American Resources(AREC) - 2020 Q4 - Annual Report

PART I Business American Resources Corporation (ARC) has transitioned to a natural resources company primarily engaged in metallurgical coal mining and processing, with diversification into metal and rare earth element recovery - The company's business focus shifted to coal mining and processing following a share exchange agreement with Quest Energy Inc. in 2017[17] - Since mid-2019, the company has ceased thermal coal mining to focus exclusively on metallurgical coal for the steel industry[19] - Subsidiaries American Metals LLC (AM) and American Rare Earth LLC (ARE) were established to diversify revenue into metal recovery and rare earth elements[19] - The company holds no 'proven' or 'probable' reserves as defined by SEC Industry Guide 7, with all business activities considered in the exploration stage[19] Historical Coal Prices (Year End) | | Metallurgical Coal (Hampton Road Index HCC - High) | CAPP Thermal Coal (Big Sandy / Kanawha Rate District) | | :--- | :--- | :--- | | 2019 | $135.00 | $60.30 | | 2020 | $101.00 | $54.35 | Operating Subsidiaries The company operates through seven coal mining and processing subsidiaries across multiple basins, with operations significantly impacted and many mines idled in 2020 due to the COVID-19 pandemic McCoy Elkhorn Coal LLC - Mine 15 Production | Year | Tons Produced | Average Sale Price/Ton | | :--- | :--- | :--- | | 2020 | 461,570 | $70.28 | | 2019 | 124,740 | $76.40 | - McCoy Elkhorn's Mine 15 and Carnegie 1 mines were idled from January 2020 through the report date due to adverse market effects from the COVID-19 pandemic[24] Deane Mining LLC - Production (2019) | Mine | Tons Produced (2019) | Average Sale Price/Ton (2019) | Coal Type | | :--- | :--- | :--- | :--- | | Access Energy | 86,077.75 | $61.45 | 17% PCI, 83% Thermal | | Razorblade Surface | 13,433.30 | $61.45 | 100% Thermal | - Perry County Resources' E4-2 mine was idled from January 2020 due to the COVID-19 pandemic, producing only 1,200 tons in 2020 compared to 45,282.78 tons in 2019[52] - Wyoming County Coal's assets, including the Pioneer Preparation Plant, are idled and require significant capital to become operational, with permit transfers awaiting final regulatory approval[47][48] Mineral and Surface Leases The company conducts all coal mining and processing operations on approximately 200 leased properties, some from a related party owned by management - The company leases all its mineral and surface properties for operations through approximately 200 different lease agreements[61] - Some leases are with Land Resources & Royalties LLC (LRR), a related party owned by members of Quest Energy Inc.'s management[61] Coal Sales and Competition ARC sells metallurgical coal to domestic and international customers via third-party intermediaries, facing intense competition and COVID-19 related sales disruptions - Coal sales are primarily outsourced to third-party intermediaries, with all final sales approved by company management[62] - The COVID-19 pandemic has disrupted sales channels due to fluctuating global steel demand[62] - Key domestic competitors include Corsa Coal Corporation, Ramaco Resources, Blackhawk Mining, Coronado Coal, Arch Resources, Contura Energy, and Warrior Met Coal[63] Environmental, Governmental, and Other Regulatory Matters Operations are subject to extensive federal, state, and local environmental and safety regulations, incurring significant compliance costs and requiring financial assurance for reclamation obligations - Operations are subject to numerous laws including SMCRA, CAA, CWA, RCRA, and CERCLA, which impose significant compliance costs and can delay or restrict mining activities[65][66] - The company must obtain numerous permits for mining operations, a process that can be delayed by public comment and legal challenges[75][76] - As of December 31, 2020, the company had $29.29 million in outstanding surety bonds for reclamation obligations, a decrease from $34.93 million in 2019[81] - Regulations concerning climate change and greenhouse gas (GHG) emissions, such as the EPA's Clean Power Plan (CPP), could reduce demand for coal and adversely impact the business, although the company is principally focused on metallurgical coal, not power generation[96][98][99] Employees and Corporate Status ARC has approximately 10 direct employees and qualifies as an 'emerging growth company,' benefiting from reduced reporting requirements under the JOBS Act - The company has approximately 10 direct employees, with four executives based in the Fishers, Indiana headquarters[118] - As an 'emerging growth company,' ARC utilizes provisions for reduced reporting burdens, including exemption from auditor attestation on internal controls and delaying adoption of new accounting standards[118][120] Risk Factors The company is not required to provide information for this item as it qualifies as a Smaller Reporting Company - As a Smaller Reporting Company, the registrant is not required to provide the information required by Item 1A[122] Unresolved Staff Comments The company reports no unresolved staff comments - There are no unresolved staff comments[122] Properties The company's principal executive offices are in Fishers, Indiana, with additional leased office and operational spaces in Kentucky - The main office is in Fishers, Indiana, with a lease expiring in December 2026. An additional office is rented from a related party in Kite, Kentucky[123] Legal Proceedings The company is subject to ordinary routine litigation incidental to its business