METC 10-Q
Ramaco Resources, Inc. (METC)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “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 and losses, 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 Quarterly Report and elsewhere in the Annual Report of Ramaco Resources, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2021 (the “Annual Report”) filed with the United States Securities and Exchange Commission (the “SEC”) on April 1, 2022 and other filings of the Company with the SEC.
Forward-looking statements may include statements about:
| ● | risks related to the impact of the novel coronavirus “COVID-19” global pandemic, such as the scope and duration of the outbreak, the health and safety of our employees, government actions and restrictive measures implemented in response, delays and cancellations of customer sales, supply chain disruptions and other impacts to the business, or our ability to execute our business continuity plans; |
| ● | anticipated production levels, costs, sales volumes and revenue; |
| ● | timing and ability to complete major capital projects; |
| ● | economic conditions in the metallurgical coal and steel industries generally, including any near-term or long-term downturn in these industries as a result of the COVID-19 global pandemic and related actions; |
| ● | expected costs to develop planned and future mining operations, including the costs to construct necessary processing, refuse disposal and transport facilities; |
| ● | estimated quantities or quality of our metallurgical coal reserves; |
| ● | 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; |
| ● | the financial condition and liquidity of our customers; |
| ● | competition in coal markets; |
| ● | the price of metallurgical coal 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 traders, 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; |
| ● | our ability to comply with certain debt covenants; |
| ● | tax payments to be paid for the current fiscal year; |
| ● | our expectations relating to dividend payments and our ability to make such payments; |
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| ● | the anticipated benefits and impacts of the Ramaco Coal, LLC (“Ramaco Coal”) and Maben acquisitions; |
| ● | the expected timing of closing the Maben acquisition; |
| ● | the risk that a condition to closing the Maben acquisition may not be satisfied; |
| ● | risks related to Russia’s recent invasion of Ukraine and the international community’s response; |
| ● | risks related to weakened global economic conditions and inflation; 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 additional risks may arise from time to time. It is not possible for our management to predict all of the risks associated with our business, nor can we assess the 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 Quarterly 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 Quarterly 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 information |
| June 30, 2022 |
| December 31, 2021 |
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Assets |
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Current assets |
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Cash and cash equivalents | $ | | $ | | |||
Accounts receivable |
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Inventories |
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Prepaid expenses and other |
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Total current assets |
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Property, plant and equipment, net |
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Financing lease right-of-use assets, net | | | |||||
Advanced coal royalties |
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Other |
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Total Assets | $ | | $ | | |||
Liabilities and Stockholders' Equity | |||||||
Liabilities | |||||||
Current liabilities | |||||||
Accounts payable | $ | | $ | | |||
Accrued expenses |
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Asset retirement obligations |
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Current portion of long-term debt |
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Current portion of related party debt | | — | |||||
Current portion of financing lease obligations | | | |||||
Other current liabilities | | | |||||
Total current liabilities |
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Asset retirement obligations |
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Long-term debt, net |
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Long-term related party debt | | — | |||||
Long-term financing lease obligations, net | |
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Senior notes, net | |
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Deferred tax liability, net |
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Other long-term liabilities | | | |||||
Total liabilities |
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Commitments and contingencies |
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Stockholders' Equity | |||||||
Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Total stockholders' equity |
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Total Liabilities and Stockholders' Equity | $ | | $ | | |||
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 Operations
Three months ended June 30, | Six months ended June 30, | |||||||||||
In thousands, except per-share amounts |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenue |
| $ | |
| $ | |
| $ | |
| $ | |
Costs and expenses | ||||||||||||
Cost of sales (exclusive of items shown separately below) |
| |
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Asset retirement obligations accretion |
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Depreciation and amortization |
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Selling, general and administrative |
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Total costs and expenses |
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Operating income |
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Other income, net |
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Interest expense, net |
| ( |
| ( |
| ( |
| ( | ||||
Income before tax |
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Income tax expense |
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Net income | $ | | $ | | $ | | $ | | ||||
Earnings per common share | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Basic weighted average shares outstanding |
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Diluted weighted average shares outstanding |
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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 | Total | |||||||||||
| Common |
| Paid- |
| Retained |
| Stockholders' | |||||
In thousands |
| Stock |
| in Capital |
| Earnings |
| Equity | ||||
Balance at January 1, 2022 | $ | | $ | | $ | | $ | | ||||
Stock-based compensation |
| |
| |
| — |
| | ||||
Dividends paid | — |
| — |
| ( |
| ( | |||||
Net income |
| — |
| — |
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Balance at March 31, 2022 | | | | | ||||||||
Restricted stock surrendered for withholding taxes payable | ( | ( | — | ( | ||||||||
Stock-based compensation |
| — |
| |
| — |
| | ||||
Dividends paid | — |
| — |
| ( |
| ( | |||||
Net income |
| — |
| — |
| |
| | ||||
Balance at June 30, 2022 | $ | | $ | | $ | | $ | | ||||
