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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
☒
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31,
2017
☐
TRANSITION REPORT UNDER 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
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(Exact Name of Registrant as specified in its charter)
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Florida
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46-3914127
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(State or jurisdiction of
Incorporation or organization
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(I.R.S EmployerIdentification No.)
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9002 Technology Lane
Fishers, Indiana
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46038
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code:
606-637-3740
Securities registered under Section 12(b) of the Exchange
Act:
Title of each class Name of each exchange on which
registered
None N/A
Securities registered under Section 12(g) of the Exchange
Act
Common Stock, $0.001 par value
(Title of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. ☐
Yes ☒ No
Indicate
by check mark whether the registrant is not required to file
reports pursuant to Section 13 or 15 (d) of the Exchange
Act. ☐ Yes ☒ No
Indicate
by check mark whether the registrant (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 ☐
No
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, 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 ☒ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation s-K (§ 229.405 of this chapter is not
contained herein and will not be contained to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☐
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 “large
accelerated filer”, “accelerated filer”
“smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☒
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(Do not
check if a smaller company)
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Emerging
growth company
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☒
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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 Act). ☐ Yes ☒
No
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the
price at which the common equity was last sold, or the average bid
and asked price of such common equity, as of the last business day
of the registrant’s most recently completed second fiscal
quarter. $892,044
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date.
The number of shares outstanding of the issuer’s Common
Stock, $.001 par value, as of April 20, 2018 was 892,044
shares.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into
which the documents is incorporated: (1) Any annual report to
security holders; (2) Any proxy or information statement; and (3)
Any prospectus filed pursuant to Rule 424(b) or (c) under the
Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to
security holders for fiscal year ended December 24,
1980).
NONE
AMERICAN RESOURCES CORPORATION
ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended December 31, 2017
TABLE OF CONTENTS
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Page
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Special Note Regarding Forward Looking Statements
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3
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PART I
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Item 1.
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Business
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4
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Item 1A.
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Risk Factors
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10
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Item 1B.
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Unresolved Staff Comments
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10
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Item 2.
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Properties
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10
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Item 3.
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Legal Proceedings
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10
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Item 4.
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Mine Safety Disclosures
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10
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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11
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Item 6.
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Selected Financial Data
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15
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Item 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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15
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Item 7A.
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Quantitative and Qualitative Disclosure About Market
Risk
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21
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Item 8.
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Financial Statements and Supplementary Data
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21
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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21
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Item 9A.
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Controls and Procedures
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22
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Item 9B.
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Other Information
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23
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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24
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Item 11.
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Executive Compensation
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27
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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30
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence
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32
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Item 14.
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Principal Accounting Fees and Services
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34
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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35
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Signatures
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36
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2
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Table of Contents
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This
annual report on Form 10-K of American Resources Corporation for
the year ended December 31, 2017 contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended, which are intended to be covered by the safe
harbors created thereby. To the extent that such statements are not
recitations of historical fact, such statements constitute forward
looking statements which, by definition involve risks and
uncertainties. In particular, statements under the Sections;
Description of Business, Management’s Discussion and Analysis
of Financial Condition and Results of Operations contain forward
looking statements. Where in any forward-looking statements, the
Company expresses an expectation or belief as to future results or
events, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be
achieved or accomplished.
The
following are factors that could cause actual results or events to
differ materially from those anticipated and include but are not
limited to: general economic, financial and business conditions;
changes in and compliance with governmental regulations; changes in
tax laws; and the cost and effects of legal
proceedings.
You
should not rely on forward looking statements in this annual
report. This annual report contains forward looking statements that
involve risks and uncertainties. We use words such as
“anticipates,” “believes,”
“plans,” “expects,” “future,”
“intends,” and similar expressions to identify these
forward-looking statements. Prospective investors should not place
undue reliance on these forward-looking statements, which apply
only as of the date of this annual report. Our actual results could
differ materially from those anticipated in these forward-looking
statements.
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3
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Table of Contents
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PART I
Item 1. Business.
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 five 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) and Quest
Processing LLC (Quest Processing) located in eastern Kentucky
within the Central Appalachian coal basin, and ERC Mining Indiana
Corporation (ERC) located in southwest Indiana within the Illinois
coal basin. The coal deposits 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. Pursuant to the definitions in Paragraph (a) (4)
of the Securities and Exchange Commission’s Industry Guide
7, our company and its business
activities are deemed to be in the exploration stage until mineral
reserves are defined on our properties.
Historical pricing for the two types of coal produced are as
follows:
Historic Metallurgical Coal Prices
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Historic CAPP Thermal Coal Prices
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Year End
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Hampton Road Index HCC - High
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Year End
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Big Sandy / Kanawha Rate District
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2013
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$110.30
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2013
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$64.09
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2014
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$100.35
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2014
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$56.00
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2015
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$80.25
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2015
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$45.55
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2016
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$223.00
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2016
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$50.65
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2017
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$210.00
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2017
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$60.90
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McCoy Elkhorn Coal LLC
Located primarily within Pike County, Kentucky, McCoy Elkhorn is
currently comprised of two active mines (Mine #15 and the Carnegie
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.
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. Mine #15 has the
estimated capacity to produce up to approximately 40,000 tons per
month of coal. The Company
acquired Mine #15 as an idled mine, and since acquisition, the
primary work completed at Mine #15 by the Company includes changing
working sections within the underground mine, air ventilation
enhancements primarily through brattice work and the use of
overcasts and installing underground mining infrastructure as the
mine advances due to coal extraction. In 2017, Mine #15 produced
approximately 247,234 tons and sold the coal at an average price of
$65.88 per ton. In 2016, Mine #15 started production and produced
approximately 62,941 tons and sold the coal at an average price of
$82.45 per ton. During 2017 and 2016, 100% and 100%, respectively,
of the coal extracted from Mine #15 was high-vol “B”
metallurgical coal quality, of which 71% and 100%, respectively,
was sold into the metallurgical market, with the balance sold in
the thermal market.
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 Carnegie
Mine has the estimated capacity to produce up to approximately
10,000 tons per month of coal. The Company acquired the Carnegie
Mine as an idled mine, and since acquisition, the primary work
completed at the Carnegie Mine by the Company includes mine
rehabilitation work in preparation for production, changing working
sections within the underground mine, air ventilation enhancements
primarily through brattice work, and installing underground mining
infrastructure as the mine advances due to coal extraction. In
2017, the first year of the mine’s production, the Carnegie 1
Mine produced approximately 11,974 tons and sold the coal at an
average price of $65.88. During 2017, 100% of the coal extracted
from the Carnegie Mine was high-vol “B” metallurgical
coal quality, of which 51% was sold into the metallurgical market,
with the balance sold in the thermal market.
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Table of Contents
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There are two coal preparation facilities at McCoy Elkhorn: the
Bevins #1 Preparation Plant, an 800 ton-per hour coal preparation
facility, and the Bevins #2 Preparation Plant, located on the same
permit site as Bevins #1, and a 500 ton-per-hour processing
facility. Both coal preparation plants have fine coal recovery and
a stoker circuits for enhanced coal recovery and coal sizing
options. 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. 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 Impoundments.
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 the
property at McCoy Elkhorn Coal paid by the company is
$58,681.
Below is a map showing the material properties at McCoy
Elkhorn:
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Knott County Coal LLC
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 17
idled mining permits (or permits in reclamation) and permits for
two preparation facilities: the Supreme Energy Preparation Plant
and the Raven Preparation Plant, both of which are also idled. 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.
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.
Knott County Coal is also owner of the permits to the idled Raven
Preparation Plant, an 800 ton-per-hour coal preparation facility
with a fine coal circuit, located in Raven, Kentucky. The Raven
rail loadout is a batch-weight rail loadout with 110 car storage
capacity and services by CSX Transportation in their Big Sandy rate
district. The Raven Preparation Plant has a coarse refuse and
slurry impoundment called the Big Branch Impoundment.
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 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. The allocated cost of
for the property at Knott County Coal paid by the company is
$200,236.
Below is a map showing the location of the idled Supreme Energy
Prep Plant, Raven Prep Plant, Loadouts, and plant impoundments at
Knott County Coal:
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Deane Mining LLC
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.
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 run as a modified contractor
mine, whereby Deane Mining 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 Company acquired Access Energy as an idled mine, and
since acquisition, the primary work completed at Access Energy by
the Company includes mine rehabilitation work in preparation for
production, air ventilation enhancements primarily through brattice
work, and installing underground mining infrastructure as the mine
advances due to coal extraction. Access Energy has the estimated
capacity to produce up to approximately 20,000 tons per month of
coal. In 2017, the first year of the mine’s production,
Access Energy produced approximately 43,286 tons and sold the coal
at an average price of $58.67 per ton. 100% of the coal sold from
Access Energy in 2017 was sold as thermal coal.
Razorblade Surface is a surface mine targeting the Hazard 4 and
Hazard 4 Rider coal seams and located in Deane, Kentucky. Deane
Mining is currently preparing Razorblade Surface for coal
extraction and anticipates extracting coal in spring of 2018. Coal
produced from Razorblade Surface will be trucked approximately one
mile to the Mill Creek Preparation Plant. The Company acquired the
Razorblade Surface mine as a new, undisturbed mine, and since
acquisition, the primary work completed at Razorblade Surface has
been some initial minor engineering work to prepare the mine for
production in 2018. Once in production, Razorblade Surface will
have the estimated capacity to produce up to approximately 8,000
tons per month of coal.
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. The Company
acquired the Mill Creek Preparation Plant as an active facility,
and since acquisition, the primary work completed at the Mill Creek
Preparation Plant by the Company includes replacing belt lines and
replacing parts worn from ordinary use. We are currently utilizing
less than 10% of the available processing capacity of the Mill
Creek Preparation Plant.
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
$2,655,505.
Below is a map showing the material properties at Deane
Mining:
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Table of Contents
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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 December 31, 2017. 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 coal
deposits, ARC may, from time to time, and frequently, acquire
additional coal mining permits or coal deposits, or dispose of coal
mining permits or coal deposits 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. LRR is considered a variable interest entity and is
consolidated into Quest Energy’s financial
statements.
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, McCoy
Elkhorn’s Carnegie Mine, and Deane Mining’s Access
Energy Mine. 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.
As of December 31, 2017, Company sales to two customers accounted
for 63% of those sales. Through our network of intermediaries, coal
consolidators and end users, interested potential customers outpace
our ability to fulfill potential orders. The Company’s desire
is to expand the customer base and those who have purchased our
product.
On March 8, 2018, President Trump signed proclamations imposing a
25% tariff on imports of steel mill products and a 10% tariff on
imports of wrought and unwrought aluminum. It is too early to know
the impact these tariffs will have on demand for our metallurgical
coal. Our export customers include foreign steel producers who may
be affected by the tariffs to the extent their production is
imported into the U.S. Conversely, demand for metallurgical coal
from our domestic customers may increase. Retaliatory threats by
foreign nations to these tariffs may limit international trade and
adversely impact global economic conditions.
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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 coal deposit 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.
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.
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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.
As of
December 31, 2017 and 2016, the cost of compliance with
environmental laws amounted to $190,940 and $9,806, respectively.
This amount represents the costs of the company associated with
fines incurred from various regulations regarding environmental and
safety compliance; please see elsewhere in this document for
additional detail regarding other reclamation and remediation
costs.
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. We also rent office
space from an entity which we consolidate as a variable interest
entity (see note 5) 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 and Deane Mining’s Razorblade
Surface mine are primarily run by company employees, McCoy
Elkhorn’s Carnegie Mine and Deane Mining’s Access
Energy 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 204 employees (excluding
personnel hired through contractors), 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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Implications of Being an Emerging Growth Company
We
qualify as an emerging growth company as that term is used in the
JOBS Act. An emerging growth company may take advantage of
specified reduced reporting and other burdens that are otherwise
applicable generally to public companies. These provisions
include:
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A
requirement to have only two years of audited financial statements
and only two years of related MD&A;
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●
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Exemption
from the auditor attestation requirement in the assessment of the
emerging growth company’s internal control over financial
reporting under Section 404 of the Sarbanes-Oxley Act of
2002;
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●
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Reduced
disclosure about the emerging growth company’s executive
compensation arrangements; and
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●
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No
non-binding advisory votes on executive compensation or golden
parachute arrangements.
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We
have already taken advantage of these reduced reporting burdens in
this Form 10-K, which are also available to us as a smaller
reporting company as defined under Rule 12b-2 of the Securities
Exchange Act of 1934, as amended (the “Exchange
Act”).
In
addition, Section 107 of the JOBS Act also provides that an
emerging growth company can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities
Act of 1933, as amended (the “Securities Act”) for
complying with new or revised accounting standards. We are choosing
to utilize the extended transition period for complying with new or
revised accounting standards under Section 102(b)(2) of the JOBS
Act. This election allows our Company to delay the adoption of new
or revised accounting standards that have different effective dates
for public and private companies until those standards apply to
private companies. As a result of this election, our financial
statements may not be comparable to companies that comply with
public company effective dates.
We
could remain an emerging growth company for up to five years, or
until the earliest of (i) the last day of the first fiscal year in
which our annual gross revenues exceed $1 billion, (ii) the date
that we become a “large accelerated filer” as defined
in Rule 12b-2 under the Exchange Act, which would occur if the
market value of our common stock that is held by non-affiliates
exceeds $700 million as of the last business day of our most
recently completed second fiscal quarter, or (iii) the date on
which we have issued more than $1 billion in non-convertible debt
during the preceding three year period.
We
are a reporting company and file all reports required under
sections 13 and 15d of the Exchange Act.
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Item 1A. Risk Factors.
Because
we are a Smaller Reporting Company, we are not required to provide
the information required by this item.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
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. We also rent office
space at 11000 Highway 7 South, Kite, Kentucky 41828 and pay $500
per month rent from an entity which we consolidated as a variable
interest entity (see note 5) and the rental lease expires October
30, 2021. The future annual rent is $6,000 through 2021. Rent
expense for 2017 and 2016 amounted to $26,000 each year,
respectively.
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. We lease the mineral
and surface at all our key locations, with lease terms at our
currently-operating, key properties typically expiring upon
exhaustion of the mineral. Across our key properties, our mineral
royalty rates payable to the mineral owner range from 5.0% to 11.0%
of the gross sales price of our coal. All permits required to
operate our material properties have been obtained. The source of
power for all our key properties is Kentucky Power, and the source
of water for all our key properties is either the local
municipality or our existing water withdrawal permits that allow us
to pull water from nearby streams.
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. As a result, we are considered an exploration stage company
pursuant to Paragraph (a) (4) of Industry Guide 7.
Please
refer to Item 7: Management’s Discussion and Analysis of
Financial Condition and Results of Operations for additional
discussion around the capacity and utilization rate of our material
properties and the work completed on the material
properties.
Item 3. Legal Proceedings.
We
are not currently a party to any legal proceedings nor are any
contemplated by us at this time.
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 Annual Report.
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PART II.
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information.
Our Class A Common Stock (also referred to as common stock or
shares) is presently traded on the OTC Pink Market under the ticker
symbol AREC. Our common stock has been thinly traded since our
Company’s inception. Moreover, we do not believe that any
institutional or other large-scale trading of our stock has
occurred or will in fact occur in the near future. The following
table sets forth information as reported by the OTC Markets Group
for the high and low bid and ask prices for each of the eight
quarters ending December 31, 2017 for our common stock. The
following prices reflect inter-dealer prices without retail markup,
markdown or commissions and may not reflect actual
transactions.
