Date: 11/5/2019     Form: 10-Q - Quarterly Report
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

X

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

 

For the quarterly period ended September 30, 2019

or

 

 

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

 

For the transition period from                 to

Commission File Number: 001-38003

RAMACO RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

38-4018838

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)

 

 

250 West Main Street, Suite 1800

 

Lexington, Kentucky

40507

(Address of principal executive offices)

(Zip code)

 

 

(859) 244-7455

(Registrant’s telephone number, including area code)

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

 

 

 

 

 

 

 

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, $0.01 par value

 

METC

 

NASDAQ Global Select Market

 

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  X    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  X    No  ☐

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

X

Emerging growth company

X

 

 

 

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

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

As of November 4, 2019, the registrant had 40,933,831 shares of common stock outstanding.

 

 

 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements

5

Item 2. 

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

14

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

21

Item 4. 

Controls and Procedures

21

 

 

 

PART II. OTHER INFORMATION 

 

Item 1. 

Legal Proceedings

22

Item 1A. 

Risk Factors

22

Item 4. 

Mine Safety Disclosures

22

Item 6. 

Exhibits

22

 

 

 

SIGNATURES 

23

 

 

2

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, estimated revenue, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under, but not limited to, the heading “Item 1A. Risk Factors” included in this report and elsewhere in the Annual Report of Ramaco Resources, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2018 (the “Annual Report”) and other filings with the Securities and Exchange Commission (“SEC”).

Forward-looking statements may include statements about:

·

anticipated production levels, costs, sales volumes and revenue;

·

timing for completion of major capital projects;

·

economic conditions in the steel industry generally;

·

economic conditions in the metallurgical coal industry generally;

·

expected costs to develop planned and future mining operations, including the costs to construct necessary processing and transport facilities;

·

estimated quantities or quality of our metallurgical coal reserves;

·

our expectations relating to dividend payments and our ability to make such payments;

·

our ability to obtain additional financing on favorable terms, if required, to complete the acquisition of additional metallurgical coal reserves as currently contemplated or to fund the operations and growth of our business;

·

maintenance, operating or other expenses or changes in the timing thereof;

·

financial condition and liquidity of our customers;

·

competition in coal markets;

·

the price of metallurgical coal and/or thermal coal;

·

compliance with stringent domestic and foreign laws and regulations, including environmental, climate change and health and safety regulations, and permitting requirements, as well as changes in the regulatory environment, the adoption of new or revised laws, regulations and permitting requirements;

·

potential legal proceedings and regulatory inquiries against us;

·

the impact of weather and natural disasters on demand, production and transportation;

·

purchases by major customers and our ability to renew sales contracts;

·

credit and performance risks associated with customers, suppliers, contract miners, co-shippers and trading, banks and other financial counterparties;

·

geologic, equipment, permitting, site access and operational risks and new technologies related to mining;

·

transportation availability, performance and costs;

·

availability, timing of delivery and costs of key supplies, capital equipment or commodities such as diesel fuel, steel, explosives and tires;

·

timely review and approval of permits, permit renewals, extensions and amendments by regulatory authorities; and

·

other risks identified in this Quarterly Report that are not historical.

 

We caution you that these forward-looking statements are subject to a number of risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of coal. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the

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impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

All forward-looking statements, expressed or implied, included in this report are expressly qualified in their entirety by this cautionary statement and speak only as of the date of this Quarterly Report. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.

Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this report.

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PART I - FINANCIAL INFORMATION

Item 1.         Financial Statements

Ramaco Resources, Inc.