Balance at January 1, 2021 | $ | | $ | | $ | | $ | | ||||
Stock-based compensation |
| |
| |
| — |
| | ||||
Net income |
| — |
| — |
| |
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Balance at March 31, 2021 | | | | | ||||||||
Restricted stock surrendered for withholding taxes payable | ( | ( | — | ( | ||||||||
Stock-based compensation |
| — |
| |
| — |
| | ||||
Net income |
| — |
| — |
| |
| | ||||
Balance at June 30, 2021 | $ | | $ | | $ | | $ | | ||||
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
Six months ended June 30, | |||||||
In thousands |
| 2022 |
| 2021 | |||
Cash flows from operating activities: |
|
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Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash from operating activities: | |||||||
Accretion of asset retirement obligations |
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Depreciation and amortization |
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Amortization of debt issuance costs |
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Stock-based compensation |
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Other income - gain on sale of mineral rights | ( | — | |||||
Other income - employee retention tax credit | — | ( | |||||
Deferred income taxes |
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Changes in operating assets and liabilities: | |||||||
Accounts receivable |
| ( |
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Prepaid expenses and other current assets |
| |
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Inventories |
| ( |
| ( | |||
Other assets and liabilities |
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| ( | |||
Accounts payable |
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Accrued expenses |
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Net cash from operating activities |
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Cash flow from investing activities: | |||||||
Capital expenditures |
| ( |
| ( | |||
Acquisition of Ramaco Coal assets | ( | — | |||||
Proceeds from sale of mineral rights | | — | |||||
Net cash from investing activities | ( | ( | |||||
Cash flows from financing activities: | |||||||
Proceeds from borrowings |
| |
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Payment of dividends | ( | — | |||||
Repayment of borrowings |
| ( |
| ( | |||
Repayments of financed insurance payable | ( | ( | |||||
Repayments of financing leased equipment | ( | ( | |||||
Restricted stock surrendered for withholding taxes payable | ( | ( | |||||
Net cash from financing activities |
| ( |
| ( | |||
Net change in cash and cash equivalents and restricted cash |
| |
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Cash and cash equivalents and restricted cash, beginning of period |
| |
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Cash and cash equivalents and restricted cash, end of period | $ | | $ | | |||
Supplemental cash flow information: | |||||||
Cash paid for interest | $ | | $ | | |||
Cash paid for taxes |
| |
| — | |||
Non-cash investing and financing activities: | |||||||
Leased assets obtained under new financing leases |
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Capital expenditures included in accounts payable and accrued expenses |
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Ramaco Coal acquisition |
| |
| — | |||
Additional asset retirement obligations incurred |
| |
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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—BUSINESS
Ramaco Resources, Inc. (the “Company,” “we,” “us” or “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. Our executive offices are located in Lexington, Kentucky, with operational offices in Charleston, West Virginia and Sheridan, Wyoming.
COVID-19 Pandemic—COVID-19 continues to impact countries across the world, and the duration and severity of the effects are currently unknown. We continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities.
Russian/Ukraine Conflict—The extent and duration of the military conflict involving Russia and Ukraine, resulting sanctions and future market or supply disruptions in the region, are impossible to predict, but could be significant and may have a severe adverse effect on the region. Globally, various governments have banned imports from Russia including commodities such as oil, natural gas and coal. These events have caused volatility in the commodity markets. This volatility, including market expectations of potential changes in coal prices and inflationary pressures on steel products, may have a significant effect on market prices and overall demand for our coal and the cost of supplies and equipment. We are closely monitoring the potential effects on the market.
We have no meaningful direct financial exposure to Russia and Ukraine. As the European Union ban on Russian coal goes into effect in August, it could create further tightness in the metallurgical coal markets as Russia was the third largest exporter of metallurgical coal in 2021 or 10% of global metallurgical coal trade and has already contributed to global thermal coal prices spiking to unprecedented levels.
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 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, 2021.
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. Intercompany balances and transactions between consolidated entities have been 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 were $
Self-Insurance—We are self-insured for certain losses relating to workers’ compensation claims, including pneumoconiosis (occupational disease) 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
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claims incurred as of the balance sheet date using current and historical claims experience and certain actuarial assumptions. At June 30, 2022, the estimated aggregate liability for uninsured claims totaled $
Financial Instruments—Our financial assets and liabilities consist of cash, accounts receivable, accounts payable and indebtedness. The fair values of these instruments approximate their carrying amounts at each reporting date, except that our Senior Notes have an estimated fair value of approximately $
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 months ended June 30, 2022, sales to our top
Adoption of New Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The standard was effective for us in the first quarter of our fiscal year 2021. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements Being Assessed
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR’) or another reference rate expected to be discontinued due to reference rate reform. The new guidance provides the following optional expedients: simplify accounting analyses under current GAAP for contract modifications, simplify the assessment of hedge effectiveness, allow hedging relationships affected by reference rate reform to continue and allow a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The update provides additional optional guidance on the transition from LIBOR to include derivative instruments that use an interest rate for margining, discounting or contract price alignment. The standard will ease, if warranted, the requirements for accounting for the future effects of the rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently assessing the impact of adopting this standard on its financial statements and the timing of adoption.