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High
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Low
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Quarters
ending in 2016
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|
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March
31
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$12.00
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$12.00
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June
30
|
12.00
|
12.00
|
September
30
|
12.00
|
12.00
|
December
31
|
12.00
|
12.00
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Quarters
ending in 2017
|
|
|
March
31
|
$18.00
|
$1.53
|
June
30
|
6.60
|
1.00
|
September
30
|
1.00
|
0.05
|
December
31
|
$0.05
|
$0.05
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(b) Holders
As of April 20, 2018, the Company had 128 common stock shareholders
of record holding 892,044 shares of our common stock issued and
outstanding. This number includes one position at Cede & Co.,
of which Company principals are not aware how many shareholders
hold the shares in street name. The number of both shareholders of
record and beneficial shareholders may change on a daily basis and
without the Company’s immediate knowledge.
(c) Dividends
Holders of common stock are entitled to receive dividends as may be
declared by our Board of Directors and, in the event of
liquidation, to share pro rata in any distribution of assets after
payment of liabilities and preferred shareholders. Our Board of
Directors has sole discretion to determine: (i) whether to declare
a dividend; (ii) the dividend rate, if any, on the shares of any
class of series of our capital stock, and if so, from which date or
dates; and (iii) the relative rights of priority of payment of
dividends, if any, between the various classes and series of our
capital stock. We have not paid any dividends and do not have any
current plans to pay any dividends.
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No established public market for common stock
Although
there have been a few trades of our stock on the OTC Markets Pink,
the quotations have been limited and sporadic and thus, there is
presently no established public market for our common stock. There
is no assurance that a trading market will develop, or, if
developed, that it will be sustained. A purchaser of our securities
may, therefore, find it difficult to resell our securities should
he or she desire to do so.
Recent Sales of Unregistered Securities.
COMMON STOCK
During the periods ending December 31, 2015, December 31, 2016 and
December 31, 2017, the Company engaged in the sale of its
unregistered securities as described below. The shares of our
common stock were issued pursuant to an exemption from registration
in Section 4(a)(2) of the Securities Act of 1933. These shares of
our common stock qualified for exemption under Section 4(a)(2) of
the Securities Act of 1933 since the issuance of shares by us did
not involve a public offering. The offering was not a “public
offering” as defined in Section 4(a)(2) due to the
insubstantial number of persons involved in the deal, size of the
offering, manner of the offering and number of shares offered. We
did not undertake an offering in which we sold a high number of
shares to a high number of investors. In addition, these
shareholders had necessary investment intent as required by Section
4(a)(2) since they agreed to receive share certificates bearing a
legend stating that such shares are restricted pursuant to Rule 144
of the 1933 Act. This restriction ensures that these shares would
not be immediately redistributed into the market and therefore not
be part of a “public offering.” All shareholders are
“sophisticated investors” and are family members,
friends or business acquaintances of our officers and directors.
Based on an analysis of the above factors, we believe we have met
the requirements to qualify for exemption under section 4(a)(2) of
the Securities Act of 1933 for this transaction.
On February 22, 2017, Tarpon Bay Partners LLC converted its $50,000
promissory note and accrued interest held in the Company into
33,334 common shares, representing the full value of the promissory
note held by Tarpon Bay Partners LLC.
During the twelve months ended December 31, 2017 the Company issued
shares to a non-related party for services, recorded at the fair
market value of the share price, in the amount of 13,333 common
shares. Additional shares of our common stock were issued at fair
market value of the share price as set forth in the table
below.
Date
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Name
|
Shares
|
|
Fair
Market
Value
|
Dollar
Amount
|
|
|
|
|
|
|
7/5/2017
|
Oscaleta Partners
LLC
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13,333
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$
|
.75/share
|
$10,000
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During the twelve months ended December 31, 2016 the Company issued
shares to a non-related party for services, recorded at the fair
market value of the share price, in the amount of 3,805 common
shares. Additional shares of our common stock were issued at fair
market value of the share price as set forth in the table below.
These items were transacted before the merger with the predecessor
company (NGFC).
Date
|
Name
|
Shares
|
Fair Market
Value
|
Dollar
Amount
|
|
|
|
|
|
|
|
8/15/2016
|
Stockvest
|
3,334
|
$
|
12.00/share
|
$40,000
|
9/30/2016
|
Clifford
Hunt
|
221
|
$
|
12.00/share
|
$2,650
|
9/30/2016
|
Lynx
Management
|
250
|
$
|
12.00/share
|
$3,000
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SERIES A PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
our Series A Preferred stock, par value $0.0001 per share, covering
up to an aggregate of 5,000,000 shares of Series A Preferred stock.
The Series A Preferred stock will cover the number of shares and
will have the powers, preferences, rights, qualifications,
limitations and restrictions determined by the board of directors,
which may include, among others, dividend rights, liquidation
preferences, voting rights, conversion rights, preemptive rights
and redemption rights. Except as provided by law or in a preferred
stock designation, the holders of preferred stock will not be
entitled to vote at or receive notice of any meeting of
stockholders. As of April 20, 2018, 4,817,792 shares of Series A
Preferred stock are outstanding.
Pursuant to the Series A Preferred Stock Designation, the holders
of the Series A Preferred stock are entitled to thirty-three and
one-third votes, on an “as-converted” basis, per each
Series A Preferred share held of record on all matters to be voted
upon by the stockholders. The holders of the Series A Preferred
stock are not entitled to receive dividends.
The holders of the Series A Preferred stock are entitled to convert
into common shares, at the holder’s discretion, at a rate of
one Series A Preferred share for three and one-third common shares.
Any fractional common shares created by the conversion is rounded
to the nearest whole common share.
Upon our liquidation, dissolution, distribution of assets or other
winding up, the holders of the Series A Preferred stock shall be
entitled to receive in preference to the holders of the Common
Stock a per share amount equal to $1.65 per share.
SERIES B PREFERRED STOCK
Our certificate of incorporation authorizes our Board of Directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
our Series B Preferred stock, par value $0.001 per share, covering
up to an aggregate of 20,000,000 shares of Series B Preferred
stock. The Series B Preferred stock will cover the number of shares
and will have the powers, preferences, rights, qualifications,
limitations and restrictions determined by the Board of Directors,
which may include, among others, dividend rights, liquidation
preferences, voting rights, conversion rights, preemptive rights
and redemption rights. Except as provided by law or in a preferred
stock designation, the holders of preferred stock will not be
entitled to vote at or receive notice of any meeting of
stockholders. As of April 20, 2018, 921,221 shares of Series B
Preferred stock are outstanding, which includes 850,000 shares of
Series B Preferred stock issued to investors and 71,221 shares of
Series B Preferred stock issued as part of the 8.0% annual dividend
that is accrued and paid in-kind, as described below.
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The holders of Series B Preferred shares are entitled to no voting
rights until the holder converts any or all of their Series B
Preferred shares to common shares. The holders of the Series B
Preferred shall accrue and pay-in-kind with additional Series B
Preferred stock a dividend based on an 8.0% annual percentage rate,
compounded quarterly in arrears, for any Series B Preferred stock
that is outstanding at the end of such prior quarter.
The holders of the Series B Preferred stock are entitled to convert
into common shares, at the holder’s discretion, at a
conversion price of Three Dollars Sixty Cents ($3.60) per share of
common stock, subject to certain price adjustments found in the
Series B Preferred stock purchase agreements.
Upon our liquidation, dissolution, distribution of assets or other
winding up, the holders of Series B Preferred shares shall have a
liquidation preference to the common shares and Series A Preferred
shares outstanding in the amount equal to the amount initially
invested by the Series B Preferred holder in the Series B Preferred
stock at the time of such investment minus the pro rata amount that
has been converted into common stock or redeemed.
“BLANK CHECK” PREFERRED STOCK
Our certificate of incorporation authorizes our board of directors,
subject to any limitations prescribed by law, without further
stockholder approval, to establish and to issue from time to time
up to an aggregate of 70,000,000 shares of preferred stock that is
considered “blank check”. The blank check preferred
stock shall be designed by the Board of Directors at the time of
classification
OPTIONS AND WARRANTS
Pursuant to our Series B Preferred stock offering, investors in the
Series B Preferred stock received warrants to purchase additional
common shares at exercise prices stated within such warrant. The
warrants have an expiration date of two or three years post the
date of the investment in the Series B Preferred stock by the
investor.
Should all Series B Preferred stock warrant holders fully exercise
their right to purchase shares, for cash, the Company will receive
$1,702,090 proceeds from such exercises and will increase the
common shares outstanding by 305,557 shares.
On June 27, 2017 we entered into a settlement agreement with
Oscaleta Partners LLC, a company we engaged on February 20, 2017 to
perform consulting services to the Company, and as part of that
settlement, we issued to Oscaleta Partners LLC the amount of 13,333
restricted shares, of the Company’s common stock, and a
three-year warrant to purchase up to 33,333 common shares of stock
of the Company at an exercise price of $3.60 per share. Should
Oscaleta Partners LLC exercise all of its shares under the warrant,
the company will receive $119,999 cash proceeds.
As compensation to Bill Bishop for his service on the Board of
Directors of the Company, we issued Mr. Bishop a three-year warrant
to purchase up to 8,334 common shares of our company at an exercise
price of $3.60 per share, subject to certain price adjustments and
other provisions found within the warrant issued to Mr. Bishop.
Should Mr. Bishop exercise the option through a cash payment to the
Company, the Company will receive up to $30,002 from Mr. Bishop and
he will receive up to 8,334 restricted common shares of the
Company. There are no registration rights associated with this
warrant that require the Company to register the
shares.
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On October 4, 2017, we entered into a financing transaction with
Golden Properties Ltd., a British Columbia company based in
Vancouver, Canada (“Golden Properties”) that involved a
series of loans made by Golden Properties to the Company. As part
of that financing, we issued to Golden Properties the following
warrants:
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●
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Warrant
B-4, for the purchase of 3,417,006 shares of common stock at $0.01
per share, as adjusted from time to time, expiring on October 4,
2020, and providing the Company with up to $34,170 in cash proceeds
should all the warrants be exercised;
|
|
|
|
|
●
|
Warrant
C-1, for the purchase of 400,000 shares of common stock at $3.55
per share, as adjusted from time to time, expiring on October 4,
2019, and providing the Company with up to $1,420,000 in cash
proceeds should all the warrants be exercised;
|
|
|
|
|
●
|
Warrant
C-2, for the purchase of 400,000 shares of common stock at $7.09
per share, as adjusted from time to time, expiring on October 4,
2019, and providing the Company with up to $2,836,000 in cash
proceeds should all the warrants be exercised;
|
|
|
|
|
●
|
Warrant
C-3, for the purchase of 400,000 shares of common stock at $8.58
per share, as adjusted from time to time, expiring October 2, 2020,
and providing the Company with up to $3,432,000 in cash proceeds
should all the warrants be exercised; and
|
|
|
|
|
●
|
Warrant
C-4, for the purchase of 400,000 shares of common stock at $11.44
per share, as adjusted from time to time, expiring October 2, 2020,
and providing the Company with up to $4,576,000 in cash proceeds
should all the warrants be exercised.
|
None of the warrants resulting from the agreement with Golden
Properties have been exercised as of the date of this annual
report.
During the period the options are outstanding, we will reserve from
our authorized and unissued common stock a sufficient number of
shares to provide for the issuance of shares of common stock
underlying the options upon the exercise of the options. No
fractional shares will be issued upon the exercise of the options.
The options are not listed on any securities exchange. Except as
otherwise provided within the option, the option holders have no
rights or privileges as members of the Company until they exercise
their options.
Item 6. Selected Financial Data.
The registrant qualifies as a smaller reporting company, as defined
by Rule 229.10(f)(1) and is not required to provide the information
required by this Item.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following Management’s Discussion and Analysis of
Financial Condition and Results of Operations contain
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors,
including those set forth under “Risk Factors” and
elsewhere in this report. The management’s
discussion, analysis of financial condition, and results of
operations should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this annual
report.
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Our Business 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 five 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) and Quest
Processing LLC (Quest Processing) located in eastern Kentucky
within the Central Appalachian coal basin, and ERC Mining Indiana
Corporation (ERC) located in southwest Indiana within the Illinois
coal basin. The coal deposits 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. Pursuant to the definitions in Paragraph (a) (4) of the
Securities and Exchange Commission’s Industry Guide 7, our
company and its business activities are deemed to be in the
exploration stage until mineral reserves are defined on our
properties.
Historical pricing for the two types of coal produced are as
follows:
Historic Metallurgical Coal Prices
|
|
Historic CAPP Thermal Coal Prices
|
||
Year End
|
Hampton Road Index HCC - High
|
|
Year End
|
Big Sandy / Kanawha Rate District
|
2013
|
$110.30
|
|
2013
|
64.09
|
2014
|
$100.35
|
|
2014
|
56.00
|
2015
|
$80.25
|
|
2015
|
45.55
|
2016
|
$223.00
|
|
2016
|
50.65
|
2017
|
$210.00
|
|
2017
|
60.90
|
McCoy Elkhorn Coal LLC
Located primarily within Pike County, Kentucky, McCoy Elkhorn is
currently comprised of two active mines (Mine #15 and the Carnegie
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.
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. Mine #15 has the
estimated capacity to produce up to approximately 40,000 tons per
month of coal. The Company acquired Mine #15 as an idled mine, and
since acquisition, the primary work completed at Mine #15 by the
Company includes changing working sections within the underground
mine, air ventilation enhancements primarily through brattice work
and the use of overcasts and installing underground mining
infrastructure as the mine advances due to coal extraction. In
2017, Mine #15 produced approximately 247,234 tons and sold the coal at an average price
of $65.88 per ton. In 2016, Mine #15 started production and
produced approximately 62,941 tons and sold the coal at an average
price of $82.45 per ton. During 2017 and 2016, 100% and 100%,
respectively, of the coal extracted from Mine #15 was high-vol
“B” metallurgical coal quality, of which 71% and 100%,
respectively, was sold into the metallurgical market, with the
balance sold in the thermal market.
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 Carnegie
Mine has the estimated capacity to produce up to approximately
10,000 tons per month of coal. The Company acquired the Carnegie
Mine as an idled mine, and since acquisition, the primary work
completed at the Carnegie Mine by the Company includes mine
rehabilitation work in preparation for production, changing working
sections within the underground mine, air ventilation enhancements
primarily through brattice work, and installing underground mining
infrastructure as the mine advances due to coal extraction. In
2017, the first year of the mine’s production, the Carnegie 1
Mine produced approximately 11,974 tons and sold the coal at an
average price of $65.88. During 2017, 100% of the coal extracted
from the Carnegie Mine was high-vol “B” metallurgical
coal quality, of which 51% was sold into the metallurgical market,
with the balance sold in the thermal market.