operations, with details provided in financial statement Note 9 - The company is subject to routine litigation. Details are provided in financial statement note 9[124][64] Mine Safety Disclosures Information regarding mine safety violations and other regulatory matters is included in Exhibit 95.1 of this Annual Report - Mine safety disclosures required by Item 104 of Regulation S-K are included in Exhibit 95.1[124] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A Common Stock trades on NASDAQ under 'AREC,' has not paid dividends, and has undergone numerous unregistered security sales, warrant, and preferred stock conversions - Class A Common Stock is traded on the NASDAQ Capital Market under the symbol AREC[126] Quarterly High/Low Stock Prices (2020) | Quarter Ending | High | Low | | :--- | :--- | :--- | | March 31, 2020 | $1.11 | $0.320 | | June 30, 2020 | $1.40 | $0.73 | | September 30, 2020 | $2.33 | $1.14 | | December 31, 2020 | $4.93 | $1.26 | - The company has not paid any dividends and does not have current plans to pay any[130] - All outstanding Series A, B, and C Preferred Stock were converted into Class A Common Stock by February 2019[156][160][164] - In 2020, the company issued numerous warrants (Series C-5 through C-36) in connection with its senior convertible note offering and debt conversions[169][170][171] Selected Financial Data The company is not required to provide this information as it qualifies as a smaller reporting company - As a smaller reporting company, the registrant is not required to provide the information for this item[183] Management's Discussion and Analysis of Financial Condition and Results of Operations The company's revenue and operations were severely impacted by the COVID-19 pandemic in 2020, leading to significant declines in sales and expenses, while assets increased due to financing activities - The company's operations were idled in January 2020 and resumed in December 2020 due to muted demand for steel and metallurgical coal caused by the COVID-19 pandemic[190] Revenue and Sales Volume Comparison (2019 vs. 2020) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $1,059,691 | $24,477,707 | | Tons Sold (Steel Making) | 6,569 | 179,381 | | Realized Price/Ton (Steel Making) | $59.09 | $83.36 | | Tons Sold (Industrial/Utility) | 1,099.98 | 146,537 | | Realized Price/Ton (Industrial/Utility) | $58.24 | $61.60 | - Operating expenses decreased from $84.5 million in 2019 to $17.5 million in 2020, primarily due to the closure of mine production[186] - Total assets increased to $38.4 million in 2020 from $35.4 million in 2019, driven by an increase in cash from debt and equity financing[187] - Total liabilities decreased to $58.4 million in 2020 from $66.6 million in 2019, mainly due to the execution of convertible debt[187] Quantitative and Qualitative Disclosure About Market Risk The company is not required to provide this information as it qualifies as a smaller reporting company - As a smaller reporting company, the registrant is not required to provide the information for this item[197] Financial Statements and Supplementary Data The report of the independent registered public accounting firm and the company's financial statements are filed as part of this report, starting on page F-1 - The financial statements and the report of the independent registered public accounting firm are incorporated by reference and located at page F-1[198] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no disagreements with its accounting firm on accounting and financial disclosure during the reporting period - There were no disagreements with the accounting firm during the reporting period[199] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of December 31, 2020, due to a material weakness in segregation of duties within the accounting function - Management concluded that as of December 31, 2020, disclosure controls and procedures were not effective[201] - A material weakness was identified: a lack of segregation of duties in the accounting and reporting functions due to an insufficient number of staff[203][204] - The company plans to ameliorate this weakness by increasing the size of its accounting staff at an appropriate time[201] Other Information There is no other information to report for this item - None[208] PART III Directors, Executive Officers and Corporate Governance This section lists the company's executive officers and board of directors, detailing their roles, biographical information, and the board's committee structure and code of conduct - The executive team includes Mark C. Jensen (CEO), Thomas M. Sauve (President), Kirk P. Taylor (CFO), and Tarlis R. Thompson (COO)[209] - The Board of Directors consists of five members: Mark C. Jensen, Thomas M. Sauve, Michael Layman, Gerardine Botte, and Courtenay O. Taplin[209] - Three directors, Ms. Botte and Messrs. Layman and Taplin, are considered independent under NASDAQ, NYSE, and SEC requirements[229] - The board has three committees: Audit, Compensation, and Safety and Environmental. The Audit and Compensation committees are composed solely of independent directors[235] Executive Compensation This section details the compensation for named executive officers and directors for fiscal years 2019 and 2020, including base salaries, option awards, and employment agreement terms 2020 Officer Compensation | Name | Position | Salary | Option Awards | Total Compensation | | :--- | :--- | :--- | :--- | :--- | | Mark C. Jensen | CEO | $250,000 | $100,000 | $374,187 | | Thomas M. Sauve | President | $200,000 | $57,730 | $286,927 | | Kirk