Unaudited Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

In thousands, except share and per share amounts

    

September 30, 2019

    

December 31, 2018

    

Assets

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

5,498

 

$

6,951

 

Accounts receivable

 

 

30,054

 

 

10,729

 

Inventories

 

 

12,644

 

 

14,185

 

Prepaid expenses and other

 

 

3,324

 

 

3,154

 

Total current assets

 

 

51,520

 

 

35,019

 

 

 

 

 

 

 

 

 

Property, plant and equipment – net

 

 

171,945

 

 

149,205

 

Advanced coal royalties

 

 

3,250

 

 

3,045

 

Other

 

 

1,041

 

 

975

 

Total Assets

 

$

227,756

 

$

188,244

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

13,851

 

$

16,393

 

Accrued expenses

 

 

11,156

 

 

8,094

 

Asset retirement obligations

 

 

734

 

 

71

 

Current portion of long-term debt

 

 

5,000

 

 

5,000

 

Other

 

 

 —

 

 

287

 

Total current liabilities

 

 

30,741

 

 

29,845

 

 

 

 

 

 

 

 

 

Asset retirement obligations

 

 

12,665

 

 

12,707

 

Long-term debt, net

 

 

11,766

 

 

4,474

 

Deferred tax liability

 

 

4,670

 

 

109

 

Other long-term liabilities

 

 

701

 

 

 —

 

Total liabilities

 

 

60,543

 

 

47,135

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued and outstanding

 

 

 —

 

 

 —

 

Common stock, $0.01 par value, 260,000,000 shares authorized, 40,933,831 and  40,082,467 shares issued and outstanding, respectively

 

 

409

 

 

401

 

Additional paid-in capital

 

 

153,976

 

 

150,926

 

Retained earnings (deficit)

 

 

12,828

 

 

(10,218)

 

Total stockholders' equity

 

 

167,213

 

 

141,109

 

Total Liabilities and Stockholders' Equity

 

$

227,756

 

$

188,244

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

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Ramaco Resources, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

In thousands, except per share amounts

    

2019

    

2018

    

2019

    

2018

Revenue

 

$

61,380

 

$

62,166

 

$

184,601

 

$

183,387

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of items shown separately below)

 

 

44,983

 

 

49,406

 

 

129,208

 

 

141,597

Asset retirement obligation accretion

 

 

128

 

 

124

 

 

383

 

 

370

Depreciation and amortization

 

 

5,353

 

 

3,348

 

 

14,291

 

 

8,741

Selling, general and administrative

 

 

4,464

 

 

3,484

 

 

13,127

 

 

10,608

Total cost and expenses

 

 

54,928

 

 

56,362

 

 

157,009

 

 

161,316

Operating income

 

 

6,452

 

 

5,804

 

 

27,592

 

 

22,071

Other income

 

 

573

 

 

1,036

 

 

1,063

 

 

2,038

Interest expense, net

 

 

(342)

 

 

(566)

 

 

(951)

 

 

(980)

Income before tax

 

 

6,683

 

 

6,274

 

 

27,704

 

 

23,129

Income tax expense

 

 

1,133

 

 

63

 

 

4,658

 

 

1,448

Net income

 

$

5,550

 

$

6,211

 

$

23,046

 

$

21,681

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.14

 

$

0.15

 

$

0.56

 

$

0.54

Diluted earnings per share

 

$

0.14

 

$

0.15

 

$

0.56

 

$

0.54

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

40,936

 

 

40,082

 

 

40,804

 

 

40,024

Diluted weighted average shares outstanding

 

 

40,936

 

 

40,329

 

 

40,804

 

 

40,271

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Ramaco Resources, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Retained

 

Total 

 

 

Common

 

Paid-

 

Earnings

 

Stockholders'

In thousands

    

Stock

    

in Capital

    

(Deficit)

    

Equity

Balance at January 1, 2019

 

$

401

 

$

150,926

 

$

(10,218)

 

$

141,109

Equity-based compensation

 

 

 7

 

 

887

 

 

 —

 

 

894

Net income

 

 

 —

 

 

 —

 

 

6,883

 

 

6,883

Balance at March 31, 2019

 

 

408

 

 

151,813

 

 

(3,335)

 

 

148,886

Equity-based compensation

 

 

 1

 

 

1,059

 

 

 —

 

 

1,060

Net income

 

 

 —

 

 

 —

 

 

10,613

 

 

10,613

Balance at June 30, 2019

 

 

409

 

 

152,872

 

 

7,278

 

 

160,559

Equity-based compensation

 

 

 —

 

 

1,104

 

 

 —

 

 

1,104

Net income

 

 

 —

 

 

 —

 

 

5,550

 