There are two coal preparation facilities at McCoy Elkhorn: the
Bevins #1 Preparation Plant, an 800 ton-per hour coal preparation
facility, and the Bevins #2 Preparation Plant, located on the same
permit site as Bevins #1, and a 500 ton-per-hour processing
facility. Both coal preparation plants have fine coal recovery and
a stoker circuits for enhanced coal recovery and coal sizing
options. 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. 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 Impoundments.
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 the
property at McCoy Elkhorn Coal paid by the company is
$58,681.
Below is a map showing the material properties at McCoy
Elkhorn:
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Knott County Coal LLC
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 17
idled mining permits (or permits in reclamation) and permits for
two preparation facilities: the Supreme Energy Preparation Plant
and the Raven Preparation Plant, both of which are also idled. 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.
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.
Knott County Coal is also owner of the permits to the idled Raven
Preparation Plant, an 800 ton-per-hour coal preparation facility
with a fine coal circuit, located in Raven, Kentucky. The Raven
rail loadout is a batch-weight rail loadout with 110 car storage
capacity and services by CSX Transportation in their Big Sandy rate
district. The Raven Preparation Plant has a coarse refuse and
slurry impoundment called the Big Branch Impoundment.
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 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. The allocated cost of
for the property at Knott County Coal paid by the company is
$200,236.
Below is a map showing the location of the idled Supreme Energy
Prep Plant, Raven Prep Plant, Loadouts, and plant impoundments at
Knott County Coal:
Deane Mining LLC
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.
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 run as a modified contractor
mine, whereby Deane Mining 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 Company acquired Access Energy as an idled mine, and
since acquisition, the primary work completed at Access Energy by
the Company includes mine rehabilitation work in preparation for
production, air ventilation enhancements primarily through brattice
work, and installing underground mining infrastructure as the mine
advances due to coal extraction. Access Energy has the estimated
capacity to produce up to approximately 20,000 tons per month of
coal. In 2017, the first year of the mine’s production,
Access Energy produced approximately 43,286 tons and sold the coal
at an average price of $58.67 per ton. 100% of the coal sold from
Access Energy in 2017 was sold as thermal coal.
Razorblade Surface is a surface mine targeting the Hazard 4 and
Hazard 4 Rider coal seams and located in Deane, Kentucky. Deane
Mining is currently preparing Razorblade Surface for coal
extraction and anticipates extracting coal in spring of 2018. Coal
produced from Razorblade Surface will be trucked approximately one
mile to the Mill Creek Preparation Plant. The Company acquired the
Razorblade Surface mine as a new, undisturbed mine, and since
acquisition, the primary work completed at Razorblade Surface has
been some initial minor engineering work to prepare the mine for
production in 2018. Once in production, Razorblade Surface will
have the estimated capacity to produce up to approximately 8,000
tons per month of coal.
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. The Company
acquired the Mill Creek Preparation Plant as an active facility,
and since acquisition, the primary work completed at the Mill Creek
Preparation Plant by the Company includes replacing belt lines and
replacing parts worn from ordinary use. We are currently utilizing
less than 10% of the available processing capacity of the Mill
Creek Preparation Plant.
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
$2,655,505.
Below is a map showing the material properties at Deane
Mining:
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 Quest MGMT 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 December31, 2017. ERC Mining LLC is considered a
variable interest entity and is consolidated into Quest
Energy’s financial statements.
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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 coal
deposits, ARC may, from time to time, and frequently, acquire
additional coal mining permits or coal deposits, or dispose of coal
mining permits or coal deposits 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. LRR is considered a variable interest entity and is
consolidated into Quest Energy’s financial
statements.
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, McCoy
Elkhorn’s Carnegie Mine, and Deane Mining’s Access
Energy Mine. 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.
As of December 31, 2017, Company sales to two customers accounted
for 63% of those sales. Through our network of intermediaries, coal
consolidators and end users, interested potential customers outpace
our ability to fulfill potential orders. The Company’s desire
is to expand the customer base and those who have purchased our
product.
On March 8, 2018, President Trump signed proclamations imposing a
25% tariff on imports of steel mill products and a 10% tariff on
imports of wrought and unwrought aluminum. It is too early to know
the impact these tariffs will have on demand for our metallurgical
coal. Our export customers include foreign steel producers who may
be affected by the tariffs to the extent their production is
imported into the U.S. Conversely, demand for metallurgical coal
from our domestic customers may increase. Retaliatory threats by
foreign nations to these tariffs may limit international trade and
adversely impact global economic conditions.
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 coal deposit 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.
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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.
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.
As of
December 31, 2017 and 2016, the cost of compliance with
environmental laws amounted to $190,940 and $9,806, respectively.
This amount represents the costs of the company associated with
fines incurred from various regulations regarding environmental and
safety compliance; please see elsewhere in this document for
additional detail regarding other reclamation and remediation
costs.
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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. We also rent office
space from an entity which we consolidate as a variable interest
entity (see note 5) 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.
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. We lease the mineral
and surface at all our key locations, with lease terms at our
currently-operating, key properties typically expiring upon
exhaustion of the mineral. Across our key properties, our mineral
royalty rates payable to the mineral owner range from 5.0% to 11.0%
of the gross sales price of our coal. All permits required to
operate our material properties have been obtained. The source of
power for all our key properties is Kentucky Power, and the source
of water for all our key properties is either the local
municipality or our existing water withdrawal permits that allow us
to pull water from nearby streams.
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. As a result, we are considered an exploration stage company
pursuant to Paragraph (a) (4) of Industry Guide 7.
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 and Deane Mining’s Razorblade
Surface mine are primarily run by company employees, McCoy
Elkhorn’s Carnegie Mine and Deane Mining’s Access
energy 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 204 employees (excluding
personnel hired through contractors), 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.
Results of Operations and Critical Accounting Policies and
Estimates.
The
results of operations are based on preparation of financial
statements in conformity with accounting principles generally
accepted in the United States. The preparation of financial
statements requires management to select accounting policies for
critical accounting areas as well as estimates and assumptions that
affect the amounts reported in the financial statements. The
Company’s accounting policies are more fully described in
Note 1 to the Notes of Financial Statements.
Results of Operations for the years ended December 31, 2017 and
December 31, 2016.
Revenues.
Revenues
for the period ended December 31, 2017 was $20,820,998 and 2016 was
$7,601,194, respectively. The primary drivers for revenue growth
was a full year of production from the Mine #15 of McCoy Elkhorn
and the beginning of production at the Access Energy mine of Deane
Mining in September 2017. Increase mine production was necessary to
fulfill market demands and customer orders.
Expenses.
Total
Operating Expenses for the period ended December 31, 2017 was
$34,839,884 and 2016 was $29,452,263, respectively. The primary
drivers for increase in operating expenses was a full year of
production from the Mine #15 of McCoy Elkhorn and the beginning of
production at the Access Energy mine of Deane Mining in September
2017. Production expenses, such as underground mine roof control,
mining consumables and wages increased as coal mining production
increased. The increased need for production expenses was caused to
the increased demand for the end product due to market demands and
customer orders. If demand from customers for our coal continues to
increase, we anticipate these production expenses will also
increase.
Total
Other Expenses for the period ended December 31, 2017 was $6,580
and 2016 was $238,213, respectively. The primary driver for
decrease in other expenses was an increase in royalty and interest
income from consolidated subsidiaries.
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Financial Condition.
Total
Assets as of December 31, 2017 amounted to $18,263,385 and 2016
amounted to $20,273,829, respectively. The primary drivers for
lower asset balance is current year depreciation and lower accounts
receivable balance.
Total
Liabilities as of December 31, 2017 amounted to $58,356,449 and
2016 amounted to $47,781,427, respectively. The primary drivers for
the increase in liability balance is an increase in accounts
payable and equipment and term debt.
Liquidity and Capital Resources.
The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern which contemplates,
among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business.
We
are not aware of any trends or known demands, commitments, events
or uncertainties that will result in or that are reasonably likely
to result in material increases or decreases in
liquidity.
Capital Resources.
We
had no material commitments for capital expenditures as of December
31, 2017.
Off-Balance Sheet Arrangements
We
have made no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk.
The
registrant qualifies as a smaller reporting company, as defined by
SEC Rule 229.10(f)(1) and is not required to provide the
information required by this Item.
Item 8. Financial Statements and Supplementary Data.
The
report of the independent registered public accounting firm and the
financial statements listed on the accompanying index at page F-1
of this report are filed as part of this report and incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
We
did not have any disagreements on accounting and financial
disclosure with our accounting firm during the reporting
period.
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Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
The
management, with participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures pursuant to Rule 12a-15 under
the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as of the end of the period covered by
this Annual Report. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource
constraints and that management is required to apply is judgement
in evaluating the benefits of possible controls and procedures
relative to their costs.
Based
on management’s evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, as of December 31,
2017, due to the weakness in internal control over financial
reporting described below, our disclosure controls and procedures
are not designed at a reasonable assurance level or effective to
provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time
periods specified in SEC rules and forms, and that such information
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. As discussed below, we plan on increasing the size of
our accounting staff at the appropriate time for our business and
its size to ameliorate our auditor’s concern that the Company
does not effectively segregate certain accounting duties, which we
believe would resolve the material weakness in internal control
over financial reporting and similarly improve disclosure controls
and procedures, but there can be no assurances as to the timing of
any such action or that the Company will be able to do
so.
(b) Management’s Annual Report on Internal Control over
Financial Reporting.
The
management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting, as
defined in Exchange Act Rule 13a-15(f). The Company’s
internal control over financial reporting is a process designed
under the supervision of the Company’s Principal Executive
Officer and Principal 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 the U.S. generally accepted
accounting principles.
As
of December 31, 2017, 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 Rule 13a-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934. Based on
this evaluation, management concluded that our internal controls
over financial reporting were not effective for the purposes for
which it is intended. Specifically, managements determination was
based on the following material weakness which existed as of
December 31, 2017:
Due
to the Company’s insufficient number of staff performing
accounting and reporting functions and lack of timely
reconciliations.
A
material weakness is a deficiency, or a combination of control
deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement
of our annual or interim consolidated financial statements will not
be prevented or detected on a timely basis. Notwithstanding the
determination that our internal control over financial reporting
was not effective, as of December 31, 2017, and that there was a
material weakness as identified in this Annual Report, we believe
that our consolidated financial statements contained in this Annual
Report fairly present our financial position, results of operations
and cash flows for the years covered hereby in all material
respects.
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As of December 31, 2017, under the supervision and
with the participation of our management, we conducted an
evaluation of the effectiveness of the design and operations of our
internal control over financial reporting, as defined in Rules
13a-15(f) or 15d-15(f) promulgated under the Securities Exchange
Act of 1934 and based on the criteria for effective internal
control described Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation,
management concluded that our internal control over financial
reporting was not effective so as to timely identify, correct and
disclose information required to be included on our Securities and
Exchange Commission (“SEC”) reports due to the
Company’s limited internal resources and lack of ability to
have multiple levels of transaction review. 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
management, including its Principal Executive Officer and Principal
Financial Officer, does not expect that its disclosure controls and
procedures, or its internal controls over financial reporting 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 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.
This
Annual Report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial reporting.
Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm
pursuant to the temporary rules of the SEC that permit the Company
to provide only management’s report in this Annual
Report.
This
report shall not be deemed to be filed for purposes of Section 18
of the Securities Exchange Act of 1934, or otherwise subject to the
liabilities of this section, and is not incorporated by reference
into any filing of the Company, whether made before or after the
date hereof, regardless of any general incorporation language in
such filing.
(c) Changes in Internal Control Over Financial
Reporting
There
have been changes in the Company’s internal control over
financial reporting during the period ended December 31, 2017 that
have materially affected the Company’s internal controls over
financial reporting.
The
Company has hired a Chief Financial Officer, President, Chief
Executive Officer and General Counsel, all of whom work in
conjunction on risk assessment and segregation of duties.
Management has identified material weaknesses as described above.
Management has hired outside consultants as described above to
mitigate the risk though we still deem the controls to be
ineffective.
Item 9B. Other Information.
None.
|
25
|
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Table of Contents
|
PART III
Item 10. Directors, Executive Officers and Corporate
Governance.
Directors and Executive Officers.
The following individuals serve as our executive officers and
members of our board of directors as of December 31,
2017:
Name
|
|
Age
|
|
Positions
|
|
|
|
|
|
Mark C.
Jensen
|
|
38
|
|
Chief
Executive Officer, Chairman of the Board of Directors
|
|
|
|
|
|
Thomas
M. Sauve
|
|
39
|
|
President,
Director
|
|
|
|
|
|
Kirk P.
Taylor
|
|
38
|
|
Chief
Financial Officer
|
Mark C. Jensen (age 38) – Chief Executive
Officer
Mark C. Jensen has been the Chief Executive Officer of American
Resources Corporation since 2015. In this role, he is responsible
for all facets of operational and strategic initiatives of the
organizations. Mark is also the co-founder and co-managing partner
in a micro-cap investment fund, T Squared Capital, LLC. Prior to
forming T Squared Capital, LLC and Quest Energy, Inc., Mark worked
on Wall Street since 2002 with firms specialized in company
turn-arounds.
Thomas M. Sauve (age 39) – President
Thomas M. Sauve has been the President of American Resources
Corporation since 2015. In this role, he is responsible for all
facets of operational and strategic initiatives of the
organizations. Tom is also the co-founder and co-managing partner
in a micro-cap investment fund, T Squared Capital, LLC. Prior to
forming T Squared Capital, LLC and Quest Energy, Inc., Tom worked
on Wall Street since 2001 with firms specialized in company
turn-arounds.
Kirk Taylor, CPA (age 38) – Chief Financial
Officer
Kirk P. Taylor, CPA, has been the Chief Financial Officer of
American Resources Corporation since 2016. In his role, he is
responsible for all financial reporting tax compliance and treasury
management. Prior to joining Quest Energy, Inc., Kirk was an
auditor with K.B Parrish & Co, LLP through beginning in 2013,
Katz Sapper & Miller, LLP beginning in 2011 and CohenReznick
beginning in 2002. While with those firms he focused on audit,
financial reporting and tax compliance with operating entities and
investment partnership utilizing various types of tax efficient
investments.
|
26
|
|
Table of Contents
|
Directors:
Mark C. Jensen – Chairman of Board &
Director
Mark C. Jensen has been the Chief Executive Officer of American
Resources Corporation since 2015. In this role, he is responsible
for all facets of operational and strategic initiatives of the
organizations. Mark is also the co-founder and co-managing partner
in a micro-cap investment fund, T Squared Capital, LLC. Prior to
forming T Squared Capital, LLC and Quest Energy, Inc., Mark worked
on Wall Street since 2002 with firms specialized in company
turn-arounds.
Thomas M. Sauve – Director
Thomas M. Sauve has been the President of American Resources
Corporation since 2015. In this role, he is responsible for all
facets of operational and strategic initiatives of the
organizations. Tom is also the co-founder and co-managing partner
in a micro-cap investment fund, T Squared Capital, LLC. Prior to
forming T Squared Capital, LLC and Quest Energy, Inc., Tom worked
on Wall Street since 2001 with firms specialized in company
turn-arounds.
