American Resources Corp 10-K

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. Overview. Our primary source of revenue is the sale of metallurgical coal and coal used in pulverized coal injection (PCI). Both metallurgical and PCI coal is an essential building block in the steel manufacturing process. The overall outlook of the metallurgical coal business is dependent on a variety of factors such as pricing, regulatory uncertainties and global economic conditions. Coal consumption and production in the U.S. have been driven in recent periods by several market dynamics and trends, such as the global economy, a strong U.S. dollar and accelerating production cuts. Results of Operations. Year Ended December 31, 2023 compared to Year Ended December 31, 2022. Year Ended December 31, 2023 2022 $ Change % Change Revenue Coal sales $ 16,120,841 $ 39,103,995 $ (22,983,154 ) -59 % Metal recovery and sales 66,552 48,199 18,353 100 % Royalty income 556,682 322,075 234,607 73 % Total revenue 16,744,075 39,474,269 (22,730,194 ) -58 % Operating expenses (income) Cost of coal sales and processing 11,611,886 21,687,656 (10,075,770 ) -46 % Accretion 993,165 1,344,047 (350,882 ) -26 % Depreciation 46,953 2,157,763 (2,110,810 ) -98 % Amortization of mining rights 1,240,914 1,238,449 2,465 0 % General and administrative 7,013,833 4,020,464 2,993,369 74 % Professional fees 1,340,745 1,103,322 237,423 22 % Production taxes and royalties 2,647,655 3,785,049 (1,137,394 ) -30 % Gain on sale of equipment (8,475,468 ) (4,510,043 ) (3,965,425 ) 88 % Development 11,746,725 28,134,883 (16,388,158 ) -58 % Total operating expenses 28,166,408 58,961,590 (30,795,182 ) -52 % Net loss from operations (11,422,333 ) (19,487,321 ) 8,064,988 -41 % Other income (expense) Other income and (expense) 423,281 317,045 106,236 34 % Unrealized gain on short-term investments 499,639 - 499,639 100 % Gain on cancelation of debt - 3,119,775 (3,119,775 ) -100 % Gain on sales of patents - 16,000,000 (16,000,000 ) -100 % Interest income 381,324 30,982 350,342 1131 % Interest expense (1,336,997 ) (1,426,153 ) 89,156 -6 % Total other (expenses) income (32,753 ) 18,041,649 (18,074,402 ) -100 % Net loss $ (11,455,086 ) $ (1,445,672 ) $ (9,755,650 ) 675 % Net loss per share - basic $ (0.15 ) $ (0.02 ) Weighted average shares outstanding - basic 75,422,390 66,777,620 29 Table of Contents Revenues. Revenues for the year ended December 31, 2023 were $16,744,075 and 2022 were $39,474,269, respectively. The primary drivers for revenue decline were slowing down of global infrastructure markets, international import bans and overall softening in customer pricing. In response to slower demand and customer requests, Perry County was idled. Contribution of revenues: All our sales are located in the United States with our operations located in the Central Appalachian basin of eastern Kentucky and West Virgina. Our coal sales are categorized as metallurgical coal (“Met”) used for steel making, pulverized coal injections (“PCI”) used in the steel making process and high-BTU, low sulfur, low moisture bituminous coal (“High BTU”) used for a variety of uses within several industries, including industrial customers and specialty products. Disaggregated information about our revenue is presented below: For the year Ended December 31, 2023 2022 $ Change % Change MET $ 16,120,841 $ 35,584,635 $ 19,463,794 (54.7 )% PCI - 3,402,048 3,402,048 (100 )% High BTU - 117,312 (117,312 ) (100 )% $ 16,120,841 $ 39,103,995 $ 19,983,154 (51.1 )% Year ended 2023 For the year ended 2023, tons sold to steel making end users amounted to 67,372.57 with a realized sales price of $180.32. Steelmaking coal was contributed by McCoy Elkhorn’s Carnegie 1 mine. For the year ended 2023, tons sold to industrial and specialty end users amounted to 0 tons. Year ended 2022 For the year ended 2022, tons sold to steel making end users amounted to 111,807 with a realized sales price of $233.11. Steelmaking coal was contributed by McCoy Elkhorn’s Carnegie 1 and Carnegie 2 mines. For the year ended 2022, tons sold to industrial and specialty end users amounted to 105,577.11 with a realized sales price of $153.43. For the year ended 2022, 100% of coal sales revenue was contributed by Perry County for industrial and specialty end users. 30 Table of Contents Cost and Expenses. Cost of sales. The decrease in cost of sales is due to lower sales volumes as a result of the ceasing of production on the Perry County mines. Accretion. The decrease in accretion expense in the year ended December 31, 2023 is driven primarily by the reduced liability balance due to no changes in the previous estimates. Depreciation. The decrease in depreciation expense in the year ended December 31, 2023 is primarily due to the Company’s significant disposal of fixed assets in 2022. The Company has acquired the majority of new fixed assets under financing leases. General and administrative. The increase in general and administrative expense in the year ended December 31, 2023 is primarily due to higher compensation cost, higher stock compensation recognized during the year and increase in travel and health benefits. Production taxes and royalties. The decrease in production taxes and royalties in the year ended December 31, 2023 is due to lower sales volumes and prices. Development. To meet specific demand and customer requests, Perry County and Carnegie 1 were re-opened with updated mine plans and more efficient long term operating structure. This re-working included one-time development costs for expanding and increasing efficient capacity at the operating locations was primarily recognized in the prior period and is the reason for the significant decrease in December 31, 2023. The Company expects to continue to improve mining performance and offset inflationary pressures through efficiency gains. Other income (expenses). The decrease in other income (expenses) is primarily due to the sale of patents that occurred totaling $16,000,000, the forgiveness of the PPP loan of $1,521,304 and the cancellation of notes payable by issuing common stock in lieu of payment to reduce our debt balance in prior year. Liquidity and Capital Resources. Our primary sources of liquidity are derived from existing unrestricted cash balances, proceeds from future coal sales, and certain financing arrangements. Our primary capital resource requirements stem from the cost of coal sales and processing, general and administrative, capital expenditures, debt service obligations, reclamation obligations, and collateral requirements. As of December 31, 2023, the company has a cash balance of $7,034,370 and working capital of $16,814,931. The Company will use a combination of cash proceeds from operations, issuance of common stock for cash or for debt conversion and issuance of new debt instruments to satisfy both short term and long term obligations, including the settlement of payables and debt that are in default of their original agreements. These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring losses and as of December 31, 2023, had an accumulated deficit of $178,694,329. For the year ending December 31, 2023, the Company sustained a net loss of $11,455,086. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the date these financial statements were issued. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is contingent upon its ability to obtain additional financing and to generate revenue and cash flow to meet its obligations on a timely basis. The Company will continue to seek to raise additional funding through debt or equity financing during the next twelve months from the date of issuance of these financial statements. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. There is no guarantee the Company will be successful in achieving these objectives. 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. 31 Table of Contents Cash Flows Year Ended December 31, 2023 compared to Year Ended December 31, 2022. Years Ended December 31, 2023 2022 Consolidated statement of cash flow data: Cash (used for) provided by operating activities $ (14,515,241 ) $ 2,549,189 Cash provided by (used for) investing activities (28,833,246 ) (1,125,759 ) Cash provided by (used for) financing activities 37,387,162 (1,015,848 ) Net change in cash and restricted cash $ (5,961,325 ) $ (12,995,695 ) Cash used for operating activities during 2023 was $14,515,241 compared to cash provided by $2,549,189 in 2022. The change was primarily due to a net loss of $11,455,086, offset by amortization of mining rights of $1,240,914, accretion expense of $993,165, amortization of right-of-use asset of $626,253, option expense of $1,506,292, unrealized gain on short-term investments of $499,639, gain on sale of equipment of $8,475,468 and a change in working capital of $1,284,489. Cash used by investing activities during 2023 was $28,833,246 compared to $1,125,759 in 2022. The change was primarily due to an increase in the net purchase of short-term investments of $29,797,565 in 2023 compared to $0 in 2022. Cash provided by financing activities during 2023 was $37,387,162 compared to cash used by financing activities in 2022 of $1,015,848 for the prior year. The change was due to $1,112,850 repayments on long term debt, $5,599,988 repayments of finance lease liabilities, and $44,100,000 proceeds from tax exempt bonds. Capital Resources. We had no material commitments for capital expenditures as of December 31, 2023. Off-Balance Sheet Arrangements As of December 31, 2023, we had no off-balance sheet arrangements. 32 Table of Contents Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amounts of revenues and expenses reported for the period then ended. Mine development costs . Mine development costs represent the costs incurred to prepare future mine sites for mining. These costs include costs of acquiring, permitting, planning, research, and establishing access to identify mineral reserves and other preparations for commercial production as necessary to develop and permit the properties for mining activities. Operating expenditures, including certain professional fees and overhead costs, are not capitalized but are expensed as incurred. Amortization of mine development costs, with respect to a specific mine, commences when mining of the related reserves begins. Amortization is computed using the units-of-production method over the proven and probable reserves dedicated to the specific mine. Asset retirement obligations . We recognize as a liability an asset retirement obligation, or ARO, associated with the retirement of a tangible long-lived asset in the period in which it is incurred or becomes determinable, with an associated increase in the carrying amount of the related long-lived asset. The initially recognized asset retirement cost is amortized using the same method and useful life as the long-lived asset to which it relates. Amortization begins when mining of the specific mineral property begins. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. Estimating the future ARO requires management to make estimates and judgments regarding timing and existence of a liability, as well as what constitutes adequate restoration. Inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing ARO liability, a corresponding adjustment is made to the related asset. Cost of Goods Sold and Gross Profit . Cost of Goods Sold for coal mined and processed include direct labor, materials and utilities. Activities related to metal recover are inherent in both direct coal labor and overhead labor and does not require additional variable costs. Impairment of Long-lived Assets. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These events and circumstances include, but are not limited to, a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life, a significant adverse change in the extent or manner in which we use a long-lived asset or a change in its physical condition. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying amount. If the projected undiscounted cash flows are less than the carrying amount, an impairment is recorded for the excess of the carrying amount over the estimated fair value. We make various assumptions, including assumptions regarding future cash flows in our assessments of long-lived assets for impairment. The assumptions about future cash flows and growth rates are based on the current and long-term business plans related to the long-lived assets. 33 Table of Contents Item 7A. Quantitative and Qualitative Disclosure About Market Risk. The Company 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.