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NOTE 3—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
(In thousands) |
| June 30, 2022 |
| December 31, 2021 | |||
Plant and equipment | $ | | $ | | |||
Mining property and mineral rights | | | |||||
Construction in process |
| |
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Capitalized mine development costs |
| |
| | |||
Less: accumulated depreciation and amortization |
| ( |
| ( | |||
Total property, plant and equipment, net | $ | | $ | | |||
Capitalized amounts related to coal reserves at properties where we are not currently developing or actively engaged in mining operations totaled $
Depreciation and amortization included:
Three months ended June 30, | Six months ended June 30, | |||||||||||
(In thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Depreciation of plant and equipment | $ | | $ | | $ | | $ | | ||||
Depreciation of right of use assets | | | | | ||||||||
Amortization of capitalized | ||||||||||||
mine development costs |
| |
| |
| |
| | ||||
Total depreciation and amortization | $ | | $ | | $ | | $ | | ||||
NOTE 4—DEBT
Revolving Credit Facility and Term Loan—On November 2, 2018, we entered into a Credit and Security Agreement (as amended or amended and restated the “Revolving Credit Facility” or the “Credit Agreement”) with KeyBank National Association (“KeyBank”), as the administrative agent, and other lenders party thereto. The Credit Agreement was amended on February 20, 2020 and March 19, 2021. On October 29, 2021, we entered into the Amended and Restated Credit and Security Agreement (the “Amendment and Restatement”) with KeyBank. Prior to the Amendment and Restatement, the Credit Agreement consisted of the $
The Revolving Credit Facility bears interest based on Secure Overnight Financing Rate (“SOFR”) +
The Term Loan is secured under a Master Security Agreement with a pledge of certain underground and surface mining equipment, bears interest at LIBOR +
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The Credit Agreement contains usual and customary covenants including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants. At June 30, 2022, we were in compliance with all financial covenants under the Credit Agreement.
Key Equipment Finance Loan—On April 16, 2020, we entered into an equipment loan with Key Equipment Finance, a division of KeyBank, as lender, in the principal amount of $
9.00% Senior Unsecured Notes due 2026—On July 13, 2021, we completed an offering of $
J. H. Fletcher & Co. Loan—On July 23, 2021 and November 24, 2021, we entered into equipment loans with J. H. Fletcher & Co., as lender, in the principal amount of $
Komatsu Financial Limited Partnership Loan—On August 16, 2021, we entered into an equipment loan with Komatsu Financial Limited Partnership, as lender, in the principal amount of $
Brandeis Machinery & Supply Company—On January 11, 2022, we entered into equipment loans with Brandeis Machinery & Supply Company, as lender, in the principal amount of $
Ramaco Coal Deferred Purchase Price—On April 29, 2022, we acquired the assets of Ramaco Coal (see Note 12) and entered into an agreement whereby an investment fund managed by Yorktown Partners, as lender, provided financing for the acquisition in the principal amount of $
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NOTE 5—LEASES
The Company has various financing leases for mining equipment. These leases are generally for terms up to
Right-of-use assets and lease liabilities are determined as the present value of the lease payments, discounted using either the implicit interest rate in the lease or our estimated incremental borrowing rate based on similar terms, payments and the economic environment where the leased asset is located. Below is a summary of our leases:
(In thousands) | Classification | June 30, 2022 | December 31, 2021 | ||||
Right-of-use assets | |||||||
Financing | Financing lease right-of-use assets, net | $ | | $ | | ||
Operating | — | | |||||
Total right-of-use assets | $ | | $ | | |||
Current lease liabilities | |||||||
Financing | Current portion of financing lease obligations | $ | | $ | | ||
Operating | — | | |||||
Non-current lease liabilities | |||||||
Financing | Long-term portion of financing lease obligations | $ | | $ | | ||
Total lease liabilities | $ | | $ | | |||
NOTE 6—EQUITY
Stock-Based Compensation Awards—Our Long-Term Incentive Plan (“LTIP”) is currently authorized by shareholders for the issuance of awards of up to approximately
As of June 30, 2022, we had four types of stock-based awards outstanding: options, restricted stock, restricted stock units and performance stock units. Stock-based compensation expense for all four types of stock-based awards totaled $
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The following table summarizes stock-based awards outstanding, as well as activity for the period:
| Restricted Stock |
|
| Restricted Stock Units |
|
| Performance Stock Units | ||||||||||
Weighted | Weighted | Weighted | |||||||||||||||
| Average Grant |
| Average Grant |
| Average Grant | ||||||||||||
Shares |
| Date Fair Value | Shares |
| Date Fair Value | Shares |
| Date Fair Value | |||||||||
Outstanding at December 31, 2021 |
| | $ | |
| — | $ | — |
| — | $ | — | |||||
Granted |
| |
| |
| |
| |
| |
| | |||||
Vested |
| ( |
| |
| — |
| — |
| — |
| — | |||||
Forfeited |
| — |
| — |
| — |
| — |
| — |
| — | |||||
Outstanding at June 30, 2022 |
| | $ | |
| | $ | |
| | $ | | |||||
Options for the purchase of a total of
Restricted Stock—We grant shares of restricted stock to certain senior executives, key employees and directors. These shares vest over approximately to and a half years from the date of grant. During the vesting period, the participants have voting rights and may receive dividends. Upon vesting, the restricted stock becomes unrestricted common shares. The fair value of the restricted stock on the date of the grant during 2022, which was $
Restricted Stock Units—We grant shares of restricted stock units to certain senior executives and key employees. These share units vest ratably over approximately
The
Performance Stock Units—We grant shares of performance stock units to certain senior executives and key employees. These share units cliff-vest approximately
The Company’s
NOTE 7—COMMITMENTS AND CONTINGENCIES
Surety Bonds—At June 30, 2022, we had total reclamation bonding requirements of $
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Contingent Transportation Purchase Commitments—We secure the ability to transport coal through rail contracts and export terminal services contracts that are sometimes funded through take-or-pay arrangements. At June 30, 2022, contingent liabilities under these take-or-pay arrangements totaled $
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.