During the past ten years, none of our directors or executive
officers has been:
●
the
subject of any bankruptcy petition filed by or against any business
of which such person was a general partner or executive officer
either at the time of the bankruptcy or within two years prior to
that time;
●
convicted
in a criminal proceeding or is subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
●
subject
to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business,
securities or banking activities;
●
found
by a court of competent jurisdiction (in a civil action), the SEC
or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, that has not been
reversed, suspended, or vacated;
●
subject
of, or a party to, any order, judgment, decree or finding, not
subsequently reversed, suspended or vacated, relating to an alleged
violation of a federal or state securities or commodities law or
regulation, law or regulation respecting financial institutions or
insurance companies, law or regulation prohibiting mail or wire
fraud or fraud in connection with any business entity;
or
●
subject
of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory
organization, any registered entity or any equivalent exchange,
association, entity or organization that has disciplinary authority
over its members or persons associated with a member.
None of our directors, executive officers or affiliates, or any
beneficial owner of 5% or more of our common stock, or any
associate of such persons, is an adverse party in any material
proceeding to, or has a material interest adverse to,
us.
|
27
|
|
Table of Contents
|
Separation of Duties of the Chairman of the Board, the Chief
Executive Officer and the President
Due to the inherent limitations of nonexecutive chairs, the duties
of the Chairman of the Board and the Chief Executive Officer have
not been separated. In order to increase objectivity and fiduciary
responsibilities to the shareholders both in appearance and
operation, the duties of the Chief Executive Officer and the
President have been separated.
Director Independence
None of our directors are considered to be
independent.
Limitation of Director Liability; Indemnification
Indemnity
To the fullest extent permitted by the Florida Business Corporation
Act, the Company shall indemnify, or advance expenses to, any
person made, or threatened to be made, a party to any action, suit
or proceeding by reason of the fact that such person (i) is or was
a director of the Company; (ii) is or was serving at the request of
the Company as a director of another Company, provided that such
person is or was at the time a director of the Company; or (iv)is
or was serving at the request of the Company as an officer of
another Company, provided that such person is or was at the time a
director of the Company or a director of such other Company,
serving at the request of the Company. Unless otherwise expressly
prohibited by the Florida Business Corporation Act, and except as
otherwise provided in the previous sentence, the Board of Directors
of the Company shall have the sole and exclusive discretion, on
such terms and conditions as it shall determine, to indemnify, or
advance expenses to, any person made, or threatened to be made, a
party to any action, suit, or proceeding by reason of the fact such
person is or was an officer, employee or agent of the Company as an
officer, employee or agent of another Company, partnership, joint
venture, trust or other enterprise. No person falling within the
purview of this paragraph may apply for indemnification or
advancement of expenses to any court of competent
jurisdiction.
Section 16(a) Beneficial Ownership Reporting
Compliance
Our
shares of common stock are registered under the Exchange Act, and
therefore our officers, directors and holders of more than 10% of
our outstanding shares are subject to the provisions of Section
16(a) which requires them to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock and
our other equity securities. Officers, directors and greater than
10% beneficial owners are required by SEC regulations to furnish us
with copies of all Section 16(a) reports they file. During the
fiscal year ended December 31, 2017, none of our officers,
directors or 10% shareholders failed to file any Section 16 report
on a timely basis.
|
28
|
|
Table of Contents
|
Code of Ethics
We
have adopted a Code of Business Conduct and Ethics that applies to
all of our employees, officers and directors. In addition to the
Code of Business Conduct and Ethics, our principal executive
officer, principal financial officer and principal accounting
officer are also subject to written policies and standards that are
reasonably designed to deter wrongdoing and to promote: honest and
ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional
relationships; full, fair, accurate, timely and understandable
disclosure in reports and documents that are filed with, or
submitted to the SEC and in other public communications made by us;
compliance with applicable government laws, rules and regulations;
the prompt internal reporting of violations of the code to an
appropriate person or persons identified in the code; and
accountability for adherence to the code. We have posted the text
of our Code of Business Conduct and Ethics on our internal website.
We intend to disclose future amendments to, or waivers from,
certain provisions of our Code of Business Conduct and Ethics as
applicable.
Legal Proceedings.
To
the best of our knowledge, except as set forth herein, none of the
directors or director designees to our knowledge has been convicted
in a criminal proceeding, excluding traffic violations or similar
misdemeanors, or has been a party to any judicial or administrative
proceeding during the past five years that resulted in a judgment
decree or final order enjoining the person from future violations
of, or prohibiting activities subject to, federal or state
securities laws, or finding of any violation of federal or state
securities laws, except for matters that were dismissed without
sanction or settlement.
Meetings and Committees of the Board of Directors.
We
do not have a nominating committee of the Board of Directors, or
any committee performing similar functions. Nominees for election
as a director are selected by the Board of Directors.
We
do not yet have an audit committee or an audit committee financial
expert. We expect to form such a committee composed of non-employee
directors when such individuals are added to the board of
directors. We may in the future attempt to add a qualified board
member to serve as an audit committee financial expert in the
future, subject to our ability to locate and compensate such a
person. Despite the lack of an audit committee, those members of
the board of directors that would otherwise be on our audit
committee will continue to analyze and investigate our actual and
potential businesses prospects as members of our board of
directors. Furthermore, our entire board of directors is aware of
the importance of the financial and accounting due diligence that
must be undertaken in furtherance of our business and they intend
to conduct a comprehensive accounting financial analysis of the
Company’s business.
Item 11. Executive Compensation.
The
following table sets forth information concerning the annual and
long-term compensation of our executive officers for services
rendered in all capacities to us during the last two completed
fiscal years. The listed individuals shall hereinafter be referred
to as the “Named Executive Officers.” We also have
included below a table regarding compensation paid to our directors
who served during the last completed fiscal year. The address for
all individuals identified in the following tables is 9002
Technology Lane, Fishers, IN 46038.
|
29
|
|
Table of Contents
|
Summary Compensation Table - Officers
(a)
|
|
(b)
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
||||||||
Name and
principal position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-equity
Incentive plan
Compensation
($)
|
|
|
Nonqualified deferred compensation earnings
($)
|
|
|
All other
Compensation
($)
|
|
|
Total
($)
|
|
||||||||
I.
Andrew Weeraratne,
|
|
2017
|
|
|
5,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
5,000
|
|
(1)
CEO, CFO
|
|
2016
|
|
|
22,800
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
22,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark C.
Jensen, (2) CEO
|
|
2017
|
|
|
156,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
156,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
M. Sauve, (3) President
|
|
2017
|
|
|
156,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
156,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kirk P.
Taylor, (4) CFO
|
|
2017
|
|
|
156,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
156,000
|
|
_______________
(1)
|
The
amount of value for the services of Mr. Weeraratne was determined
by agreement for shares in which he received as a founder for (1)
control, (2) willingness to serve on the Board of Directors and (3)
participation in the foundational days of the corporation. Mr.
Weeraratne submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(2)
|
Of the
salary amount listed in this table, $32,000 was accrued and unpaid
in 2017. The employment agreement for fiscal year 2017 also allows
for payment of a bonus that has not yet been calculated. On January
2, 2018, the Company entered into an employment agreement with Mr.
Jensen, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.64 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors.
|
|
|
(3)
|
Of the
salary amount listed in this table, $32,000 was accrued and unpaid
in 2017. The employment agreement for fiscal year 2017 also allows
for payment of a bonus that has not yet been calculated. On January
2, 2018, the Company entered into an employment agreement with Mr.
Sauve, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.54 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors.
|
|
|
(4)
|
Of the
salary amount listed in this table, $26,293 was accrued and unpaid
in 2017. The employment agreement for fiscal year 2017 also allows
for payment of a bonus that has not yet been calculated. On January
2, 2018, the Company entered into an employment agreement with Mr.
Taylor, at an annual rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.20 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors.
|
|
30
|
|
Table of Contents
|
Director Compensation
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
|
Fees Earned or
Paid in Cash
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensation
|
Nonqualified
deferred compensation earnings
|
All Other
Compensation
|
Total
|
Name and
principal position
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
James C. New
(1)
|
-0-
|
1,500
|
-0-
|
-0-
|
-0-
|
-0-
|
1,500
|
I. Andrew
Weeraratne (2)
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Eugene Nichols
(3)
|
-0-
|
15,000
|
-0-
|
-0-
|
-0-
|
-0-
|
15,000
|
Bo G. Engberg
(4)
|
-0-
|
1,500
|
-0-
|
-0-
|
-0-
|
-0-
|
1,500
|
William D. Bishop
(5)
|
-0-
|
-0-
|
50,000
|
-0-
|
-0-
|
-0-
|
50,000
|
Mark C. Jensen
(6)
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
Thomas M. Sauve
(7)
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
____________
(1)
|
Mr. New
submitted his resignation to the Company on February 7, 2017 in
connection with a change of control of the Company.
|
|
|
(2)
|
Mr.
Weeraratne submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(3)
|
Mr.
Nichols submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(4)
|
Mr.
Engberg submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(5)
|
Mr.
Bishop was appointed as director on May 10, 2017 and as
compensation to Bill Bishop for his service on the Board of
Directors, the Company issued Mr. Bishop a three-year option to
purchase up to 8,334 common shares of our company at an exercise
price of $3.60 per share, subject to certain price adjustments and
other provisions found within the option issued to Mr. Bishop.
Effective November 8, 2017, Mr. Bishop resigned as a director of
the Company and Mr. Bishop’s resignation from the Board of
Directors did not result from any disagreement with the
Company.
|
|
|
(6)
|
Mr.
Jensen was appointed as a director on February 7, 2017. On January
2, 2018, the Company entered into an employment agreement with Mr.
Jensen, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.64 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors. Mr. Jensen is not paid separately
for his services as a director for the Company.
|
|
|
(7)
|
Mr.
Sauve was appointed as a director on February 7, 2017. On January
2, 2018, the Company entered into an employment agreement with Mr.
Sauve, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.54 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors. Mr. Sauve is not paid separately for
his services as a director for the Company.
|
No
retirement, pension, profit sharing, stock option or insurance
programs or other similar programs have been adopted by the Company
for the benefit of its employees.
There
are no understandings or agreements regarding compensation our
management will receive after a business combination that is
required to be included in this table, or otherwise.
|
31
|
|
Table of Contents
|
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
The
following table lists, as of April 20, 2018, the number of shares
of our Common Stock and Series A Convertible Preferred Stock that
are beneficially owned by (i) each person or entity known to us to
be the beneficial owner of more than 5% of our common stock; (ii)
each executive officer and director of our company; and (iii) all
executive officers and directors as a group. Information relating
to beneficial ownership of Common Stock and our Convertible
Preferred Stock by our principal shareholders and management is
based upon information furnished by each person using
“beneficial ownership” concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is
deemed to be a beneficial owner of a security if that person has or
shares voting power, which includes the power to vote or direct the
voting of the security, or investment power, which includes the
power to vote or direct the voting of the security. The person is
also deemed to be a beneficial owner of any security of which that
person has a right to acquire beneficial ownership within 60 days
under any contract, option or warrant. Under the Securities and
Exchange Commission rules, more than one person may be deemed to be
a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she
may not have any pecuniary beneficial interest. Except as noted
below, each person has sole voting and investment power. Unless
otherwise specified, the address of each beneficial owner listed in
the tables is c/o American Resources Corporation, 9002 Technology
Lane, Fishers, IN 46038.
Name and
Address
of
Shareholder
|
Number of
Shares of
Common
Stock
Beneficially
Owned (1)
|
Percent of
Common Stock Owned (2)
|
|
|
|
|
|
Golden Properties,
Ltd. (3)
|
1,688,350
|
9.99
|
%
|
________________
(1)
|
A
person is deemed to be the beneficial owner of securities that can
be acquired by such a person within 60 days upon exercise of
options, warrants or convertible securities. Each beneficial
owner’s percentage ownership is determined by assuming that
options, warrants and convertible securities that are held by such
a person (but not those held by any other person) and are
exercisable within 60 days from that date have been
exercised;
|
|
|
(2)
|
Based
on 18,875,811 shares of Common Stock deemed to be outstanding as if
one or more warrants were exercised up to the maximum amount of
9.99% (or 1,688,350 shares) of the issued and outstanding number of
shares at December 31, 2017, including the common shares issuable
from the conversion of the Series A Preferred to common and the
conversion of the Series B Preferred to common (exclusive of any
shares due to Series B Preferred holders from accrued interest).
This percentage has been rounded for convenience;
|
|
|
(3)
|
Golden
Properties, Ltd. is the owner of several Company common stock
warrants for the purchase of shares of our Common Stock, which
warrants are exercisable at such company’s discretion,
subject to the following limitation on amount. The warrant
agreements provide that at no time may Golden Properties, Ltd. or
its affiliates exercise any warrant that would result in their
ownership of more than 9.99% of the issued and outstanding shares
of our Common Stock on the date of exercise. Additionally,
Alexander Lau, who is a principal of Golden Properties and a
beneficial owner through Golden Properties, is a holder of 59,133
Series A Preferred shares. Accordingly, Golden Properties, Ltd. is
presently deemed the beneficial owner of 1,885,460 shares of our
Common Stock pursuant to Securities and Exchange Commission Rule
13d-3, promulgated under the Securities Exchange Act of 1934.
The
full number of shares that Golden Properties' beneficially owns
(including all shares underlying all the warrants owned by Golden
Properties and excluding those Series A Preferred shares owned by
Alexander Lau stated above) is 5,050,339
shares.
|
|
32
|
|
Table of Contents
|
Name
|
Number of
Shares of
Series A Preferred
Stock Beneficially
Owned (4)
|
Percent of
Series A
Preferred Stock
Owned (5)
|
Common Stock
Beneficially
Owned (6)
|
Percent of Common
Stock Beneficially
Owned (7)
|
|
|
|
|
|
Officers
and Directors
|
|
|
|
|
|
|
|
|
|
Mark C. Jensen
(8) Chief Executive Officer,
Director
|
1,541,693
|
32.00%
|
5,138,977
|
30.32%
|
|
|
|
|
|
Thomas M. Sauve (9)
President, Director
|
1,300,803
|
27.00%
|
4,336,010
|
25.58%
|
|
|
|
|
|
Kirk P. Taylor
Chief Financial Officer
|
486,115
|
10.09%
|
1,620,383
|
9.56%
|
|
|
|
|
|
All Directors and Officers as a Group (3
persons) (10)
|
3,328,611
|
69.09%
|
11,095,370
|
65.45%
|
|
|
|
|
|
5%
Holders
|
|
|
|
|
|
|
|
|
|
Gregory Q.
Jensen
|
486,115
|
10.09%
|
1,620,383
|
9.56%
|
|
|
|
|
|
Adam B.
Jensen
|
486,115
|
10.09%
|
1,620,383
|
9.56%
|
|
|
|
|
|
All
Directors, Officers and 5% Holders as a Group (5
persons)
|
4,300,841
|
89.27%
|
14,336,136
|
84.57%
|
___________
(4)
|
A
person is deemed to be the beneficial owner of securities that can
be acquired by such a person within 60 days from December 31, 2017,
upon exercise of options, warrants or convertible securities. Each
beneficial owner’s percentage ownership is determined by
assuming that options, warrants and convertible securities that are
held by such a person (but not those held by any other person) and
are exercisable within 60 days from that date have been
exercised;
|
|
|
(5)
|
Based
on 4,794,425 shares of Series A Convertible Preferred Stock
outstanding as of December 31, 2017. These percentages have been
rounded for convenience;
|
|
|
(6)
|
Assuming
the Series A Preferred Stock is converted to Class A Common
Stock;
|
|
|
(7)
|
Based
on 892,044 Class A Common Stock outstanding as of December 31,
2017. These percentages have been rounded for
convenience;
|
|
|
(8)
|
Mr.
