaled $16,145,264.
During the six-month period ended June 30, 2018, proceeds from the factoring agreement totaled $12,179,565 and repayments totaled $12,371,188.
On February 4, 2019, the ARC business loan was amended to allow for an initial three-month due date extension and will subsequently be due on 30 days demand. As part of this amendment, a conversion into company common stock was also added. The balance at conversion including accrued interest totaled $7,362,925. The conversion price is $5.25 and the common stock price at the time of the amended was $11.00. The addition of the beneficial conversion feature created a discount in the amount of $7,362,925 which is amortized into interest expense over the three-month extension period. Additional expense due to the amortization of the discount for the three-month period ended June 30, 2019 amounted to $2,863,360 and for the six-month period amounted to $7,362,925, respectively. The Company analyzed the conversion options in the convertible loan payables for derivative accounting consideration under ASC 815, Derivative and Hedging, and determines that the transactions do not qualify for derivative treatment. The Company evaluated the conversion for Beneficial Conversion Features (BCF) and concluded the amendment incurred a Beneficial Conversion Features (BCF) when it was issued on February 4, 2019.
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 in the consolidated financial statements. For the three-month and six-month period ending June, 2019, royalty expense incurred with LRR amounted to $34,173 and $69,564 respectively. Additionally, amounts advanced from LRR amounted to $26,568 and amounts repaid to LRR amounted to $42,208. As of June 30, 2019, total amounts owed LRR amounted to $636,863.
The Company has in the past borrowed funds from affiliates. These amounts are unsecured, due on demand and non-interest bearing. Amounts outstanding as of June 30, 2019 and December 31, 2018 totaled $124,000, respectively.
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 six month period ended June 30, 2019 and 2018 are $47,336 and $99,582, respectively and the amounts repaid totaled $47,336 and $192,155, respectively. During the six-month period ended June 30, 2019 and 2018, fees paid under the agreement amounted $329,111 and $267,845, respectively which has been recorded in other income.
NOTE 6 – EQUITY TRANSACTIONS
There were no common or other Series A Preferred transactions for the three-month and six-month periods ending June 30, 2018.
Employee stock compensation expense for the three-month period ending June 30, 2019 and 2018 amounted to $73,603 and $0 respectively.
Employee stock compensation expense for the six-month period ending June 30, 2019 and 2018 amounted to $142,296 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.
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 which are received under the second six months of engagement are exercised, 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.
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.
On May 7, 2019, the Company issued 50,000 shares of common stock as part of a settlement to an unrelated entity for the use of certain mining equipment. The stock price at the time of issuance was $3.65 resulting in a settlement expense of $182,500.
On May 30, 2019, the Company issued 25,000 shares to an unrelated entity in conjunction with a short-term borrowing facility issued by the entity. The stock price at the time of issuance was $3.49 resulting in a stock interest expense of $87,250.
On June 5, 2019, the Company issued options to certain employees in the amount of 175,000 under an adopted stock option plan. The issuance of employee options resulted in an expense totaling $4,910. The total expense will be $353,500 which will be amortized over the three-year vesting period.
On June 6, 2019, the Company and a former employee reached a settlement agreement where 107,000 shares of common stock were canceled and returned to the company. These shares were forfeited and returned to the company for no consideration and are accounted for as authorized and not issued.
On June 7, 2019, the Company issued 25,000 shares of common stock at $4 per share to an unrelated entity under an equity purchase agreement. The Company received $100,000 cash consideration for the investment. The stock price at the time of issuance was $2.10. If the Company, during the period in which the purchased shares are held by the original entity, issues or sells any shares of common stock for a price less than $4.00, the Company shall issue to the purchaser an additional number of shares of common stock, so as to provide the purchaser the benefit of the reduced price per share.
On June 7, 2019, the Company issued 30,000 shares of common stock for consulting services to an unrelated party. The stock price at the time of issuance was $2.10 resulting in an expense totaling $63,000. The consulting agreement is for six months and the shares for services were deemed to have been earned upon execution of the consulting agreement on May 30, 2019. In addition to the shares issued, 75,000 warrants with three-year exercise period and $4.00 strike price were issued upon execution of the consulting agreement resulting in a expense of $139,500.
On June 12, 2019, the Company restructured a series of warrants; C-1, C-2, C-3 and C-4, held by an unrelated party as part of the ARC business loan which resulted in an increase in the number of warrants issued from 1.6 million shares across four warrants to 3.0 million shares across four warrants; an increase in the term of the warrants from the date of the amendment from a weighted average of 297 days to 753 days, and a decrease in the weighted average exercise price from $7.665 per share to $4.325 per share. Fair value was determined using the Black-Scholes Option Pricing Model. The incremental value as a result of the modification is a one-time warrant expense totaling $2,545,360 as of June 30, 2019.