 

5,550

Balance at September 30, 2019

 

$

409

 

$

153,976

 

$

12,828

 

$

167,213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

$

396

 

$

148,293

 

$

(35,292)

 

$

113,397

Equity-based compensation

 

 

 5

 

 

546

 

 

 —

 

 

551

Net income

 

 

 —

 

 

 —

 

 

5,266

 

 

5,266

Balance at March 31, 2018

 

 

401

 

 

148,839

 

 

(30,026)

 

 

119,214

Equity-based compensation

 

 

 —

 

 

694

 

 

 —

 

 

694

Net income

 

 

 —

 

 

 —

 

 

10,204

 

 

10,204

Balance at June 30, 2018

 

 

401

 

 

149,533

 

 

(19,822)

 

 

130,112

Equity-based compensation

 

 

 —

 

 

695

 

 

 —

 

 

695

Net income

 

 

 —

 

 

 —

 

 

6,211

 

 

6,211

Balance at September 30, 2018

 

$

401

 

$

150,228

 

$

(13,611)

 

$

137,018

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

 

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Ramaco Resources, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

In thousands

    

2019

    

2018

 

Cash flows from operating activities

 

 

  

 

 

  

 

Net income

 

$

23,046

 

$

21,681

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

Accretion of asset retirement obligations

 

 

383

 

 

370

 

Depreciation and amortization

 

 

14,291

 

 

8,741

 

Amortization of debt issuance costs

 

 

43

 

 

406

 

Stock-based compensation

 

 

3,058

 

 

1,940

 

Deferred income taxes

 

 

4,561

 

 

1,448

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(19,325)

 

 

(24,122)

 

Prepaid expenses and other current assets

 

 

(170)

 

 

(942)

 

Inventories

 

 

1,541

 

 

2,107

 

Advanced coal royalties

 

 

(205)

 

 

(172)

 

Other assets and liabilities

 

 

634

 

 

(307)

 

Accounts payable

 

 

(5,291)

 

 

5,236

 

Accrued expenses

 

 

3,062

 

 

4,087

 

Net cash from operating activities

 

 

25,628

 

 

20,473

 

 

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(34,043)

 

 

(39,883)

 

Proceeds from maturities of investment securities

 

 

 —

 

 

5,200

 

Net cash from investing activities

 

 

(34,043)

 

 

(34,683)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

58,050

 

 

13,000

 

Proceeds from notes payable - related party

 

 

 —

 

 

3,000

 

Payments of debt issuance cost

 

 

 —

 

 

(569)

 

Repayment of borrowings

 

 

(50,801)

 

 

(1,000)

 

Repayments of financed insurance payable

 

 

(287)

 

 

(673)

 

Net cash from financing activities

 

 

6,962

 

 

13,758

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(1,453)

 

 

(452)

 

Cash and cash equivalents, beginning of period

 

 

6,951

 

 

5,934

 

Cash and cash equivalents, end of period

 

$

5,498

 

$

5,482

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

821

 

$

801

 

Cash paid for taxes

 

 

 —

 

 

 —

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Capital expenditures included in accounts payable and accrued expenses

 

 

4,068

 

 

894

 

Financed insurance

 

 

 —

 

 

1,276

 

Additional asset retirement obligations incurred

 

 

239

 

 

200

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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Ramaco Resources, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1—DESCRIPTION OF BUSINESS

Ramaco Resources, Inc. (“the Company,” “we,” “us,” “our,”) is a Delaware corporation formed in October 2016. Our principal corporate offices are located in Lexington, Kentucky. We are an operator and developer of high-quality, low-cost metallurgical coal in southern West Virginia, southwestern Virginia, and southwestern Pennsylvania.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial position as of, and the results of operations for, all periods presented. In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the condensed consolidated financial statements and disclosures of contingencies. Actual results may differ from those estimates. The results for interim periods are not necessarily indicative of annual results. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. Intercompany balances and transactions between consolidated entities are eliminated.

Cash and Cash Equivalents—We classify all highly-liquid instruments with an original maturity of three months or less to be cash equivalents. Restricted cash balances at September 30, 2019 were $1.2 million, consisted of funds held in escrow for potential future workers’ compensation claims and were classified in other current assets in the consolidated balance sheets.