Jensen beneficially owns 58,933 shares of our Series A Convertible
Preferred Stock through his equity ownership in T Squared Partners,
LP, which shares are included in the table above;
|
|
|
(9)
|
Mr.
Sauve beneficially owns 38,417 shares of our Series A Convertible
Preferred Stock through his equity ownership in T Squared Partners,
LP, which shares are included in the table above;
|
|
|
(10)
|
Our
officers and directors do not own any shares of our Class A Common
Stock (892,044 shares outstanding) or any shares of our Series B
Convertible Preferred Stock (850,000 shares outstanding, exclusive
of any shares due from accrued interest).
|
|
33
|
|
Table of Contents
|
Item 13. Certain Relationships and Related Transactions, and
Director Independence.
Transactions with Related Persons, Promoters and Certain Control
Persons.
On June
12, 2015, the Company executed a consulting agreement with an
entity with common ownership. During 2017 and 2016, the Company
incurred fees totaling $0 and $12,340,615 relating to services
rendered under this agreement. The amount outstanding and payable
as of December 31, 2017 and 2016, was $17,840,615 and $17,840,615,
respectively. The amount is due on demand and does not accrue
interest.
On
January 1, 2016, the Company awarded stock options for 827,862
shares in exchange for consulting efforts to an entity with common
ownership. No stock options were awarded to related parties during
2017.
During
2015, equipment purchasing was paid by an affiliate resulting in a
note payable. The balance of the note was $74,000 as of December
31, 2017 and 2016, respectively.
On
April 30, 2017, the Company purchased $250,000 of secured debt that
had been owed to that party, by an operating subsidiary of a
related party. As a result of the transaction, the Company is now
the creditor on the notes. The first note in the amount of $150,000
is dated March 13, 2013, carries an interest rate of 12% and was
due on September 13, 2015. The second note in the amount of
$100,000 is dated July 17, 2013, carries an interest rate of 12%
and was due January 17, 2016. Both notes are in default and have
been fully impaired due to collectability uncertainty.
During
July 2017, an officer of the Company advanced $50,000 to the
Company. The advance is unsecured, non interest bearing and due on
demand.
The
following table sets forth information concerning the annual and
long-term compensation of our executive officers for services
rendered in all capacities to us during the last two completed
fiscal years. The listed individuals shall hereinafter be referred
to as the “Named Executive Officers.” We also have
included below a table regarding compensation paid to our directors
who served during the last completed fiscal year. The address for
all individuals identified in the following tables is 9002
Technology Lane, Fishers, IN 46038.
Summary Compensation Table - Officers
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
Name and
principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-equity
Incentive plan
Compensation
($)
|
Nonqualified deferred compensation earnings
($)
|
All other
Compensation
($)
|
Total
($)
|
I. Andrew
Weeraratne,
|
2017
|
5,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
5,000
|
(1) CEO,
CFO
|
2016
|
22,800
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
22,800
|
|
|
|
|
|
|
|
|
|
|
Mark C. Jensen, (2)
CEO
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
|
|
|
|
|
|
|
|
|
|
Thomas M. Sauve,
(3) President
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
|
|
|
|
|
|
|
|
|
|
Kirk P. Taylor, (4)
CFO
|
2017
|
156,000
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
156,000
|
___________
(1)
|
The
amount of value for the services of Mr. Weeraratne was determined
by agreement for shares in which he received as a founder for (1)
control, (2) willingness to serve on the Board of Directors and (3)
participation in the foundational days of the corporation. Mr.
Weeraratne submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(2)
|
Of the
salary amount listed in this table, $32,000.00 was accrued and
unpaid in 2017. The employment agreement for fiscal year 2017 also
allows for payment of a bonus that has not yet been calculated. On
January 2, 2018, the Company entered into an employment agreement
with Mr. Jensen, at an annual salary rate of $156,000. The Company
also has provided for a discretionary quarterly performance bonus
of up to $.64 per clean ton of coal mined. The payment of such
bonus shall be in the sole discretion of the Company’s
management and/or applicable Board of Directors.
|
|
|
(3)
|
Of the
salary amount listed in this table, $32,000.00 was accrued and
unpaid in 2017. The employment agreement for fiscal year 2017 also
allows for payment of a bonus that has not yet been calculated. On
January 2, 2018, the Company entered into an employment agreement
with Mr. Sauve, at an annual salary rate of $156,000. The Company
also has provided for a discretionary quarterly performance bonus
of up to $.54 per clean ton of coal mined. The payment of such
bonus shall be in the sole discretion of the Company’s
management and/or applicable Board of Directors.
|
|
|
(4)
|
Of the
salary amount listed in this table, $26,293.16 was accrued and
unpaid in 2017. The employment agreement for fiscal year 2017 also
allows for payment of a bonus that has not yet been calculated. On
January 2, 2018, the Company entered into an employment agreement
with Mr. Taylor, at an annual rate of $156,000. The Company also
has provided for a discretionary quarterly performance bonus of up
to $.20 per clean ton of coal mined. The payment of such bonus
shall be in the sole discretion of the Company’s management
and/or applicable Board of Directors.
|
34
Director Compensation
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|||||||
|
|
Fees Earned or Paid in Cash
|
|
|
Stock Awards
|
|
|
Option Awards
|
|
|
Non-Equity Incentive Plan Compensation
|
|
|
Nonqualified deferred compensation earnings
|
|
|
All Other Compensation
|
|
|
Total
|
|
|||||||
Name and principal position
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|||||||
James
C. New (1)
|
|
|
-0-
|
|
|
|
1,500
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
1,500
|
|
I.
Andrew Weeraratne (2)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Eugene
Nichols (3)
|
|
|
-0-
|
|
|
|
15,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
15,000
|
|
Bo G.
Engberg (4)
|
|
|
-0-
|
|
|
|
1,500
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
1,500
|
|
William
D. Bishop (5)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
50,000
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
50,000
|
|
Mark C.
Jensen (6)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Thomas
M. Sauve (7)
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
__________
(1)
|
Mr. New
submitted his resignation to the Company on February 7, 2017 in
connection with a change of control of the Company.
|
|
|
(2)
|
Mr.
Weeraratne submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(3)
|
Mr.
Nichols submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(4)
|
Mr.
Engberg submitted his resignation to the Company on February 7,
2017 in connection with a change of control of the
Company.
|
|
|
(5)
|
Mr.
Bishop was appointed as director on May 10, 2017 and as
compensation to Bill Bishop for his service on the Board of
Directors, the Company issued Mr. Bishop a three-year option to
purchase up to 8,334 common shares of our company at an exercise
price of $3.60 per share, subject to certain price adjustments and
other provisions found within the option issued to Mr. Bishop.
Effective November 8, 2017, Mr. Bishop resigned as a director of
the Company and Mr. Bishop’s resignation from the Board of
Directors did not result from any disagreement with the
Company.
|
|
|
(6)
|
Mr.
Jensen was appointed as a director on February 7, 2017. On January
2, 2018, the Company entered into an employment agreement with Mr.
Jensen, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.64 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors. Mr. Jensen is not paid separately
for his services as a director for the Company.
|
|
|
(7)
|
Mr.
Sauve was appointed as a director on February 7, 2017. On January
2, 2018, the Company entered into an employment agreement with Mr.
Sauve, at an annual salary rate of $156,000. The Company also has
provided for a discretionary quarterly performance bonus of up to
$.54 per clean ton of coal mined. The payment of such bonus shall
be in the sole discretion of the Company’s management and/or
applicable Board of Directors. Mr. Sauve is not paid separately for
his services as a director for the Company.
|
|
|
No
retirement, pension, profit sharing, stock option or insurance
programs or other similar programs have been adopted by the Company
for the benefit of its employees.
|
|
|
|
There
are no understandings or agreements regarding compensation our
management will receive after a business combination that is
required to be included in this table, or otherwise.
|
35
Director Independence.
We have not:
|
●
|
Established
our own definition for determining whether our director or nominees
for directors are “independent” nor has it adopted any
other standard of independence employed by any national securities
exchange or inter-dealer quotation system, though our current
directors would not be deemed to be “independent” under
any applicable definition given that he is an officer of the
Company; nor,
|
|
|
|
|
●
|
Established
any committees of the Board of Directors.
|
Item 14. Principal Accounting Fees and Services.
|
2017
|
2016
|
Audit
fees
|
$130,000
|
$97,000
|
Audit related
fees
|
---
|
---
|
Tax
fees
|
---
|
---
|
All other
fees
|
---
|
---
|
The Company does not currently have an audit committee. The normal
functions of the audit committee are handled by the board of
directors.
36
PART IV
Item 15. Exhibits, Financial Statement Schedule.
The following exhibits are filed herewith except as otherwise
noted. Exhibits referenced in previous filings by the Company with
the SEC are incorporated by reference herein.
Exhibit No.
|
|
Description
|
|
||
|
||
|
||
|
||
|
||
|
||
|
||
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
|
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
|
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.
|
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.
|
95.1
|
|
Exhibit
95 – 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
|
37
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
NAME
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Mark C. Jensen
|
|
Principal
Executive Officer,
|
|
October
22, 2018
|
Mark C.
Jensen
|
|
Chief Executive Officer, Chairman of the Board of
Directors
|
|
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
NAME
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Mark C. Jensen
|
|
Principal
Executive Officer,
|
|
October,
22, 2018
|
Mark C.
Jensen
|
|
Chief Executive Officer, Chairman of the Board of
Directors
|
|
|
|
|
|
|
|
/s/ Kirk P. Taylor
|
|
Principal
Financial Officer, Chief Financial Officer
|
|
October
22, 2018
|
Kirk P.
Taylor
|
|
|
|
|
|
|
|
|
|
/s/ Thomas M. Sauve
|
|
Director
|
|
October
22, 2018
|
Thomas
M. Sauve
|
|
|
|
|
|
38
|
|
|
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Act by Registrants
Which Have Not Registered Securities Pursuant to Section 12 of the
Act
None.
39
AMERICAN RESOURCES CORPORATION
CONSOLIDATED
FINANCIAL STATEMENTS
December
31, 2017 and 2016
CONTENTS
|
Page
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
|
Consolidated
Statements of Operations
|
F-4
|
|
|
Consolidated
Statements of Stockholders’ Deficit
|
F-5
|
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the shareholders and board of directors of
American Resources Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
American Resources Corporation and its subsidiaries (collectively,
the “Company”) as of December 31, 2017 and 2016, and
the related consolidated statements of operations, changes in
stockholders’ deficit, and cash flows for the years then
ended, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the
results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Going Concern Matter
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered
recurring losses from operations and has a net capital deficiency
that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and
are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the entity's internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ MaloneBailey,
LLP
www.malonebailey.com
We have served as the Company's auditor since 2017.