On June 13, 2019, the Company issued 28,000 shares of common stock under a consulting agreement to an unrelated party. The stock price at the time of issuance was $2.53 resulting in a stock-based compensation of $70,840. The term of the consulting agreement is 6 months with monthly payments equal to $5,000 payable in months three through six of the agreement.
The table below shows the Black-Scholes option-pricing model inputs used by the Company to value the warrant and option fair value:
Warrant and Option Fair Value Inputs
|
|
|
June 30,
2019
|
|
Expected Dividend Yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
94.35-97.29
|
%
|
Risk-free rate
|
|
|
1.4–1.62
|
%
|
Expected life of warrants
|
|
|
.68 – 6.93 years
|
|
|
|
|
|
|
The following is a summary of the Company’s stock warrant activity for the six months June 30, 2019:
Company Warrants:
WARRANTS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 to June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life in Years
|
|
|
Value
|
|
Outstanding - December 31, 2018
|
|
|
5,545,227
|
|
|
$
|
2.745
|
|
|
|
1.704
|
|
|
$
|
42,063,228
|
|
Exercisable - December 31, 2018
|
|
|
5,545,227
|
|
|
$
|
2.745
|
|
|
|
1.704
|
|
|
$
|
42,063,228
|
|
Granted
|
|
|
3,405,500
|
|
|
$
|
4.115
|
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited or Expired
|
|
|
1,697,223
|
|
|
$
|
7.638
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
600,000
|
|
|
$
|
0.010
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding - June 30, 2019
|
|
|
6,653,504
|
|
|
$
|
2.301
|
|
|
|
1.835
|
|
|
$
|
9,274,358
|
|
Exercisable - June 30, 2019
|
|
|
6,653,504
|
|
|
$
|
2.301
|
|
|
|
1.835
|
|
|
$
|
9,274,358
|
|
The following is a summary of the Company’s stock option activity for the six months June 30, 2019:
Company Options:
OPTIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018 to June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Life in Years
|
|
|
Value
|
|
Outstanding - December 31, 2018
|
|
|
681,830
|
|
|
$
|
1.413
|
|
|
|
6.447
|
|
|
$
|
405,000
|
|
Exercisable - December 31, 2018
|
|
|
70,000
|
|
|
$
|
4.214
|
|
|
|
4.247
|
|
|
$
|
405,000
|
|
Granted
|
|
|
175,000
|
|
|
$
|
2.630
|
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited or Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding - June 30, 2019
|
|
|
856,830
|
|
|
$
|
1.596
|
|
|
|
6.151
|
|
|
$
|
48,750
|
|
Exercisable - June 30, 2019
|
|
|
70,000
|
|
|
$
|
4.214
|
|
|
|
3.751
|
|
|
$
|
48,750
|
|
Total preferred dividend requirement for the six-month period ending June 30, 2019 and 2018 amounted to $0 and $87,157, 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 June 30, 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 June 30, 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 June 30, 2018.
The following table presents the impact of the correction in the financial statements as of June 30, 2018:
Balance Sheet
|
|
As of June 30, 2018
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
$
|
2,876,726
|
|
|
$
|
-
|
|
|
$
|
2,876,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash - restricted
|
|
|
246,328
|
|
|
|
-
|
|
|
|
246,328
|
|
Processing and Rail Facility
|
|
|
2,914,422
|
|
|
|
(279,647
|
)
|
|
|
2,634,775
|
|
Underground Equipment
|
|
|
9,315,392
|
|
|
|
(1,633,897
|
)
|
|
|
7,681,495
|
|
Surface Equipment
|
|
|
4,439,263
|
|
|
|
(1,126,208
|
)
|
|
|
3,313,055
|
|
Minings Rights
|
|
|
2,217,952
|
|
|
|
473,138
|
|
|
|
2,691,090
|
|
Less Accumulated Depreciation
|
|
|
(5,950,125
|
)
|
|
|
968,445
|
|
|
|
(4,981,680
|
)
|
Land
|
|
|
178,683
|
|
|
|
-
|
|
|
|
178,683
|
|
Accounts Receivable - Other
|
|
|
94,769
|
|
|
|
-
|
|
|
|
94,769
|
|
Note Receivable
|
|
|
4,117,139
|
|
|
|
-
|
|
|
|
4,117,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
20,450,549
|
|
|
$
|
(1,598,169
|
)
|
|
$
|
18,852,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
$
|
21,217,238
|
|
|
$
|
-
|
|
|
$
|
21,217,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of note payables
|
|
|
5,282,930
|
|
|
|
-
|
|
|
|
5,282,930
|
|
Reclamation liability
|
|
|
20,668,914
|
|
|
|
(4,637,147
|
)
|
|
|
16,031,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