In November 2018, one of our three raw coal storage silos that fed our Elk Creek plant experienced a partial structural failure. Our insurance carrier disputed our claim for coverage and in August 2019 we filed suit. The case went to trial in June 2021 and in July 2021, the jury returned a verdict in our favor for $
On April 1, 2022, we filed a notice of appeal with the U.S. Court of Appeals for the Fourth Circuit.
NOTE 8—REVENUE
Our revenue is 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
Three months ended June 30, | Six months ended June 30, | ||||||||||||
(In thousands) |
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Coal Sales |
|
|
|
|
|
|
| ||||||
North American revenue | $ | | $ | | $ | | $ | | |||||
Export revenue, excluding Canada |
| |
| |
| |
| | |||||
Total revenue | $ | | $ | | $ | | $ | | |||||
At June 30, 2022, we had outstanding performance obligations for the remainder of 2022 of approximately
NOTE 9—INCOME TAXES
Income tax provisions for interim quarterly periods are generally 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 income tax impacts of discrete items are recognized in the period these occur.
Excluding discrete items, our effective tax rate for the three months ended June 30, 2022 and June 30, 2021 was
15
NOTE 10—EARNINGS PER SHARE
The following is the computation of basic and diluted EPS:
| Three months ended June 30, | Six months ended June 30, | |||||||||||
(In thousands, except per share amounts) |
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
Numerator |
|
|
|
|
|
|
| ||||||
Net income | $ | | $ | | $ | | $ | | |||||
Denominator | |||||||||||||
Weighted average shares used to compute basic earnings per share |
| |
| |
| |
| | |||||
Dilutive effect of stock option awards |
| |
| — |
| |
| — | |||||
Dilutive effect of restricted stock units and performance stock units awards | | — | | — | |||||||||
Weighted average shares used to compute diluted earnings per share |
| |
| |
| |
| | |||||
Earnings (loss) per share | |||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
Diluted EPS in the three and six months ended June 30, 2021 excluded
NOTE 11—RELATED PARTY TRANSACTIONS
Mineral Lease and Surface Rights Agreements—Prior to the acquisition of Ramaco Coal, LLC (“Ramaco Coal”), see Note 12, 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, who was a related party. Production royalty payables totaling $
On-going Administrative Services—Also prior to the acquisition of Ramaco Coal, the Company and Ramaco Coal agreed to share the services of certain of each company’s employees pursuant to a Mutual Service Agreement, dated December 22, 2017 but effective as of March 31, 2017. 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. Charges to Ramaco Coal were $
Legal Services—Some of the professional legal services we receive are provided by Jones & Associates (“Jones”), a related party. Legal services payable totaled $
Ramaco Coal Deferred Purchase Price—As part of the financing of the acquisition of Ramaco Coal (see Note 12), we incurred interest expense of $
16
NOTE 12—RAMACO COAL ACQUISITION
On April 29, 2022, the acquisition of Ramaco Coal, an entity owned by an investment fund managed by Yorktown Partners and certain members of the Company's management, was completed pursuant to a Purchase and Sale Agreement, dated February 23, 2022. The purchase price was approximately $
Ramaco Coal controls certain coal mineral interests of principally metallurgical coal properties which are owned in fee or leased under long-term leases that are, in turn, leased or subleased to the Company and various third parties. Such lessees pay a royalty based on the amount of metallurgical coal mined and the realized price per ton.
Ramaco Coal also controls a large thermal coal deposit and permit near Sheridan, Wyoming covering approximately
Concurrent with this acquisition, the Company and Ramaco Coal each sold certain mineral rights located in West Virginia (the “Split Ridge Arrangement”). To compensate for the sale of these rights, we received an overriding royalty arrangement which included $
The acquisition of Ramaco Coal was accounted for as a purchase of assets. The consideration paid in connection with the acquisition of Ramaco Coal, including $
The fair values were determined based on Level 3 inputs and was allocated based on fair values of the assets acquired, the primary asset of which was mining properties. The fair value of mining properties was determined based on Level 3 inputs, which are generally unobservable, requiring the Company to make assumptions based on a market participant perspective. Key Level 3 assumptions included future coal prices, future coal production, production costs and an appropriate rate at which to discount the future cash flows associated with the mining properties. We believe our assumptions to be consistent with those a market participant would use for valuation purposes.