Houston, Texas
April 20, 2018
F-2
AMERICAN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
|
December
31,
|
|
|
2017
|
2016
|
|
|
|
ASSETS
|
||
CURRENT
ASSETS
|
|
|
Cash
|
$186,722
|
$784,525
|
Accounts
Receivable
|
1,870,562
|
2,753,199
|
Inventory
|
615,096
|
-
|
Intercompany
|
-
|
-
|
Accounts Receivable
- Other
|
30,021
|
199,701
|
Total Current
Assets
|
2,702,401
|
3,737,425
|
|
|
|
OTHER
ASSETS
|
|
|
Cash -
restricted
|
198,943
|
141,102
|
Processing and rail
facility
|
2,914,422
|
2,914,422
|
Underground
equipment
|
8,887,045
|
7,500,512
|
Surface
equipment
|
3,957,603
|
3,751,054
|
Less Accumulated
Depreciation
|
(4,820,569)
|
(2,262,855)
|
Land
|
178,683
|
178,683
|
Accounts Receivable
- Other
|
127,718
|
196,347
|
Note
Receivable
|
4,117,139
|
4,117,139
|
Total Other
Assets
|
15,560,984
|
16,536,404
|
|
|
|
TOTAL
ASSETS
|
$18,263,385
|
$20,273,829
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable
|
$5,360,537
|
$2,196,060
|
Accrued management
fee
|
17,840,615
|
17,840,615
|
Accrued
interest
|
336,570
|
122,945
|
Funds held for
others
|
82,828
|
24,987
|
Due to
affiliate
|
124,000
|
74,000
|
Current portion of
long term-debt (net of unamortized discount of $35,000 and
$0)
|
9,645,154
|
4,431,006
|
Current portion of
reclamation liability
|
2,033,862
|
519,489
|
Total Current
Liabilities
|
35,423,566
|
25,209,102
|
|
|
|
OTHER
LIABILITIES
|
|
|
Long-term portion
of note payable (net of issuance costs $440,333 and
$451,389)
|
5,081,688
|
4,964,941
|
Reclamation
liability
|
17,851,195
|
17,607,384
|
Total Other
Liabilities
|
22,932,883
|
22,572,325
|
|
|
|
Total
Liabilities
|
58,356,449
|
47,781,427
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
AREC - Class A
Common stock: $.0001 par value; 230,000,000 shares authorized,
892,044 and 0 shares issued and outstanding for the period
end
|
89
|
-
|
AREC - Series A
Preferred stock: $.0001 par value; 4,817,792 shares authorized,
4,817,792 shares issued and outstanding
|
482
|
482
|
AREC - Series B
Preferred stock: $.001 par value; 20,000,000 shares authorized,
850,000 shares issued and outstanding
|
850
|
-
|
Additional paid-in
capital
|
1,527,254
|
88,193
|
Accumulated
deficit
|
(42,019,595)
|
(27,651,030)
|
Total American
Resources Corporation Shareholders' Equity
|
(40,490,920)
|
(27,562,355)
|
Non controlling
interest
|
397,856
|
54,757
|
Total Stockholders'
Deficit
|
(40,093,064)
|
(27,507,598)
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
$18,263,385
|
$20,273,829
|
The accompanying footnotes are integral to the consolidated
financial statements
F-3
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Years ended
December 31,
|
|
|
2017
|
2016
|
|
|
|
Coal
Sales
|
$19,231,249
|
$5,345,145
|
Processing Services
Income
|
1,589,749
|
2,256,049
|
|
|
|
Total
Revenue
|
20,820,998
|
7,601,194
|
|
|
|
Cost of Coal Sales
and Processing
|
(16,344,567)
|
(8,961,653)
|
Accretion
Expense
|
(1,791,051)
|
(1,664,774)
|
Loss on reclamation
settlement
|
-
|
(71,245)
|
Depreciation
|
(2,557,714)
|
(2,262,855)
|
General and
Administrative
|
(1,378,111)
|
(237,601)
|
Professional
Fees
|
(694,366)
|
(391,659)
|
Consulting Fees -
Related Party
|
-
|
(12,340,615)
|
Production Taxes
and Royalties
|
(4,974,013)
|
(1,250,365)
|
Impairment Loss
from notes receivable from related party
|
(250,000)
|
(510,902)
|
Development
Costs
|
(6,850,062)
|
(1,760,594)
|
|
|
|
Total Expenses from
Operations
|
(34,839,884)
|
(29,452,263)
|
|
|
|
Net Loss from
Operations
|
(14,018,886)
|
(21,851,069)
|
|
|
|
Other
Income
|
343,100
|
54,757
|
Amortization of
debt discount and debt issuance costs
|
(477,056)
|
(9,406)
|
Interest
Income
|
298,721
|
-
|
Receipt of
previously impaired receivables
|
387,427
|
-
|
|
|
|
Interest
|
(558,772)
|
(283,564)
|
|
|
|
Net
Loss
|
(14,025,466)
|
(22,089,282)
|
|
|
|
Less: Preferred
dividend requirement
|
(53,157)
|
-
|
|
|
|
Less: Net income
attributable to Non Controlling Interest
|
(343,099)
|
(54,757)
|
|
|
|
Net loss
attributable to American Resources Corporation
Shareholders
|
$(14,421,722)
|
$(22,144,039)
|
|
|
|
Net loss per share
- basic and diluted
|
$(18.20)
|
$-
|
|
|
|
Weighted average
shares outstanding
|
792,391
|
-
|
The accompanying footnotes are integral to the consolidated
financial statements
F-4
AMERICAN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS OF EQUITY
|
|
|
|
|
|
|
Additional
|
|
Non-
|
|
|
Common
|
Common
|
Preferred
|
Preferred
|
Preferred
|
Preferred
|
Paid-In
|
Retained
|
Controlling
|
|
|
Shares
|
Stock
|
A
Shares
|
A
Stock
|
B
Shares
|
B
Stock
|
Capital
|
Earnings
|
Interest
|
Total
|
Balance January
1, 2016
|
-
|
$-
|
2,550,430
|
$-
|
-
|
$-
|
$-
|
$(5,506,991)
|
$-
|
$(5,506,991)
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
2,267,362
|
482
|
-
|
-
|
88,193
|
-
|
-
|
88,675
|
|
|
|
|
|
|
|
|
|
|
|
New issuances
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(22,144,039)
|
54,757
|
(22,089,282)
|
|
|
|
|
|
|
|
|
|
|
|
Balance December
31, 2016
|
-
|
$-
|
4,817,792
|
$482
|
-
|
$-
|
$88,193
|
$(27,651,030)
|
$54,757
|
$(27,507,598)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Non-
|
|
|
Common
|
Common
|
Preferred
|
Preferred
|
Preferred
|
Preferred
|
Paid-In
|
Retained
|
Controlling
|
|
|
Shares
|
Stock
|
A
Shares
|
A
Stock
|
B
Shares
|
B
Stock
|
Capital
|
Earnings
|
Interest
|
Total
|
Balance January
1, 2017
|
-
|
$-
|
4,817,792
|
$482
|
-
|
$-
|
88,193
|
(27,651,030)
|
54,757
|
(27,507,598)
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
845,377
|
85
|
-
|
-
|
-
|
-
|
(85)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Preferred Series B
Stock
|
-
|
-
|
-
|
-
|
850,000
|
850
|
849,150
|
-
|
-
|
850,000
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of
Debt
|
33,334
|
3
|
-
|
-
|
-
|
-
|
49,997
|
-
|
-
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion
feature
|
-
|
-
|
-
|
-
|
-
|
-
|
50,000
|
-
|
-
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to
consultant
|
13,333
|
1
|
|
|
|
|
9,999
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
40,000
|
-
|
-
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
Relative fair value debt
discount
|
|
|
|
|
|
|
|
|
|
|
on warrants
issued
|
-
|
-
|
-
|
-
|
-
|
-
|
440,000
|
-
|
-
|
440,000
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(14,358,565)
|
343,099
|
(14,025,466)
|
|
|
|
|
|
|
|
|
|
|
|
Balance December
31, 2017
|
892,044
|
$89
|
4,817,792
|
$482
|
850,000
|
$850
|
1,527,254
|
(42,019,595)
|
397,856
|
(40,093,064)
|
The accompanying footnotes are integral to the consolidated
financial statements
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Years ended
December 31,
|
|
|
2017
|
2016
|
Cash
Flows from Operating activities:
|
|
|
Net
loss
|
$(14,025,466)
|
$(22,089,282)
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
Depreciation
|
2,557,714
|
2,262,855
|
Accretion
expense
|
1,791,051
|
1,664,774
|
Loss on reclamation
settlements
|
-
|
71,245
|
Assumption of note
payable in reverse merger
|
50,000
|
-
|
Amortization of
debt discount and debt issuance costs
|
477,056
|
9,406
|
Impairment
(recovery) of advances receivable
|
(387,427)
|
510,902
|
Impairment of
related party note receivable
|
250,000
|
-
|
Stock compensation
expense
|
50,000
|
88,675
|
Change
in current assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
882,637
|
(2,753,199)
|
Prepaid expenses
and other assets
|
-
|
920
|
Inventory
|
(615,096)
|
-
|
Restricted cash
used to pay interest expense
|
14,981
|
13,984
|
Accounts
payable
|
3,096,351
|
2,196,060
|
Accrued
expenses
|
-
|
12,340,615
|
Accrued
interest
|
213,625
|
122,945
|
Reclamation
liability settlements
|
-
|
(256,892)
|
Cash used in
operating activities
|
(5,644,574)
|
(5,816,992)
|
|
|
|
Cash
Flows from Investing activities:
|
|
|
|
|
|
Note
receivable
|
-
|
(4,117,139)
|
Increase in
restricted cash
|
(57,841)
|
(116,115)
|
Restricted cash
used to pay down debt
|
65,604
|
54,421
|
Advances made in
connection with management agreement
|
(77,800)
|
(1,845,902)
|
Advance repayment
in connection with management agreement
|
625,227
|
1,175,000
|
Cash paid for PPE,
net
|
(173,432)
|
(34,200)
|
Cash received from
acquisitions, net of $0 and $100 cash paid
|
-
|
5,315,700
|
Cash provided by
investing activities
|
381,758
|
431,765
|
|
|
|
Cash
Flows from Financing activities:
|
|
|
|
|
|
Principal payments
on long term debt
|
(392,002)
|
(303,706)
|
Proceeds from long
term debt (net of issuance costs $0 and $460,795)
|
4,440,000
|
4,857,391
|
Proceeds from
related party
|
50,000
|
|
Net (payments)
proceeds from factoring agreement
|
(32,985)
|
1,616,067
|
Proceeds from
private placements
|
600,000
|
-
|
Cash provided by
financing activities
|
4,665,013
|
6,169,752
|
|
|
|
Increase(decrease)
in cash
|
(597,803)
|
784,525
|
|
|
|
Cash, beginning of
year
|
784,525
|
-
|
|
|
|
Cash,
end of year
|
$186,722
|
$784,525
|
|
|
|
Supplemental
Information
|
|
|
|
|
|
Assumption of net
assets and liabilities for asset acquisitions
|
$-
|
$2,745,582
|
Equipment for notes
payable
|
$1,419,650
|
$904,425
|
Purchase of related
party note receivable in exchange for Series B Equity
|
$250,000
|
$-
|
Affiliate note for
equipment
|
$-
|
$63,000
|
Conversion of note
payable to common stock
|
$50,000
|
$-
|
Beneficial
conversion feature on note payable
|
$50,000
|
$-
|
Relative fair value
debt discount on warrant issue
|
$440,000
|
$-
|
|
|
|
Cash paid for
interest
|
$345,147
|
$160,619
|
The
accompanying footnotes are integral to the consolidated financial
statements
F-6
AMERICAN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
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) and
Knott County Coal LLC (KCC). All significant intercompany accounts
and transactions have been eliminated.
On January 5, 2017, QEI entered into a share exchange agreement
with NGFC Equities, Inc (NGFC). Under the agreement, the
shareholders of QEI exchanged 100% of its common stock to NGFC for
4,817,792 newly created Series A Preferred shares that is
convertible into approximately 95% of outstanding common stock of
NGFC. The previous NGFC shareholders retained 845,377 common shares
as part of the agreement. The conditions to the agreement were
fully satisfied on February 7, 2017, at which time the Company took
full control of NGFC. NGFC has been renamed to American Resources
Corporation (ARC). The transaction was accounted for as a
recapitalization. QEI was the accounting acquirer and ARC will
continue the business operations of QEI, therefore, the historical
financial statements presented are those of QEI and its
subsidiaries. The equity and share information reflect the results
of the recapitalization. On May 15, 2017 ARC initiated a
one-for-thirty reverse stock split. The financial statements have
been retrospectively restated to give effect to this
split.
Entities for which ownership is less than 100% a determination is
made whether there is a requirement to apply the variable interest
entity (VIE) model to the entity. Where the company holds current
or potential rights that give it the power to direct the activities
of a VIE that most significantly impact the VIE’s economic
performance, combined with a variable interest that gives the
Company the right to receive potentially significant benefits or
the obligation to absorb potentially significant losses, the
Company would be deemed to have a controlling
interest.
The company is the primary beneficiary of ERC Mining, LLC, which
qualifies as a variable interest entity. Accordingly, the assets,
liabilities, revenue and expenses of ERC Mining, LLC have been
included in the accompanying consolidated financial statements. The
company has no ownership in ERC Mining, LLC. Determination of the
company as the primary beneficiary is based on the power
through its management functions to direct the activities that most
significantly impact the economic performance of ERC Mining, LLC. On March 18, 2016, the company
lent ERC Mining, LLC $4,117,139 to facilitate the transaction
described in Note 6, which represent amounts that could be
significant to ERC. No further support has been provided. The
company has ongoing involvement in the management of ERC Mining,
LLC to ensure their fulfillment of the transaction described in
Note 6.
The company is the primary beneficiary of Land Resources &
Royalties LLC (LRR) which qualifies as a variable interest entity.
Accordingly, the assets, liabilities, revenue and expenses of Land
Resources & Royalties have been included in the accompanying
consolidated financial statements. The company has no ownership in
LRR. Determination of the company as the primary beneficiary is
based on the power through its management functions to
direct the activities that most significantly impact the economic
performance of LRR. On October 24,
2016, the company issued LRR a note in the amount of $178,683 to
facilitate the transaction described in Note 5, which represent
amounts that could be significant to LRR. No further support has
been provided. The company has ongoing involvement in the
management of LRR to ensure their fulfillment of the transaction
described in Note 5.
Deane was formed in November 2007 for the purpose of operating
underground coal mines and coal processing facilities. Deane was
acquired on December 31, 2015 and as such no operations are
presented prior to the acquisition date.
Quest Processing was formed in November 2014 for the purpose of
operating coal processing facilities and had no operations before
March 8, 2016.
ERC was formed in April 2015 for the purpose managing an
underground coal mine and coal processing facility. Operations
commenced in June 2015.
F-7
McCoy was formed in February 2016 for the purpose of operating
underground coal mines and coal processing facilities. The assets
of McCoy were acquired on February 17, 2016 and as such no
operations are presented prior to the acquisition
date.
KCC was formed in September 2004 for the purpose of operating
underground coal mines and coal processing facilities. KCC was
acquired on April 14, 2016 and as such no operations are presented
prior to the acquisition date.
On February 17, 2016, McCoy Elkhorn Coal LLC (McCoy) acquired
certain assets in exchange for $100 and for assuming certain
liabilities of Fortress Resources, LLC. The fair values of the
asset retirement obligation liabilities assumed were determined to
be $3,561,848 respectively. The liabilities assumed do not require
fair value readjustments.
The assets acquired of McCoy do not represent a business as defined
in FASB AS 805-10-20. McCoy does not have an integrated set of
activities and assets that that is capable of being conducted and
managed for the purpose of providing a return or other economic
benefit to their investors, members or participants. 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 McCoy were as
follows at the purchase date:
Assets
|
|
Cash
|
$2,935,800
|
Underground Mining
Equipment
|
531,249
|
Surface Mining
Equipment
|
36,218
|
Coal Preparation
and Loading Facilities
|
58,681
|
Liabilities
|
|
Asset Retirement
Obligation
|
$3,561,848
|
On April 14, 2016, the Company acquired 100% of the membership
interests of ICG Knott County, LLC, subsequently renamed Knott
County Coal LLC. The fair values of the asset retirement obligation
liabilities assumed were determined to be $4,499,434 respectively.
The liabilities assumed do not require fair value
readjustments.
The assets acquired of ICG Knott County do not represent a business
as defined in FASB AS 805-10-20. IGC Knott County does not have an
integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return or
other economic benefit to their investors, members or participants.
Accordingly, the assets acquired and liabilities assumed are
initially recognized at the consideration paid, including direct
acquisition costs. The cost is allocated to the group of assets
acquired and liabilities assumed based on their relative fair
value. The assets and liabilities assumed of ICG Knott County were
as follows on the purchase date:
Assets
|
|
Cash
|
$2,380,000
|
Underground Mining
Equipment
|
1,533,937
|
Surface Mining
Equipment
|
206,578
|
Land
|
178,683
|
Coal Preparation
and Loading Facilities
|
200,236
|
Liabilities
|
|
Asset Retirement
Obligation
|
$4,499,434
|
As a result of the KCC and McCoy acquisitions during 2016,
$8,061,282 of ARO was assumed for net cash of $5,315,700 and
property, equipment and land of $2,745,582.
F-8
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.
Estimates: Management uses estimates and assumptions in
preparing financial statements in accordance with accounting
principles generally accepted in the United States of America.
Those estimates and assumptions affect the reported amounts of
assets, liabilities, revenues, expenses and the disclosure of
contingent assets and liabilities. Actual results could vary from
those estimates.
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
in interest expense in the accompanying Consolidated Statements of
Operations.
Related Party Policies: In
accordance with FASB ASC 850 related parties are defined as either
an executive, director or nominee, greater than 10% beneficial
owner, or an immediate family member of any of the proceeding.
Transactions with related parties are reviewed and approved by the
directors of the Company, as per internal
policies.
Advance Royalties: Coal leases
that require minimum annual or advance payments and are recoverable
from future production are generally deferred and charged to
expense as the coal is subsequently produced.
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.
F-9
As of December 31, 2017 and 2016 total cash, including restricted
cash, amounted to $385,665 and $925,627, respectively. Restricted
cash as of December 31, 2017 and 2016 amounted to $198,943 and
$141,102, respectively.
Restrictions to cash include funds held for the benefit other
parties in the amount of $82,828 and $24,987 as of December 31,
2017 and 2016, respectively. The use of these funds are in
conjunction with the management of the property owned by this party
and the duration of the restrictions matches the duration of the
management agreement. (See Note 7)
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. (See Note 6)
Concentration: As of December
31, 2017 and 2016 63% and 78% of revenue and 99% and 97% of
outstanding accounts receivable came from three and two customers,
respectively.
Coal Property and Equipment are
recorded at cost. For equipment, depreciation is calculated using
the straight-line method over the estimated useful lives of the
assets, generally ranging from three to seven years. Amortization
of the equipment under capital lease is included with depreciation
expense.
Property and equipment and amortizable intangible assets are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability is measured by comparison of the
carrying amount to the future net undiscounted cash flows expected
to be generated by the related assets. If these assets are
determined to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount exceeds the
fair market value of the assets.