P. Taylor | CFO | $200,000 | $57,730 | $181,467 | | Tarlis R. Thompson | COO | $175,000 | $435,000 | $610,000 | - Employment agreements for the CEO, President, and CFO were updated on October 1, 2020, increasing base salaries and including performance bonuses at the board's discretion[242][243][244] - Directors receive compensation primarily in the form of option awards. In 2020, Courtenay O. Taplin received awards valued at $161,450 and Michael Layman received awards valued at $93,500[247] - In November 2020, the CEO, President, and CFO were issued options to purchase 85,976, 70,732, and 45,732 shares, respectively, which vested immediately[254] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the beneficial ownership of the company's Class A Common Stock by individuals and entities owning more than 5%, as well as by executive officers and directors Beneficial Ownership of Officers and Directors (as of Dec 31, 2020) | Name | Position | Common Stock Beneficially Owned | Percent of Common Stock Owned | | :--- | :--- | :--- | :--- | | Mark C. Jensen | CEO, Director | 5,251,755 | 12.85% | | Thomas M. Sauve | President, Director | 4,464,136 | 10.92% | | Kirk P. Taylor | CFO | 1,620,383 | 3.96% | | All Directors and Officers as a Group | (4 persons) | 11,412,313 | 27.91% | - Golden Properties, Ltd. is listed as a greater than 5% holder, with beneficial ownership of 4,084,188 shares (9.99%), subject to a 9.99% ownership limitation on warrant exercises[259] Certain Relationships and Related Transactions, and Director Independence The company discloses several transactions with related parties, including leases and contract services agreements with entities controlled by management, and details director independence - The company leases property and minerals from Land Resources & Royalties LLC (LRR), an entity owned by members of management, incurring $232,208 in royalty expense in 2020[266] - A Contract Services Agreement with Land Betterment Corp, an entity controlled by management, resulted in $1,547,671 of incurred costs in 2020[265][268] - An investment fund controlled by a director invested a total of $1,250,000 in the company's convertible debt offering during 2020[267] - The Board of Directors has determined that directors Botte, Layman, and Taplin are independent[270] Principal Accounting Fees and Services This section details the fees paid to the company's independent registered public accounting firms for the fiscal years 2019 and 2020 Accounting Fees (2019 vs. 2020) | Fee Type | 2020 (BF Borgers, PC) | 2019 (Malone Bailey LLP) | | :--- | :--- | :--- | | Audit Fees | $180,000 | $235,000 | | Audit-Related Fees | $10,000 | $34,000 | PART IV Exhibits, Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including corporate governance documents, material agreements, and required certifications - Lists all exhibits filed with the report, such as corporate governance documents, material agreements (e.g., loan agreements, asset purchase agreements), and required certifications (e.g., Sarbanes-Oxley Act Sections 302 and 906)[273][275] - Exhibit 95.1 contains the Mine Safety Disclosure[275] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm The auditors issued opinions stating that the financial statements are fairly presented, but both reports include a 'Going Concern' paragraph due to significant operating losses and a net capital deficiency - The auditor for 2020, BF Borgers CPA PC, expressed an opinion that the financial statements are fairly presented[283] - Both the 2020 and 2019 audit reports highlight a 'Going Concern' issue, citing the company's significant operating losses and raising substantial doubt about its ability to continue operations[287][290] Consolidated Financial Statements Tables The consolidated financial statements present the company's financial position and performance, showing a net loss of $10.3 million for 2020 and an increase in total assets due to financing activities Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $38,415,395 | $35,229,650 | | Cash | $10,617,495 | $3,324 | | Total Liabilities | $58,420,895 | $67,934,291 | | Total Stockholders' Deficit | $(20,005,500) | $(32,704,641) | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenue | $1,059,691 | $24,477,707 | | Net Loss from Operations | $(16,447,365) | $(59,954,174) | | Impairment of Fixed Assets | $0 | $(27,688,030) | | Net Loss | $(10,255,762) | $(70,918,302) | | Net Loss Per Share | $(0.35) | $(2.94) | Notes to Consolidated Financial Statements The notes provide detailed explanations of the financial statements, covering 'Going Concern' uncertainty, asset acquisitions, revenue recognition, debt structure, related-party transactions, equity, and legal contingencies - Note 1 reiterates the substantial doubt about the company's ability to continue as a going concern due to recurring losses and a working capital deficit. Management plans to raise funds through equity or debt financing[330] - Note 1 details the May 2020 settlement and rescission of the Empire acquisition, where the property was returned to the seller in exchange for 2,000,000 common shares and extinguishment of a $2,000,000 note, resulting in a gain on sale of $6,820,949[320] - Note 9 discloses contingencies including claims from the Kentucky Energy Cabinet ($1,427,990 assessed) and the Mine Health Safety Administration ($918,611 assessed)[462] - Note 10 details significant subsequent events in early 2021, including numerous warrant exercises, conversions of notes payable into common stock, and new stock issuances for services and debt settlement[467][468][480]