NOTE 13—SUBSEQUENT EVENTS
On July 10, 2022, we experienced a material methane ignition at our Berwind mining complex. The cause of the ignition is unknown. We, in conjunction with the appropriate state and federal regulatory authorities, will be conducting a full investigation into the incident. The mine was idle at the time of the incident, and there were
On July 14, 2022, the Board of Directors approved the payment of a quarterly cash dividend in the amount of $
On August 8, 2022, we entered into a Securities Purchase Agreement with Appleton Coal LLC to acquire 100% of the membership interests in Maben Coal LLC for an aggregate purchase price of $30 million (the “Maben Acquisition”). The purchase price will consist of (i) $9 million to be paid in cash at closing and (ii) $21 million to be
17
paid from the proceeds of a secured note payable to Investec Bank, PLC (the “Investec”) pursuant to a vendor loan facility between the Investec and us. The completion of the Maben Acquisition remains subject to customary closing conditions, including obtaining certain consents and delivery of ancillary transaction documents.
* * * * *
18
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 and in this Quarterly 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.
Overview
We are an operator and developer of high-quality, low-cost metallurgical coal in southern West Virginia, southwestern Virginia, and southwestern Pennsylvania. Our executive offices are located in Lexington, Kentucky, with operational offices in Charleston, West Virginia and Sheridan, Wyoming. We are a pure play metallurgical coal company with 39 million reserve tons and 769 million resource tons of high-quality metallurgical coal. We believe our advantaged reserve geology provides us with higher productivities and industry leading lower cash costs.
Our development portfolio primarily includes four properties: Elk Creek, Berwind, Knox Creek and RAM Mine. Each of these properties possesses geologic and logistical advantages that make our coal among the lowest delivered-cost U.S. metallurgical coal to our domestic target customer base, North American blast furnace steel mills and coke plants, as well as international metallurgical and thermal coal consumers. In addition, with the Ramaco Coal acquisition, we control coal deposits in Wyoming along with facilities that house research and development activities.
During the first half of 2022, we sold 1.2 million tons of coal. Of this, 51% was sold in North American markets, including Canada, and 49% was sold in export markets, principally to Europe, South America, Asia and Africa. During the same period of 2021, 48% of our sales were sold in North American markets, with the remaining 52% being sold into the export markets.
At June 30, 2022, we had outstanding performance obligations for the remainder of 2022 of approximately 1.1 million tons for contracts with fixed sales prices averaging $196/ton and 0.2 million tons for contracts with index-based pricing mechanisms.
COVID-19 continues to impact countries across the world, and the duration and severity of the effects are currently unknown. We continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, suppliers, and stakeholders, or as required by federal, state, or local authorities.
Regarding the military conflict involving Russia and Ukraine, resulting sanctions and future market or supply disruptions in the region, are impossible to predict, but could be significant and may have a severe adverse effect on the region. Globally, various governments have banned imports from Russia including commodities such as oil, natural gas and coal. These events have caused volatility in the commodity markets. This volatility, including market expectations of potential changes in coal prices and inflationary pressures on steel products, may have a significant effect on market prices and overall demand for our coal and the cost of supplies and equipment. We are closely monitoring the potential effects on the market.
We have no meaningful direct financial exposure to Russia and Ukraine. As the European Union ban on Russian coal goes into effect in August, it could create further tightness in the metallurgical coal markets as Russia was the third
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largest exporter of metallurgical coal in 2021 or 10% of global metallurgical coal trade and has already contributed to global thermal coal prices spiking to unprecedented levels.
Recent Developments
On July 10, 2022, we experienced a material methane ignition at our Berwind mining complex. The cause of the ignition is unknown. We, in conjunction with the appropriate state and federal regulatory authorities, will be conducting a full investigation into the incident. The mine was idle at the time of the incident, and there were no personnel in the mine nor any injuries or fatalities. We are evaluating the extent of the damage. Production from the Berwind Complex is expected to be impacted for an indeterminant period of time. We will provide additional information regarding plans for both the rehabilitation and restarting of the mine as it becomes available.
On August 8, 2022, we entered into a Securities Purchase Agreement with Appleton Coal LLC to acquire 100% of the membership interests in Maben Coal LLC for an aggregate purchase price of $30 million (the “Maben Acquisition”). The purchase price will consist of (i) $9 million to be paid in cash at closing and (ii) $21 million to be paid from the proceeds of a secured note payable to Investec Bank, PLC (the “Investec”) pursuant to a vendor loan facility between the Investec and us. The completion of the Maben Acquisition remains subject to customary closing conditions, including obtaining certain consents and delivery of ancillary transaction documents.