Costs related to maintenance and repairs which do not prolong the
asset’s useful life are expensed as incurred.
Mine Development: Costs of
developing new coal mines, including asset retirement obligation
assets, are capitalized and amortized using the units-of-production
method over estimated recoverable coal deposits or proven reserves.
Costs incurred for development and expansion of existing coal
deposits or proven reserves are expensed as
incurred.
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 coal
deposits. We are using a discount rate of 10%, risk free rate of
.23% and inflation rate of 1.5%. 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 2017 and
2016, $0 and $71,245 were incurred for loss on settlement on
ARO.
F-10
The table below reflects the changes to our ARO:
|
2017
|
2016
|
Beginning
Balance
|
$18,126,873
|
$8,586,464
|
Accretion
|
1,791,051
|
1,664,774
|
Reclamation
work
|
(32,867)
|
(185,647)
|
McCoy
Acquisition
|
-
|
3,561,848
|
KCC
Acquisition
|
-
|
4,499,434
|
Ending
balance
|
$19,885,057
|
$18,126,873
|
Current portion of
reclamation liability
|
$2,033,862
|
$519,489
|
Long-term portion
of reclamation liability
|
$17,851,195
|
$17,607,384
|
Income Taxes include U.S.
federal and state income taxes currently payable and deferred
income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
the period of enactment. Deferred income tax expense represents the
change during the year in the deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax asset will not be
realized.
The Company filed an initial tax return in 2015. Management
believes that the Company’s income tax filing positions will
be sustained on audit and does not anticipate any adjustments that
will result in a material change. Therefore, no reserve for
uncertain income tax positions has been recorded. The
Company’s policy for recording interest and penalties, if
any, associated with income tax examinations will be to record such
items as a component of income taxes.
Revenue Recognition: The
Company recognizes revenue in accordance with ASC 605 when the
terms of the contract have been satisfied; generally, this occurs
when delivery has been rendered, the fee is fixed or determinable,
and collectability is reasonably assured. Revenue is measured as
the amount of consideration we expect to receive in exchange for
transferring goods or providing services.
Our revenue is comprised of sales of mined coal and services for
processing coal. All of the activity is undertaken in eastern
Kentucky.
We recognize revenue from coal sales at the time risk of loss
passes to the customer at contracted amounts and amounts are deemed
collectible. Revenue from coal processing and loading are
recognized when services have been performed according to the
contract in place.
Leases: Leases are reviewed by
management based on the provisions of ASC 840 and examined to see
if they are required to be categorized as an operating lease, a
capital lease or a financing transaction.
The Company leases certain equipment and other assets under
noncancelable operating leases, typically with initial terms of 3
to 7 years. Minimum rent on operating leases is expensed on a
straight-line basis over the term of the lease. In addition to
minimum rental payments, certain leases require additional payments
based on sales volume, as well as reimbursement of real estate
taxes, which are expensed when incurred. Capital leases are
recorded at the present value of the future minimum lease payments
at the inception of the lease. The gross amount of assets recorded
under capital lease amounted to $333,875, all of which is
classified as surface equipment.
Loan Issuance Costs and Discounts are amortized using the effective interest method.
Amortization expense amounted to $477,056 and $9,406 as of December
31, 2017 and 2016, respectively. Amortization expense for the next
five years is expected to be $11,520, annually.
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.
F-11
Allowance for trade receivables as of December 31, 2017 and 2016
amounted to $0 and $0, respectively. Allowance for other accounts
receivables as of December 31, 2017 and 2016 amounted to $92,573
and $640,000, respectively.
Trade and loan receivables are carried at amortized cost, net of
allowance for losses. Amortized cost approximated book value as of
December 31, 2017 and 2016.
Inventory: Inventory consisting
of mined coal is stated at the lower of cost (first in, first out
method) or net realizable value.
Stock-based Compensation: Stock-based compensation is measured at the grant
date based on the fair value of the award and is recognized as
expense over the applicable vesting period of the stock award
(generally 0 to 5 years) using the straight-line method. Stock
compensation to employees is accounted for under ASC 718 and stock
compensation to non-employees is accounted for under ASC
505.
Earnings Per Share: The
Company’s basic earnings per share (EPS) amounts have been
computed based on the average number of shares of common stock
outstanding for the period and include the effect of any
participating securities as appropriate. Diluted EPS includes the
effect of the Company’s outstanding stock options, restricted
stock awards, restricted stock units and performance-based stock
awards if the inclusion of these items is
dilutive.
For the years ended December 31, 2017 and 2016, the Company had
5,364,230 and 0 outstanding stock warrants, respectively. For the
years ended December 31, 2017 and 2016, the Company did not have
any restrictive stock awards, restricted stock units, or
performance-based awards.
Reclassifications: Reclassifications have been made to conform with
current year presentation.
New Accounting Pronouncements: Management has determined that the impact of the
following recent FASB pronouncements will not have a material
impact on the financial statements.
|
●
|
Accounting
Standards Update (ASU) 2014-09, Revenue from Contracts with Customers,
effective for years beginning after December 15, 2017
|
|
●
|
ASU
2015-11, Simplifying the
Measurement of Inventory, effective for years beginning
after December 15, 2016. Adoption of ASU 2015-11 did not have a
material effect on the consolidated financial
statements.
|
|
●
|
ASU
2015-17, Balance Sheet
Classification of Deferred Taxes, effective for years
beginning after December 15, 2016. Adoption of ASU 2015-17 did not
have a material effect on the consolidated financial statements or
related disclosures.
|
|
●
|
ASU
2016-01, Recognition and
Measurement of Financial Assets and Financial Liabilities,
effective for years beginning after December 15, 2017
|
|
●
|
ASU
2016-02, Leases, effective
for years beginning after December 15, 2019. We expect to adopt ASU
2016-02 beginning January 1, 2019 and are in the process of
assessing the impact that this new guidance is expected to have on
our consolidated financial statements and related
disclosures.
|
|
●
|
ASU
2016-18, Statement of Cash Flows:
Restricted Cash, effective beginning after December 15,
2017
|
|
●
|
ASU
2017-01, Business
Combinations, effective beginning after December 15,
2017
|
|
●
|
AUS
2017-09, Compensation –
Stock Compensation, effective beginning after December 31,
2017
|
|
●
|
ASU
2017-11, Earnings Per
Share, effective beginning after December 15,
2018
|
|
●
|
ASU
2018-05, Income Taxes,
effective beginning after December 15, 2017. We expect to adopt ASU
2018-05 beginning January 1, 2018 and are in the process of
assessing the impact that this new guidance is expected to have on
our consolidated financial statements and related
disclosures.
|
Management has elected to early adopt ASU 2017-01,
Business
Combinations (Topic 805): Clarifying the Definition of a
Business effective at
inception. See above in Note 1.
F-12
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. We adopted
Topic 606 as of January 1, 2018 using the modified retrospective
method of adoption. Implementation of Topic 606 caused no change in
previously recognized revenue.
NOTE 2 – PROPERTY AND EQUIPMENT
At December 31, 2017 and 2016, property and equipment were
comprised of the following:
|
2017
|
2016
|
Processing and rail
facility
|
$2,914,422
|
$2,914,422
|
Underground
equipment
|
8,887,045
|
7,500,512
|
Surface
equipment
|
3,957,603
|
3,751,054
|
Land
|
178,683
|
178,683
|
Less: Accumulated
depreciation
|
(4,820,569)
|
(2,262,855)
|
|
|
|
Total Property and
Equipment, Net
|
$11,117,184
|
$12,081,816
|
Depreciation expense amounted to $2,557,714 and $2,262,855 for the
years of December 31, 2017 and 2016, respectively.
The estimated useful lives are as follows:
Processing
and Rail Facilities
|
|
20
years
|
Surface
Equipment
|
|
7
years
|
Underground
Equipment
|
|
5
years
|
NOTE 3 – NOTES PAYABLE
During the year ended December 31, 2017 and 2016, principal
payments on long term debt totaled $392,002 and $303,706,
respectively. During the year ended December 31, 2017 and 2016, new
debt issuances totaled $5,909,650 and $5,824,816, respectively,
primarily from $4,490,000 of working capital loans and $1,419,650
of equipment loans in 2017 and $4,688,152 from the Kentucky New
Markets Development program and $967,425 in equipment loans in
2016. (See Note 5). During the year ended December 31, 2017 and
2016, net proceeds from our factoring agreement totaled $32,985 and
$1,616,067, respectively.
During the year ended December 31, 2017 and 2016, discounts on debt
issued amounted to $490,000 and $-, respectively related to the ARC
business loan discussed below and the note payable discussed in
note 9. During 2017 and 2016, $455,000 and $- was amortized into
expense with $35,000 and $- remaining as unamortized
discount.
Long-term debt consisted of the following at December 31, 2017 and
2016:
|
2017
|
2016
|
|
|
|
Equipment Loans -
QEI
|
|
|
|
|
|
Note payable to an
unrelated company in monthly installments of $2,064, with interest
at 8.75%, through maturity in March 2019, when the note is due in
full. The note is secured by equipment and a personal guarantee by
an officer of the Company.
|
$30,962
|
$50,235
|
|
|
|
Note payable to an
unrelated company in monthly installments of $1,468, With interest
at 6.95%, through maturity in March 2021, when the note is due in
full. The note is secured by equipment and a personal guarantee by
an officer of the Company
|
57,290
|
64,175
|
|
|
|
On September 8,
2017, Quest entered into an equipment purchase agreement with an
unaffiliated entity, to purchase certain underground mining
equipment for $600,000. The agreement provided for $80,000 paid
upon execution, $30,000 monthly payments until the balance is paid
in full.
|
460,000
|
0
|
|
|
|
On October 19,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$90,400. The agreement calls for monthly payments until maturity of
October 19, 2019 and interest of 9.95%.
|
88,297
|
0
|
F-13
On October 20,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$50,250. The agreement calls for monthly payments until maturity of
October 20, 2019 and interest of 10.60%.
|
51,320
|
0
|
|
|
|
On December 4,
2017, Quest entered into an equipment financing agreement with an
unaffiliated entity, to purchase certain surface equipment for
$56,900. The agreement calls for monthly payments until maturity of
January 7, 2021.
|
56,900
|
0
|
|
|
|
Business Loan -
ARC
|
|
|
|
|
|
On October 4, 2017,
ARC entered into a consolidated loan agreement with an unaffiliated
entity. $5,444,632 has been advanced under the note. $1,300,000 of
the note was advanced after December 31, 2017. The agreement calls
for interest of 7% and with all outstanding amounts due on demand.
The note is secured by all assets of Quest and subsidiaries. In
conjunction with the loan, a warrants for up to 5,017,006 common
shares were issued at an exercise price ranging from $.01 to $11.44
per share and with an expiration date of October 2, 2020. The loan
consolidation was treated as a loan modification for accounting
purposes giving rise to a discount of $140,000. The discount was
amortized over the life of the loan with $105,000 included as
interest expense and $35,000 included as a note discount as of
December 31, 2017.
|
4,444,632
|
175,000
|
|
|
|
Equipment Loans
– ERC
|
|
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $771 with
an interest rate of 5.25% with a balloon payment at maturity of
June 30, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
27,288
|
35,644
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $3,304 with
an interest rate of 5.25% with a balloon payment at maturity of
June 30, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
128,254
|
161,738
|
|
|
|
Equipment lease
payable to an unrelated company in 48 equal payments of $2,031 with
an interest rate of 5.25% with a balloon payment at maturity of
August 13, 2019. The note is secured by equipment and a corporate
guarantee from Quest Energy Inc. The equipment is being utilized as
part of the management agreement referred to in Note 7. Therefore,
the title of the assets are not held with ERC and there is a
corresponding receivable due for the payment of this
note.
|
36,890
|
60,541
|
F-14
Equipment Loans -
McCoy
|
|
|
|
|
|
Equipment note
payable to an unrelated company, with monthly payments of $150,000
in September 2016, October 2016, November 2016 and a final payment
of $315,000 due in December 2016. No extensions have been entered
into subsequent to December 31, 2017 resulting in the note being in
default.
|
540,000
|
540,000
|
|
|
|
On May 2, 2017,
Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $250,000. Full payment was due September 12,
2017.
|
135,000
|
0
|
|
|
|
On June 12, 2017,
Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $22,500. Full payment was due September 12,
2017.
|
22,500
|
0
|
|
|
|
On September 25,
2017, Quest entered into an equipment purchase agreement with an
unaffiliated entity, Inc. to purchase certain underground mining
equipment for $350,000. The agreement provided for $20,000 monthly
payments until the balance is paid in full.
|
330,000
|
0
|
|
|
|
Business Loans -
McCoy
|
|
|
|
|
|
Business loan
agreement with Crestmark Bank in the amount of $200,000, with
monthly payments of 23,000, with an interest rate of 12%, through
maturity in January 1, 2018. The note is secured by a corporate
guaranty by the Company and a personal guaranty.
|
66,667
|
0
|
|
|
|
Seller Note -
Deane
|
|
|
|
|
|
Deane Mining -
promissory note payable to an unrelated company, with monthly
interest payments of $10,000, at an interest rate of 6%, beginning
June 30, 2016. The note is due December 31, 2017. No payments have
been made on the note and no extensions have been entered into
subsequent to December 31, 2017, resulting in the note being in
default.
|
2,000,000
|
2,000,000
|
|
|
|
Accounts Receivable
Factoring Agreement
|
|
|
|
|
|
McCoy, Deane and
Knott County secured accounts receivable note payable to a bank.
The agreement calls for interest of .30% for each 10 days of
outstanding balances. The advance is secured by the accounts
receivable, corporate guaranty by the Company and personal
guarantees by two officers of the Company. The agreement ends in
October 2018
|
1,582,989
|
1,616,167
|
|
|
|
Kentucky New
Markets Development Program
|
|
|
|
|
|
Quest Processing -
loan payable to Community Venture Investment XV, LLC, with interest
only payments due quarterly until March 2023, at which time
quarterly principal and interest payments are due. The note bears
interest at 3.698554% and is due March 7, 2046. The loan is secured
by all equipment and accounts of Quest Processing. See
Note
|
4,117,139
|
4,117,139
|
|
|
|
Quest Processing -
loan payable to Community Venture Investment XV, LLC, with interest
only payments due quarterly until March 2023, at which time
quarterly principal and interest payments are due. The note bears
interest at 3.698554% and is due March 7, 2046. The loan is secured
by all equipment and accounts of Quest Processing. See
Note
|
1,026,047
|
1,026,047
|
|
|
|
Less: Debt
Discounts and Loan Issuance Costs
|
(475,333)
|
(451,389)
|
F-15
Affiliate
Notes
|
|
|
|
|
|
Notes payable to
affiliate, due on demand with no interest and is uncollateralized.
Equipment purchasing was paid by an affiliate resulting in the note
payable.
|
$74,000
|
$74,000
|
|
|
|
During July 2017,
an officer of the Company advanced $50,000 to Quest. The advance is
unsecured, non interest bearing and due on demand.
|
$50,000
|
$0
|
|
|
|
|
14,850,842
|
9,469,947
|
Less: Current
maturities
|
9,769,154
|
4,505,006
|
|
|
|
Total Long-term
Debt
|
$5,081,688
|
$4,964,941
|
Total interest expense was $558,772 in 2017 and $283,564 in
2016.