Self-Insurance—We are self-insured for certain losses relating to workers’ compensation claims. We purchase insurance coverage to reduce our exposure to significant levels of these claims. Self-insured losses are accrued based upon estimates of the aggregate liability for uninsured claims incurred as of the balance sheet date using current and historical claims experience and certain actuarial assumptions. At September 30, 2019, the estimated aggregate liability for uninsured claims totaled  $0.9 million.  Of this, $0.6 million is included in other long-term liabilities within the consolidated balance sheets. These estimates are subject to uncertainty due to a variety of factors, including extended lag times in the reporting and resolution of claims, and trends or changes in claim settlement patterns, insurance industry practices and legal interpretations. As a result, actual costs could differ significantly from the estimated amounts. Adjustments to estimated liabilities are recorded in the period in which the change in estimate occurs. 

Financial Instruments—Our financial assets and liabilities consist of cash, accounts receivable, accounts payable and notes payable. The fair values of these instruments approximate their carrying amounts at each reporting date.

Nonrecurring fair value measurements include asset retirement obligations, the estimated fair value of which is calculated as the present value of estimated cash flows related to its reclamation liabilities using Level 3 inputs. The significant inputs used to calculate such liabilities include estimates of costs to be incurred, our credit adjusted discount rate, inflation rates and estimated date of reclamation.

Concentrations—During the three and nine months ended September 30, 2019, sales to three customers accounted for approximately 58% and 49% of total revenue, respectively. The balance due from these three customers at September 

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30, 2019 was approximately 64% of total accounts receivable. During the three and nine months ended September 30, 2018 sales to six customers accounted for approximately 66% and 71% of total revenue, respectively.

Recent Accounting Pronouncements—In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. Leases of mineral reserves and related land leases have been exempted from the standard. We adopted ASU 2016-02, Leases, on January 1, 2019. We elected the “package of practical expedients” within the standard which permits us not to reassess prior conclusions about lease identification, lease classification and initial direct costs. We made an accounting policy election to not separate lease and non-lease components for all leases. The adoption of this standard resulted in the recognition of right-of-use assets and lease liabilities of $0.3 million, which were not previously recorded on our balance sheet.

 

NOTE 3—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

    

September 30, 2019

    

December 31, 2018

 

Plant and equipment

 

$

137,841

 

$

109,911

 

Construction in process

 

 

10,722

 

 

12,066

 

Capitalized mine development cost

 

 

53,482

 

 

43,037

 

Less: accumulated depreciation and amortization

 

 

(30,100)

 

 

(15,809)

 

Total property, plant and equipment, net

 

$

171,945

 

$

149,205

 

 

Capitalized amounts related to coal reserves at properties where we are not currently engaged in mining operations totaled $9.7 million as of September 30, 2019 and $5.5 million as of December 31, 2018.

 

Depreciation and amortization included:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

(In thousands)

    

2019

    

2018

    

2019

    

2018

Depreciation of plant and equipment

 

$

3,706

 

$

2,582

 

$

10,142

 

$

6,946

Amortization of capitalized

 

 

 

 

 

 

 

 

 

 

 

 

mine development costs

 

 

1,647

 

 

766

 

 

4,149

 

 

1,795

Total depreciation and amortization

 

$

5,353

 

$

3,348

 

$

14,291

 

$

8,741

 

 

NOTE 4—DEBT

Credit Facility

On November 2, 2018, we entered into a Credit and Security Agreement (the “Credit Facility”) with KeyBank National Association (“KeyBank”). The Credit Facility consists of a $10.0 million term loan (the “Term Loan”) and up to $30.0 million revolving line of credit, including $1.0 million letter of credit availability (the “Revolving Credit Facility”). All personal property assets, including, but not limited to accounts receivable, coal inventory, and certain surface mining equipment were pledged to secure the Credit Facility. Real property and improvements are excluded from the collateral package and are not encumbered in connection with the Credit Facility. The Credit Facility has a maturity date of November 2, 2021.