Results of Operations
Three months ended June 30, | Six months ended June 30, | ||||||||||||
(In thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Revenue | $ | 138,655 | $ | 76,057 | $ | 293,537 | $ | 119,511 | |||||
Costs and expenses | |||||||||||||
Cost of sales (exclusive of items shown separately below) |
| 76,644 |
| 57,762 |
| 157,897 |
| 88,958 |
| ||||
Asset retirement obligations accretion | 755 |
| 154 |
| 990 |
| 305 |
| |||||
Depreciation and amortization |
| 9,783 | 5,955 | 18,463 | 12,110 | ||||||||
Selling, general and administrative |
| 8,786 | 5,165 | 20,610 | 9,873 | ||||||||
Total costs and expenses |
| 95,968 | 69,036 | 197,960 | 111,246 | ||||||||
Operating income |
| 42,687 |
| 7,021 |
| 95,577 |
| 8,265 |
| ||||
Other income, net |
| 2,348 | 3,432 | 2,714 | 6,367 | ||||||||
Interest expense, net |
| (1,937) | (283) | (3,068) | (485) | ||||||||
Income before tax | 43,098 | 10,170 | 95,223 | 14,147 | |||||||||
Income tax expense |
| 9,818 |
| 228 |
| 20,472 |
| 62 |
| ||||
Net income | $ | 33,280 | $ | 9,942 | $ | 74,751 | $ | 14,085 | |||||
Earnings per common share | |||||||||||||
Basic | $ | 0.75 | $ | 0.23 | $ | 1.69 | $ | 0.32 | |||||
Diluted | $ | 0.74 | $ | 0.23 | $ | 1.66 | $ | 0.32 | |||||
Adjusted EBITDA | $ | 57,859 | $ | 18,084 | $ | 121,917 | $ | 29,624 | |||||
During the three and six months ended June 30, 2022, our net income and Adjusted EBITDA were significantly higher compared to the same periods in 2021. Sales pricing was higher by 122% and 141%, respectively, during the three and six months ended June 30, 2022 than the same periods during 2021, which was primarily due to the global rebound of metallurgical demand from the previous effects of COVID-19. Other income for the three and six months ended June 30, 2022 included $2.0 million related to the sale of mineral rights. In the three and six months ended June
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30, 2021, we recognized a total of $2.9 million and $5.3 million, respectively, in other income for the CARES Act Employee Retention Tax Credit.
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Revenue. Our revenue includes sales 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. Revenue per ton sold (FOB mine) and cash cost per ton sold (FOB mine) each exclude the impact of transportation billings and costs.
Coal sales information is summarized as follows:
Three months ended June 30, | |||||||||
(In thousands) |
| 2022 |
| 2021 |
| Increase (Decrease) | |||
Company Produced |
|
|
|
|
|
| |||
Coal sales revenue | $ | 137,714 | $ | 73,211 | $ | 64,503 | |||
Tons sold |
| 578 |
| 664 |
| (86) | |||
Purchased from Third Parties |
|
|
|
|
|
| |||
Coal sales revenue | $ | 941 | $ | 2,846 | $ | (1,905) | |||
Tons sold |
| 5 |
| 21 |
| (16) | |||
Coal sales revenue in the second quarter of 2022 was $138.7 million, 82% higher than in the second quarter of 2021 primarily due to increased revenue per tons sold (FOB Mine) in the second quarter of 2022. Revenue per ton sold (FOB mine) increased 122% from $97/ton in the second quarter of 2021 to $215/ton in the second quarter of 2022. We sold 584 thousand tons of coal in the second quarter of 2022, a 15% decrease over the same period in 2021 due to rail-related constraints. We benefited from improved domestic, spot and index pricing for metallurgical coal in 2022. Additionally, favorable conditions in the steel and metallurgical markets contributed to an increase demand for metallurgical coal and stronger pricing.
Cost of sales. Our cost of sales totaled $76.6 million for the three months ended June 30, 2022 as compared with $57.8 million for the same period in 2021 due to higher sales-related costs directly associated with higher revenue per ton sold in 2022 and inflationary pressures on overall costs. The cash cost per ton sold (FOB mine) for the second quarter of 2022 was $108/ton, compared with $70/ton in the second quarter of 2021. Our cash cost per ton sold in the 2022 period was primarily due to higher sales-related costs directly associated with higher revenue per ton sold in 2022 and inflationary pressures on overall costs.
Asset retirement obligation accretion. Asset retirement obligation accretion was $0.8 million for the three month period ended June 30, 2022 and $0.2 million for the three month period ended June 30, 2021.
Depreciation and amortization. Depreciation and amortization expense was $9.8 million and $6.0 million for the three month periods ended June 30, 2022 and June 30, 2021, respectively, primarily due to additional mining equipment placed in service in recent periods over the past year.
Selling, general and administrative. Selling, general and administrative expenses were $8.8 million for the three months ended June 30, 2022 and $5.2 million for the three months ended June 30, 2021 primarily due to higher stock compensation, incentives and professional services in 2022, related to the Company’s production growth profile.
Other income. Other income was $2.3 million for the three months ended June 30, 2022, which includes a gain of $2.1 million on the sale of mineral rights. For the three months ended June 30, 2021, other income was $3.4 million which includes $2.9 million for the CARES Act Employee Retention Tax Credit.
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Interest expense, net. Interest expense, net was approximately $1.9 million during the three months ended June 30, 2022. Interest expense, net was approximately $0.3 million in the three months ended June 30, 2021. Interest expense, net was higher from the prior period primarily due to the issuance of the Senior Notes in July 2021.