Future minimum principal payments, interest payments and payments
on capital leases are as follows:
Payable
In
|
|
Loan
Principal
|
|
|
Lease
Principal
|
|
|
Total Loan and
Lease Principal
|
|
|
Lease
Interest
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
2018
|
|
|
9,704,444
|
|
|
|
64,710
|
|
|
|
9,769,154
|
|
|
|
8,560
|
|
2019
|
|
|
312,707
|
|
|
|
125,798
|
|
|
|
438,505
|
|
|
|
3,722
|
|
2020
|
|
|
37,283
|
|
|
|
-
|
|
|
|
37,283
|
|
|
|
-
|
|
2021
|
|
|
10,491
|
|
|
|
-
|
|
|
|
10,491
|
|
|
|
-
|
|
2022
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Thereafter
|
|
|
4,595,409
|
|
|
|
|
|
|
|
4,595,409
|
|
|
|
|
|
NOTE 4 – RELATED PARTY TRANSACTIONS
On June 12, 2015, the Company executed a consulting agreement with
an entity with common ownership. During 2017 and 2016, the Company
incurred fees totaling $0 and $12,340,615, respectively, relating
to services rendered under this agreement. The amount outstanding
and payable as of December 31, 2017 and 2016, was $17,840,615 and
$17,840,615, respectively. The amount is due on demand and does not
accrue interest.
On January 1, 2016, the Company awarded stock options for 857,464
shares that were cashlessly exercised into 290,513 shares of Series
A preferred stock or consulting efforts to an entity with common
ownership. No stock options were awarded to related parties during
2017.
During 2015, equipment purchasing was paid by an affiliate
resulting in a note payable. The balance of the note was $74,000 as
of December 31, 2017 and 2016, respectively.
On April 30, 2017, the Company purchased $250,000 of secured debt
that had been owed to that party, by an operating subsidiary of a
related party. As a result of the transaction, the Company is now
the creditor on the notes. The first note in the amount of $150,000
is dated March 13, 2013, carries an interest rate of 12% and was
due on September 13, 2015. The second note in the amount of
$100,000 is dated July 17, 2013, carries an interest rate of 12%
and was due January 17, 2016. Both notes are in default and have
been fully impaired due to collectability uncertainty. (see Note
9)
During July 2017, an officer of the Company advanced $50,000 to
Quest. The advance is unsecured, non interest bearing and due on
demand. (see Note 3)
On June 12, 2015, the Company executed a consulting agreement with
an entity with common ownership. During 2017 and 2016, the Company
incurred fees totaling $0 and $12,340,615, respectively, relating
to services rendered under this agreement. The amount outstanding
and payable as of December 31, 2017 and 2016, was $17,840,615 and
$17,840,615, respectively. The amount is due on demand and does not
accrue interest.
F-16
NOTE 5 – VARIABLE INTEREST ENTITY
On October 24, 2016, the Company sold certain mineral and land
interests to a subsidiary of an entity, LRR, owned by members of
the Company’s management. LRR leases various parcels of land
to QEI and engages in other activities creating miscellaneous
income. The consideration for the transaction was a note in the
amount of $178,683. The note bears no interest and is due in 2026.
The balance as of December 31, 2016 was $130,145. As of January 28,
2017, the note was paid in full. This transaction was eliminated
upon consolidation as a variable interest entity.
The Company’s management also manages the operations of LRR.
LRR has assets totaling $475,401 and liabilities totaling $77,443
as of December 31, 2017 for which there were no
restrictions. The
Company’s risk associated with LRR is greater than its
ownership percentage and its involvement does not affect the
Company’s business beyond the relationship described
above.
NOTE 6 – KENTUCKY NEW MARKETS DEVELOPMENT
PROGRAM
On March 18, 2016, Quest Processing entered into two loans under
the Kentucky New Markets Development Program for a total of
$5,143,186. Quest Processing paid $460,795 of debt issuance costs
resulting in net proceeds of $4,682,391. See note 3. The Company
retains the right to call $5,143,186 of the loans in March 2023.
State of Kentucky income tax credits were generated for the lender
which the Company has guaranteed over their statutory life of seven
years in the event the credits are recaptured or reduced. At the
time of the transaction, the income tax credits were valued at
$2,005,843. The Company has not established a liability in
connection with the guarantee because it believes the likelihood of
recapture or reduction is remote.
On March 18, 2016, ERC Mining LLC, an entity consolidated as a VIE,
lent $4,117,139 to an unaffiliated entity, as part of the Kentucky
New Markets Development Program loans. The note bears interest at
4% and is due March 7, 2046. The balance as of December 31, 2017
and 2016 was $4,117,139 and $4,117,139, respectively. Payments of
interest only are due quarterly until March 18, 2023 at which time
quarterly principal and interest are due. The note is
collateralized by the equity interests of the
borrower.
The Company’s management also manages the operations of ERC
Mining LLC. ERC Mining LLC has assets totaling $4,415,860 and
liabilities totaling $4,117,139 as of December 31, 2017 for which
there are to be used in conjunction with the transaction described
above. Assets
totaling $3,818,418 and liabilities totaling $4,117,139,
respectively, are eliminated upon consolidation. The
Company’s risk associated with ERC Mining LLC is greater than
its ownership percentage and its involvement does not affect the
Company’s business beyond the relationship described
above.
NOTE 7 – 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. The agreement called
for a monthly base fee of $20,000 in addition to certain per ton
fees based on performance to be paid to ERC. During 2017 and 2016
no fee had been paid and due to the uncertainty of collection, no
fee has been recorded. Fees earned totaled $240,000 and $240,000
for 2017 and 2016, respectively, which have been fully reserved.
The agreement called for equipment payments to be made by the
entity. As of December 31, 2017 and 2016 amounts owed from the
entity to ERC for equipment payments amounted to $192,432 and
$258,096, respectively.
During 2017, ERC had advances of $77,800 and repayments of $625,227
of amounts previously advanced. During 2016, ERC had advances of
$1,975,000 which is unsecured, non-interest bearing and due upon
demand and repayments of previously advanced amounts of $1,175,000.
Of the amounts received in 2017, $387,427 was the collection of a
previously impaired amount.
As part of the agreement, ERC retained the administrative rights to
the underlying mining permit and reclamation liability. The entity
has the right within the agreement to take the mining permits and
reclamation liability at any time. In addition, all operational
activity that takes place on the facility is the responsibility of
the entity. ERC acts as a fiduciary and as such has recorded cash
held for the entity’s benefit as both an asset and an
offsetting liability amounting to $82,828 and $24,987 respectively
as of December 31, 2017 and 2016.
F-17
NOTE 8 – INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. The primary temporary differences that give rise to
the deferred tax assets and liabilities are as follows: accrued
expenses.
Deferred tax assets consisted of $4,152,800 at December 31, 2017,
which was fully reserved. Deferred tax assets consist of net
operating loss carryforwards in the amount of $4,152,800 at
December 31, 2017, which was fully reserved. The net operating loss
carryforwards for years 2015, 2016 and 2017 begin to expire in
2035. The application of net operating loss carryforwards are
subject to certain limitations as provided for in the tax code. The
Tax Cuts and Jobs Act was signed into law on December 22, 2017, and
reduced the corporate income tax rate from 34% to 21%. The
Company’s deferred tax assets, liabilities, and valuation
allowance have been adjusted to reflect the impact of the new tax
law.
The Company’s effective income tax rate is lower than what
would be expected if the U.S. federal statutory rate (34%) were
applied to income before income taxes primarily due to certain
expenses being deductible for tax purposes but not for financial
reporting purposes. The Company files income tax returns in the
U.S. federal jurisdiction and various state jurisdictions. All
years are open to examination as of December 31, 2017.
NOTE 9 – EQUITY TRANSACTIONS
A new 2016 Stock Incentive Plan (2016 Plan) was approved by the
Board during January 2016. The Company may grant up to 6,363,225
shares of Series A Preferred stock under the 2016 Plan. The 2016
Plan is administered by the Board of Directors, which has
substantial discretion to determine persons, amounts, time, price,
exercise terms, and restrictions of the grants, if any. The options
issued under the 2016 Plan vest upon issuance.
During 2016, the Company issued options amounting to 6,363,225
shares (which includes shares disclosed above) under an adopted
stock option plan that were cashlessly exercised into 2,267,362
shares of Series A preferred stock resulting in an expense of
$88,675.
On May 10, 2017, the Company issued warrants amounting to 8,334
common shares to a board member. The options expire May 9, 2020 and
have an exercise price of $3.60. An expense in the amount of
$40,000 was recognized for this issuance.
The Company had a note payable in the amount of $50,000 which was
assumed as part of the share exchange agreement and accounted for
as an expense in the recapitalization transaction. On February 22,
2017, the Company modified the note to add a conversion option with
a price of $1.50. The conversion option was beneficial, therefore,
the Company recognized $50,000 as a discount to the assumed note
payable. The note was immediately converted, resulting in the
issuance of 33,334 shares and the full amortization of the
discount.
On March 7, 2017, ARC closed a private placement whereby it issued
an aggregate of 500,000 shares of ARC’s Series B Preferred
Stock at a purchase price of $1.00 per Series B Preferred share,
and warrants to purchase an aggregate of 208,334 shares of the
ARC’s common stock (subject to certain adjustments), for
proceeds to ARC of $500,000 (the “March 2017 Private
Placement”). After deducting for fees and expenses, the
aggregate net proceeds from the sale of the preferred series B
shares and the warrants in the March 2017 Private Placement were
approximately $500,000. The ‘A’ warrants totaling
138,889 shares expire March 6, 2020 and hold an exercise price of
$7.60 per share. The ‘A-1’ warrants totaling 69,445
shares expire March 6, 2020 and hold an exercise price of $.003 per
share.
F-18
On April 2, 2017, American Resources Corporation closed a private
placement whereby it issued an aggregate of 100,000 shares of the
ARC’s Series B Preferred Stock at a purchase price of $1.00
per Series B Preferred share, and warrants to purchase an aggregate
of 27,778 shares of the ARC’s common stock (subject to
certain adjustments), for proceeds to ARC of $100,000 (the
“April 2017 Private Placement”). After deducting for
fees and expenses, the aggregate net proceeds from the sale of the
series B preferred shares and the warrants in the April 2017
Private Placement were approximately $100,000. The ‘A’
warrants totaling 27,778 shares expire April 2, 2019 and hold an
exercise price of $7.20 per share.
On April 30, 2017, American Resources Corporation closed on a
private placement agreement whereby it issued an aggregate of
250,000 shares of the ARC’s Series B Preferred Stock and A
warrants amounting to 69,445 to an unrelated party for the purchase
of $250,000 of secured debt that had been owed to that party, by an
operating subsidiary of a related party. As a result of the
transaction, the Company is now the creditor on the notes. The
first note in the amount of $150,000 is dated March 13, 2013,
carries an interest rate of 12% and was due on September 13, 2015.
The second note in the amount of $100,000 is dated July 17, 2013,
carries an interest rate of 12% and was due January 17, 2016. Both
notes are in default and were impaired. The A warrants totaling
69,445 shares expire April 29, 2019 and hold an exercise price of
$7.20 per share.
The Series B Preferred Stock converts into common stock of the
Company at the holder’s discretion at a conversion price of
$3.60 per common share (one share of Series B Preferred converts to
common at a ratio of 0.27778). Furthermore, the Series B Preferred
share purchase agreement provides for certain adjustments to the
conversion value of the Series B Preferred to common shares of the
Company that are based on the EBITDA (earning before interest,
taxes, depreciation, and amortization) for the Company for the 12
months ended March 31, 2018 of $6,000,000. Those adjustments
provide for a decrease in the conversion value based on the
proportional miss of the Company’s EBITDA, up to a maximum of
30.0% decrease in the conversion value of the Series B Preferred to
common shares.
The Series B Preferred share purchase agreement provides, for a
period of nine months post execution of the purchase agreement, an
option for the investor to put the Series B Preferred investment to
the Company at a 12% premium to the Series B Preferred purchase
price should the Company achieve certain hurdles, such as a
secondary offering and an up-listing to a national stock exchange.
Such put option expires after 20 days from notification of the
Company to the Series B Preferred investor of the fulfillment of
such qualifications.
Total preferred dividend requirement for 2017 and 2016 amounted to
$53,157 and $0, respectively.
Total stock based compensation expense incurred for awards to
employees during 2017 and 2016 was $0 and $88,675, respectively.
Fair value was determined using the total enterprise value
approach.
On July 5, 2017, the Company issued 13,333 common shares and
warrants to purchase 33,333 shares to an unrelated consulting
company. The warrants had an exercise price of $3.60 with a
three-year term. The total compensation expense related to this
warrant was $10,000 which was determined using the closing stock
price at the date of the grant and the Black-Sholes Option Pricing
Model.
In conjunction with the ARC business loan, warrants of 5,996,609
common shares were issued and 979,603 were subsequently canceled at
an exercise price ranging from $.01 to $11.44 per share and with an
expiration date of October 2, 2020.
|
2017
|
Expected Dividend
Yield
|
0%
|
Expected
volatility
|
13.73%
|
Risk-free
rate
|
1.62%
|
Expected life of
warrants
|
2-3
years
|
F-19
|
|
Weighted
|
Weighted
|
|
|
|
Average
|
Average
|
Aggregate
|
|
Number
of
|
Exercise
|
Contractual
|
Intrinsic
|
|
Warrants
|
Price
|
Life in
Years
|
Value
|
Outstanding
– December 31, 2015
|
-
|
-
|
-
|
-
|
Exercisable -
December 31, 2015
|
-
|
-
|
-
|
-
|
Granted
|
-
|
-
|
-
|
-
|
Forfeited or
Expired
|
-
|
-
|
-
|
-
|
Outstanding -
December 31, 2016
|
-
|
-
|
-
|
-
|
Exercisable -
December 31, 2016
|
-
|
-
|
-
|
-
|
Granted
|
6,343,833
|
$2.317
|
2.706
|
$174,253
|
Forfeited or
Expired
|
979,603
|
$0.560
|
1.997
|
$36,184
|
Exercised
|
-
|
-
|
-
|
-
|
Outstanding -
December 31, 2017
|
5,364,230
|
$2.638
|
2.835
|
$138,069
|
Exercisable -
December 31, 2017
|
5,364,230
|
$2.638
|
2.835
|
$138,069
|
NOTE 10 – 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.
The company leases various office space some from an entity which
we consolidate as a variable interest entity. (see note 5). The
future annual rent is $6,000 through 2021. Rent expense for 2017
and 2016 amounted to $26,000 each year, respectively.
NOTE 11 – SUBSEQUENT EVENTS
On January 25, 2018, Quest entered into an equipment financing
agreement with an unaffiliated entity, to purchase certain surface
equipment for $346,660. The agreement calls for monthly payments
until maturity of December 25, 2020.
During 2018, the company drew an additional $1,300,000 on the ARC
business loan. (see note 3)
On March 29, 2018, Quest entered into an equipment financing
agreement with an affiliated entity, to purchase certain surface
mining equipment for $135,000. Payments of $75,000 and $60,000 are
due on April 6, 2018 and April 13, 2018, respectively.
F-20