The Revolving Credit Facility interest rate is based on LIBOR + 2.35% or Base Rate + 1.75%. The Term Loan credit interest rate is based on LIBOR + 4.75% or Base Rate + 3.75%. Base Rate is the highest of (i) KeyBank’s prime rate, (ii) Federal Funds Effective Rate + 0.5%, or (iii) LIBOR + 1.0%. Both loans are initially base rate loans, but may be converted to LIBOR rate loans at certain times at our discretion.

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The outstanding principal balance of the Term Loan is required to be repaid in monthly installments of approximately $0.4 million until fully repaid. The outstanding principal balance of the Term Loan was $5.8 million at September 30, 2019 and $9.6 million at December 31, 2018. As of September 30, 2019, $11.0 million was outstanding on the Revolving Credit Facility and we had remaining availability of $15 million.

The Credit Facility contains usual and customary covenants, including but not limited to, limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants. As of September 30, 2019,  we were in compliance with all covenants under the Credit Facility.

 

NOTE 5—EQUITY

As of September 30, 2019,  there were 40,933,831  shares of common stock outstanding.

Stock-Based Compensation

We have a stock-based compensation plan under which stock options, restricted stock, performance shares and other stock-based awards may be granted. At September 30, 2019, 5.1 million shares were available under the current plan for future awards.

Stock Options – Options for the purchase of a total of 937,424 shares of our common stock for $5.34 per share were granted to two executives on August 31, 2016. The options have a ten-year term from the grant date and are fully vested.  The options remain outstanding and unexercised and were not in-the-money at September 30, 2019.

Restricted Stock—We grant shares of restricted stock to certain senior executives, key employees and directors. The shares vest over one to three years from the date of grant. During the vesting period, the participants have voting rights and may receive dividends, but the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Additionally, granted but unvested shares are forfeited upon termination of employment, unless an employee enters into another written arrangement. The fair value of the restricted shares on the date of the grant is amortized ratably over the service period. Compensation expense related to these awards totaled $1.1 million and $3.1 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, there was $5.4 million of total unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted-average period of 1.4 years.

The following table summarizes restricted awards outstanding, as well as activity for the period:

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

Average Grant

 

 

Shares

 

 

Date Fair Value

Outstanding at December 31, 2018

 

966,134

 

$

6.99

Granted

 

867,201

 

 

5.49

Vested

 

 —

 

 

 —

Forfeited

 

(15,837)

 

 

5.73

Outstanding at September 30, 2019

 

1,817,498

 

$

6.28

 

 

NOTE 6—COMMITMENTS AND CONTINGENCIES

Surety Bond

As of September 30, 2019,  our asset retirement obligations totaled $13.4 million and we had total corresponding reclamation bonding requirements of $12.8 million, which were supported by surety bonds.

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Purchase Commitments

We secure the ability to transport coal through rail contracts and export terminals that are sometimes funded through take-or-pay arrangements. As of September 30, 2019,  commitments under take-or-pay arrangements totaled $1.6 million through March 31, 2020.

Litigation

From time to time, the Company may be subject to various litigation and other claims in the normal course of business. No amounts have been accrued in the consolidated financial statements with respect to any matters.

 

On November 5, 2018, one of our three raw coal storage silos that feed our Elk Creek plant in West Virginia experienced a partial structural failure. The prep plant at our Elk Creek mining complex was idled for approximately three weeks due to the partial structural failure of the silo. In late November 2018, we completed a temporary conveying system at our Elk Creek mining complex. The temporary conveying system allowed us to bypass the damaged raw coal storage silo, which has since been demolished, and allowed for the immediate processing and shipping of coal at approximately 80% of the entire plant capacity, throughout December 2018. In February 2019, we completed the fabrication of a higher capacity bypass system to provide a secondary conveyance system, which operated at greater than 80% of processing capacity with increased reliability compared to the initial bypass system. All remediation efforts were completed in mid-July 2019 and the Elk Creek prep plant returned to full processing capacity at the beginning of August 2019. Our insurance carrier, Federal Insurance Company, disputed our claim for coverage based on certain exclusions to the applicable policy and therefore on August 21, 2019 we filed suit against Federal Insurance Company and Chubb INA Holdings, Inc. in Logan County Circuit Court in West Virginia seeking a declatory judgment that the partial silo collapse was an insurable event and to require coverage under our policy. Chubb INA Holdings, Inc. has filed a motion to dismiss and Federal Insurance Company has filed a motion to remove the case to federal court in West Virginia.