Income tax expense. The effective tax rate for the three months ended June 30, 2022, excluding discrete items, was 22.8%. The effective tax rate for the three months ended June 30, 2021, excluding discrete items, was 10%. Discrete items during the three months ended June 30, 2021 included the impact of legislative changes in West Virginia for which we recognized a tax benefit of $1.0 million. The primary difference from the federal statutory rate of 21% is related to state taxes, permanent differences for non-deductible expenses and the difference in depletion expense between GAAP and federal income tax purposes.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Revenue. Coal sales information is summarized as follows:
Six months ended June 30, | |||||||||
(In thousands) |
| 2022 |
| 2021 |
| Increase (Decrease) | |||
Company Produced |
|
|
|
|
|
| |||
Coal sales revenue | $ | 288,643 | $ | 115,004 | $ | 173,639 | |||
Tons sold |
| 1,151 |
| 1,071 |
| 80 | |||
Purchased from Third Parties |
|
|
|
|
|
| |||
Coal sales revenue | $ | 4,894 | $ | 4,507 | $ | 387 | |||
Tons sold |
| 16 |
| 37 |
| (21) | |||
Coal sales revenue in the six months ended June 30, 2022 was $293.5 million, 146% higher than in the same period in 2021 principally due to 5% higher volume of tons sold in 2022 and revenue per ton sold (FOB mine) increasing 142% from $93/ton in the six months ended June 30, 2021 to $225/ton in the same period in 2022. We sold 1.2 million tons of coal in the six month period ended June 30, 2022, a 5% increase over the same period in 2021.
Cost of sales. Our cost of sales totaled $157.9 million for the six months ended June 30, 2022 as compared with $89.0 million for the same period in 2021 due to higher tons sold, higher sales-related costs directly associated with higher revenue per ton sold in 2022 and inflationary pressures on overall costs. The cash cost per ton sold (FOB mine) for the first half of 2022 was $109, compared with $66 in the same period in 2021.
Asset retirement obligation accretion. Asset retirement obligation accretion was $1.0 million for the six months ended June 30, 2022 and $0.3 million for the six months ended June 30, 2021.
Depreciation and amortization. Depreciation and amortization expense was $18.5 million and $12.1 million for the six month periods ended June 30, 2022 and June 30, 2021, respectively, principally due to higher production volumes in the first half of 2022 and depreciation on capital equipment placed in service.
Selling, general and administrative. Selling, general and administrative expenses were $20.6 million for the six months ended June 30, 2022 and $9.9 million for the six months ended June 30, 2021 primarily due to higher stock compensation, incentives and professional services in 2022, related to the Company’s production growth profile.
Other income. Other income was $2.7 million for the six months ended June 30, 2022 due to a gain of $2.1 million on the sale of mineral rights. For the six months ended June 30, 2021, other income was $6.4 million principally due to the recognition of $5.3 million for the CARES Act Employee Retention Tax Credit
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Interest expense, net. Interest expense, net was approximately $3.1 million in the six month period ended June 30, 2022 and $0.5 million for the same period in 2021. Interest expense, net was higher from the prior period primarily due to the issuance of the Senior Notes in July 2021.
Income tax expense. During the six months ended June 30, 2021, we recognized a tax benefit of $1.4 million for legislative changes in West Virginia. The effective tax rate for this period, excluding discrete items, was 9%. The effective tax rate for the six months ended June 30, 2022 was 21.5%. The primary difference from the federal statutory rate of 21% is related to state taxes, permanent differences for non-deductible expenses and the difference in depletion expense between U.S. GAAP and federal income tax purposes.
Liquidity and Capital Resources
At June 30, 2022, we had $43.5 million of cash and cash equivalents and $39.6 million available under our existing credit agreements for future borrowings.
Significant sources and uses of cash during the first six months of 2022
Sources of cash:
| ● | Cash flows from operating activities were $109.3 million. This included the negative impact of an increase in inventories of $16.6 million, primarily due to rail-related constraints, offset by an increase in accrued expenses of $18.4 million, principally due to accrued purchases, income taxes and payroll and related items. |
Uses of cash:
| ● | Capital expenditures were $53.8 million, which were primarily for growth projects at the Berwind and Elk Creek mining complexes, excluding the acquisition of the Ramaco Coal assets. |
| ● | We made net repayments of $11.0 million primarily for the Ramaco Coal acquisition note (see Note 12), certain equipment purchases and management of our normal operating cash position. |
| ● | We paid dividends of $10.0 million. |
| ● | We paid for the acquisition of Ramaco Coal for $11.7 million, including transaction costs. |
At June 30, 2022, we also had $1.3 million of restricted cash, classified in other current assets in the condensed consolidated balance sheet, for potential future workers’ compensation claims.
Future sources and uses of cash
Our primary use of cash includes capital expenditures for mine development, ongoing operating expenses and deferred cash payments in connection with the Ramaco Coal acquisition. We expect to fund our capital and liquidity requirements with cash on hand, anticipated cash flows from operations and borrowings discussed in more detail below. We believe that current cash on hand, cash flow from operations and available liquidity under our existing credit agreements will be sufficient to meet our capital expenditure and operating plans.