47,169,082
|
|
|
|
(4,637,147
|
)
|
|
|
42,531,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common stock
|
|
|
89
|
|
|
|
-
|
|
|
|
89
|
|
Series A Preferred stock
|
|
|
482
|
|
|
|
-
|
|
|
|
482
|
|
Series B Preferred stock
|
|
|
850
|
|
|
|
-
|
|
|
|
850
|
|
APIC
|
|
|
19,367,869
|
|
|
|
-
|
|
|
|
19,367,869
|
|
Accumulated Deficit
|
|
|
(46,636,957
|
)
|
|
|
3,038,978
|
|
|
|
(43,597,979
|
)
|
Total American Resources Corporation Shareholders’ Deficit
|
|
|
(27,267,667
|
)
|
|
|
3,038,978
|
|
|
|
(24,228,689
|
)
|
Non Controlling Interest
|
|
|
549,134
|
|
|
|
-
|
|
|
|
549,134
|
|
Total Liabilities and Shareholders’ Deficit
|
|
$
|
20,450,549
|
|
|
$
|
(1,598,169
|
)
|
|
$
|
18,852,380
|
|
Income Statement
|
|
For the Six Months Ended June 30, 2018
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
14,348,416
|
|
|
$
|
-
|
|
|
$
|
14,348,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Coal Sales and Processing
|
|
|
(10,093,103
|
)
|
|
|
-
|
|
|
|
(10,093,103
|
)
|
Accretion Expense
|
|
|
(895,524
|
)
|
|
|
212,363
|
|
|
|
(683,161
|
)
|
Depreciation
|
|
|
(1,129,556
|
)
|
|
|
(101,223
|
)
|
|
|
(1,230,779
|
)
|
General and Administrative
|
|
|
(1,033,272
|
)
|
|
|
-
|
|
|
|
(1,033,272
|
)
|
Professional Fees
|
|
|
(438,015
|
)
|
|
|
-
|
|
|
|
(438,015
|
)
|
Production Taxes and Royalties
|
|
|
(1,727,917
|
)
|
|
|
-
|
|
|
|
(1,727,917
|
)
|
Development Costs
|
|
|
(3,719,374
|
)
|
|
|
-
|
|
|
|
(3,719,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss from Operations
|
|
$
|
(4,688,345
|
)
|
|
$
|
111,140
|
|
|
$
|
(4,577,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income, net
|
|
|
309,418
|
|
|
|
-
|
|
|
|
309,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,378,927
|
)
|
|
$
|
111,140
|
|
|
$
|
(4,267,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred dividend requirement
|
|
|
(87,157
|
)
|
|
|
-
|
|
|
|
(87,157
|
)
|
Less: Net income attributable to Non Controlling Interest
|
|
|
(151,278
|
)
|
|
|
-
|
|
|
|
(151,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to American Resources Corporation Shareholders
|
|
$
|
(4,617,362
|
)
|
|
$
|
111,140
|
|
|
$
|
(4,506,222
|
)
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flow
|
|
For the Six Months Ended June 30, 2018
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,378,927
|
)
|
|
$
|
111,140
|
|
|
$
|
(4,267,787
|
)
|
Adjustments to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,129,556
|
|
|
|
101,223
|
|
|
|
1,230,779
|
|
Gain on cancelation of debt
|
|
|
(315,000
|
)
|
|
|
-
|
|
|
|
(315,000
|
)
|
Accretion expense
|
|
|
895,524
|
|
|
|
(212,363
|
)
|
|
|
683,161
|
|
Amortization of debt discount and issuance costs
|
|
|
126,529
|
|
|
|
-
|
|
|
|
126,529
|
|
Recovery of advances receivable
|
|
|
(92,573
|
)
|
|
|
-
|
|
|
|
(92,573
|
)
|
|
|
$
|
(2,634,891
|
)
|
|
$
|
-
|
|
|
$
|
(2,634,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in current assets and liabilities
|
|
|
153,450
|
|
|
|
-
|
|
|
|
153,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
$
|
(2,481,441
|
)
|
|
|
-
|
|
|
$
|
(2,481,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
92,573
|
|
|
|
-
|
|
|
|
92,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
2,942,368
|
|
|
|
-
|
|
|
|
2,942,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
|
|
|
553,500
|
|
|
|
-
|
|
|
|
553,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of year
|
|
|
385,665
|
|
|
|
-
|
|
|
|
385,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
939,165
|
|
|
$
|
-
|
|
|
$
|
939,165
|
|
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 six-month period ending June 30, 2019 and 2018 amounted to $18,000 and $18,000 each period, respectively.
NOTE 9 - SUBSEQUENT EVENTS
On July 25, 2019, the Company drew an additional $400,000 on the ARC Business Loan. The advance is to be repaid in weekly $100,000 payments commencing on August 9, 2019. The advance carries a 12% interest rate.
On August 5, 2019, the Company entered into a $500,000 promissory note with a non-related entity. The note bears interest at 11% and is due by September 5, 2019. On August 6, 2019, $250,000 was drawn on the promissory note.