NOTE 7—REVENUE

Our revenues are derived from contracts for the sale of coal which is recognized at the point in time control is transferred to our customer. Generally, domestic sales contracts have terms of about one year and the pricing is typically fixed. Export sales have spot or term contracts and pricing can either be by fixed-price or a price derived against index-based pricing mechanisms. Disaggregated information about our revenue is presented below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

(In thousands)

    

2019

    

2018

 

2019

    

2018

 

Coal Sales

 

 

  

 

 

  

 

 

  

 

 

  

 

Domestic revenues

 

$

50,382

 

$

35,736

 

$

126,498

 

$

95,810

 

Export revenues

 

 

10,998

 

 

26,430

 

 

58,103

 

 

87,577

 

Total revenues

 

$

61,380

 

$

62,166

 

$

184,601

 

$

183,387

 

 

As of September 30, 2019, we had outstanding performance obligations for the remainder of 2019 of approximately 0.3 million tons for contracts with fixed sales prices averaging $105/ton and 0.1 million tons for contracts with index-based pricing mechanisms. Additionally, we had outstanding performance obligations beyond 2019 of approximately 1.3 million tons for contracts having fixed pricing and approximately 0.08 million tons with index-based pricing mechanisms.

 

NOTE 8—INCOME TAXES

Income tax provisions for interim quarterly periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. The effective tax rate for the three months ended September 30, 2019 was 17%, compared to 1% for the three months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 and 2018 was 17% and 6%, respectively. The primary difference from the statutory rate of 21% is related to permanent differences for state

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income taxes, non-deductible expenses and the difference in depletion expense between U.S. GAAP and federal income tax purposes. In 2018, we removed the valuation allowance against deferred taxes, which reduced our effective tax rate.

 

 

NOTE 9—EARNINGS PER SHARE

The following is the computation of basic and diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended September 30, 

 

Nine months ended September 30, 

 

(In thousands, except per share amounts)

    

2019

    

2018

    

2019

    

2018

 

Numerator

 

 

  

 

 

  

 

 

  

 

 

  

 

Net income

 

$

5,550

 

$

6,211

 

$

23,046

 

$

21,681

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to compute basic EPS

 

 

40,936

 

 

40,082

 

 

40,804

 

 

40,024

 

Dilutive effect of share-based awards

 

 

 —

 

 

247

 

 

 —

 

 

247

 

Weighted average shares used to compute diluted EPS

 

 

40,936

 

 

40,329

 

 

40,804

 

 

40,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14

 

$

0.15

 

$

0.56

 

$

0.54

 

Diluted

 

$

0.14

 

$

0.15

 

$

0.56

 

$

0.54

 

 

 

 

Diluted EPS for the three months ended September 30, 2019 excludes 937,424 options to purchase our common stock because their effect would be anti-dilutive.

 

 

 

NOTE 10—RELATED PARTY TRANSACTIONS

Mineral Lease and Surface Rights Agreements

Much of the coal reserves and surface rights that we control were acquired through a series of mineral leases and surface rights agreements with Ramaco Coal, LLC, a related party. Payments of minimum royalties and throughput payments commenced in 2017 pursuant to the terms of the agreements. Under these agreements, minimum royalties are paid in arrears each month to the extent that the earned production royalties for such month are less than the required minimum royalties. Amounts due to Ramaco Coal, LLC for production royalty payables totaling  $0.6 million and $2.9 million at September 30, 2019 and December 31, 2018, respectively, are included in accounts payable in the condensed consolidated balance sheet.

On-going Administrative Services

Under a Mutual Services Agreement dated December 22, 2017 but effective as of March 31, 2018, the Company and Ramaco Coal, LLC agreed to share the services of certain party’s employees. Each party will pay the other a fee on a quarterly basis for such services calculated as the annual base salary of each employee providing services multiplied by the percentage of time each employee spent providing services for the other party. The services will be provided for 12-month terms, but may be terminated by either party at the end of any 12-month term by providing written notice at least 30 days prior to the end of the then-current term. During the nine months ended September 30, 2019, we billed  $8,000 to Ramaco Coal, LLC for use of services.   

*  *   *   *   *

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report, as well as the financial statements and related notes appearing elsewhere in this Quarterly Report. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. We caution you that our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences are discussed elsewhere in this Quarterly Report, particularly in the “Cautionary Note Regarding Forward-Looking Statements” and in our Annual Report under the heading “Item 1A. Risk Factors,” all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.

Business Overview

Our primary source of revenue is the sale of metallurgical coal. As of December 31, 2018, we had a 248-million-ton reserve base of high-quality metallurgical coal and four long-lived projects under development. We are currently mining in four underground mines, one surface mine and with one highwall miner at our two complexes. Our plan is to complete development of our remaining projects and grow production to more than 4.0 million clean tons of metallurgical coal over the next three to four years depending on market demand and the rate at which we are able to deploy capital. We may make acquisitions of reserves or infrastructure that continue our focus on advantaged geology and lower costs.

We sell substantially all of our metallurgical coal production to steel producers. Metallurgical coal, which is converted to coke, is a critical input in the steel production process. Metallurgical coal markets weakened significantly during the third quarter of 2019 as certain China ports placed restrictions on imported coal. Between these restrictions, concerns about the stability of the global economy and the ongoing trade dispute between China and the U.S., metallurgical coal prices dropped meaningfully during the period.  These pricing declines are expected to have little impact on our 2019 operating results as most of our remaining sales volumes are committed at fixed prices. Furthermore, pricing has rebounded off of recent lows, as Chinese buyers have taken advantage of the fact that the price of importing metallurgical coal was (and still is) materially cheaper than buying domestically, thereby taking advantage of this arbitrage opportunity.

The annual contracting season for 2020 with domestic steel producers is largely completed. To date, we have entered into forward sales contracts with domestic customers for 2020 on a fixed price basis for 1.3 million tons at an average sales price of $91/ton. This level of pricing in 2020 is lower than in 2019 and is due to a combination of factors, including the impact of the Chinese port restrictions discussed above, lower year-over-year steel prices, changes in types of coal qualities purchased by customers in 2020 and general economic concerns in the United States.

Third Quarter 2019 Overview

·

All remediation efforts in response to the structural failure of one of the three raw coal storage silos at our Elk Creek prep plant facility in late-2018 were completed in mid-July 2019, and the Elk Creek prep plant returned to full processing capacity at the beginning of August 2019.

·

Adjusted EBITDA was $13.6 million in the third quarter of 2019, which was 24% above the same period in 2018.

·

Third quarter sales of company produced tons totaled 510,000, equaling our strongest quarter on record.

·

Third quarter realized pricing of $110/ton on company produced coal was our second highest quarter on record. The strong pricing was reflective of our decision in 2018 to commit the majority of our 2019 sales tons into the domestic steel market.

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Results of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

(In thousands)

    

2019

    

2018

    

2019

    

2018

Consolidated statement of operations data

 

 

  

 

 

  

 

 

  

 

 

  

Revenue

 

$

61,380

 

$

62,166

 

$

184,601

 

$

183,387

Cost and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of items shown separately below)

 

 

44,983

 

 

49,406

 

 

129,208

 

 

141,597

Asset retirement obligation accretion

 

 

128

 

 

124

 

 

383

 

 

370

Depreciation and amortization

 

 

5,353

 

 

3,348

 

 

14,291

 

 

8,741

Selling, general and administrative

 

 

4,464

 

 

3,484

 

 

13,127

 

 

10,608

Total cost and expenses

 

 

54,928

 

 

56,362

 

 

157,009

 

 

161,316

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

6,452

 

 

5,804

 

 

27,592

 

 

22,071

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income

 

 

573

 

 

1,036

 

 

1,063

 

 

2,038

Interest expense, net

 

 

(342)

 

 

(566)

 

 

(951)

 

 

(980)

Income before tax

 

 

6,683

 

 

6,274

 

 

27,704

 

 

23,129

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

1,133

 

 

63

 

 

4,658

 

 

1,448

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,550

 

$

6,211

 

$

23,046

 

$

21,681

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

13,610

 

$

11,007

 

$

46,387

 

$

35,160

 

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

Revenue.  Our revenue includes sales to customers of Company produced coal and coal purchased from third parties. We include amounts billed by us for transportation to our customers within revenue and transportation costs incurred within cost of sales.  Coal sales information is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

(In thousands)

    

2019

    

2018

    

Increase (Decrease)

Company Produced

 

 

  

 

 

  

 

 

  

Coal sales revenue

 

$

59,083

 

$

51,963

 

$

7,120

Tons sold

 

 

510

 

 

510

 

 

(0)

Purchased from Third Parties

 

 

  

 

 

  

 

 

  

Coal sales revenue

 

$

2,297

 

$

10,203

 

$

(7,906)

Tons sold

 

 

17

 

 

90

 

 

(73)

 

Coal sales revenue in the third quarter of 2019 was  $0.8 million lower than in the third quarter of 2018 principally due to decreased sales of purchased coal.  Purchases from third parties have been significantly curtailed in 2019.  Much of this decrease has been offset by higher sales revenue for Company produced met coal.

Cost of sales. Our cost of sales totaled $45.0 million for the three months ended September 30, 2019 as compared with $49.4 million for the same period in 2018.  This decrease was primarily driven by lower purchased coal sales volumes, and partially offset by increased costs per ton.

The total cash cost per ton sold (FOB mine) for the third quarter of 2019 was approximately $80 for our produced coal and approximately $113 for coal we purchased from third parties. The $80 cash cost per ton for produced coal in the third quarter of 2019 was up from approximately $65 in the third quarter of 2018. Almost one third of the increase was due to the impact of more tonnage coming from our Berwind mine, which is in the development state of production and

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therefore has a higher average cost than the Elk Creek complex. Specifically, Berwind saw a 120% increase in coal sales in the 2019 period as compared with the prior year period.  About one quarter of the cost increase was due to an increase in labor, while approximately 15% of the increase was due to higher sales-related costs, such as royalties and severance taxes, related to the higher sales prices in the 2019 period.

Asset retirement obligation accretion. Asset retirement obligation accretion was $0.1 million in each of the three-month periods ended September 30, 2019 and 2018.

Depreciation and amortization. Depreciation and amortization expense for the third quarter of 2019 was $5.4 million as compared with $3.3 million for the third quarter of 2018. Increased depreciation and amortization expense resulted from our growth and expanded operations over the past year.

Selling, general and administrative. Selling, general and administrative expenses were $4.5 million for the three months ended September 30, 2019 as compared with $3.5 million for the same period in 2018. This increase was primarily due to an increase of $0.4 million in stock-based compensation expense.  The majority of stock-based compensation awards vest over a three-year period and expense is recognized over that vesting period.

Other income. Other income was $0.6 million for the third quarter of 2019, as compared with $1.0 million for the third quarter of 2018. This decrease was primarily due to a decrease in rail rebates received.

Interest expense, net. Interest expense, net was $0.3 million in the three months ended September 30, 2019 as compared with $0.6 million for the same period of 2018.  Borrowing costs under the present Credit Facility are more favorable than under past facilities.

Income tax expense. The effective tax rate for the three months ended September 30, 2019 was 17%, compared to 1% for the three months ended September 30, 2018. The primary difference from the statutory rate of 21% is related to permanent differences for state income taxes, non-deductible expenses and the difference in depletion expense between U.S. GAAP and federal income tax purposes. In 2018, we removed the valuation allowance against deferred taxes, which reduced our effective tax rate.

Cash taxes paid for 2019 are expected to be less than $0.1 million.  

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

 

Revenue. Coal sales information is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

(In thousands)

    

2019

    

2018

    

Increase (Decrease)

Company Produced