Additional factors that could adversely impact our future liquidity and ability to carry out our capital expenditure program include:
| ● | Timely delivery of our product by rail and other transportation carriers; |
| ● | Late payments of accounts receivable by our customers; |
| ● | Cost overruns in our purchases of equipment needed to complete our mine development plans; |
| ● | Delays in completion of development of our various mines, processing plants and refuse disposal facilities, which would reduce the coal we would have available to sell and our cash flow from operations; and |
| ● | Adverse changes in the metallurgical coal markets that would reduce the expected cash flow from operations. |
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If future cash flows are insufficient to meet our liquidity needs or capital requirements, we may reduce our expected level of capital expenditures and/or fund a portion of our capital expenditures through the issuance of debt or equity securities, the entry into debt arrangements or from other sources, such as asset sales.
Indebtedness
Revolving Credit Facility and Term Loan—On November 2, 2018, we entered into a Credit and Security Agreement (as amended or amended and restated the “Revolving Credit Facility” or the “Credit Agreement”) with KeyBank National Association (“KeyBank”), as the administrative agent, and other lenders party thereto. The Credit Agreement was amended on February 20, 2020 and March 19, 2021. On October 29, 2021, we entered into the Amended and Restated Credit and Security Agreement (the “Amendment and Restatement”) with KeyBank. Prior to the Amendment and Restatement, the Credit Agreement consisted of the $10.0 million term loan (the “Term Loan”) and up to $30.0 million revolving line of credit, including $3.0 million letter of credit availability. The Amendment and Restatement increased the overall availability under the revolving credit line to $40.0 million and extended the maturity date to December 31, 2024. All personal property assets, including, but not limited to accounts receivable, coal inventory and certain mining equipment are pledged to secure the Revolving Credit Facility. On April 29, 2022, we entered into the First Amendment to Amended and Restated Credit and Security Agreement with KeyBank to allow for the Ramaco Coal asset acquisition.
The Revolving Credit Facility bears interest based on Secure Overnight Financing Rate (“SOFR”) + 2.0% or Base Rate + 1.5%. “Base Rate” is the highest of (i) KeyBank’s prime rate, (ii) Federal Funds Effective Rate + 0.5%, or (iii) SOFR + 2.0%. Advances under the Revolving Credit Facility are made initially as Base Rate loans but may be converted to SOFR rate loans at certain times at our discretion. At June 30, 2022, there was $0.4 million drawn in the form of a letter of credit under the Revolving Credit Facility and we had remaining availability of $39.6 million.
The Term Loan is secured under a Master Security Agreement with a pledge of certain underground and surface mining equipment, bears interest at LIBOR + 5.15% and is required to be repaid in monthly installments of $278 thousand including accrued interest. The outstanding principal balance of the Term Loan was $1.7 million at June 30, 2022.
The Credit Agreement contains usual and customary covenants including limitations on liens, additional indebtedness, investments, restricted payments, asset sales, mergers, affiliate transactions and other customary limitations, as well as financial covenants. At June 30, 2022, we were in compliance with all financial covenants under the Credit Agreement.
Key Equipment Finance Loan—On April 16, 2020, we entered into an equipment loan with Key Equipment Finance, a division of KeyBank, as lender, in the principal amount of $4.7 million for the financing of existing underground and surface equipment (the “Equipment Loan”). The Equipment Loan bears interest at 7.45% per annum and is payable in 36 monthly installments of $147 thousand. There is a 3% premium for prepayment of the note within the first 12 months. This premium declines by 1% during each successive 12-month period. The outstanding principal balance of the Equipment Loan was $1.4 million at June 30, 2022.
9.00% Senior Unsecured Notes due 2026—On July 13, 2021, we completed an offering of $34.5 million, in the aggregate, of the Company’s 9.00% Senior Unsecured Notes due 2026 (the “Senior Notes”), and incurred $2.4 million for note offering costs. The Senior Notes mature on July 30, 2026, unless redeemed prior to maturity. The Senior Notes bear interest at a rate of 9.00% per annum, payable quarterly in arrears on the 30th day of January, April, July and October of each year. We may redeem the Senior Notes in whole or in part, at our option, at any time on or after July 30, 2023, or upon certain change of control events, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to, but not including, the date of redemption. Issuance costs for the Senior Notes included underwriters’ fees, attorney, accounting and filing costs totaling $2.4 million. These issuance costs are reported as a debt discount which is being amortized over the Senior Notes term using an effective rate method. The outstanding principal balance under the Senior Notes was $34.5 million at June 30, 2022 and is presented net of unamortized discounts of $1.9 million. The effective interest rate is approximately 10.45%.
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J. H. Fletcher & Co. Loan—On July 23, 2021 and November 24, 2021, we entered into equipment loans with J. H. Fletcher & Co., as lender, in the principal amount of $0.9 million and $3.9 million, respectively, for the financing of underground equipment (the “Fletcher Equipment Loans”). The Fletcher Equipment Loans bear no interest and are payable in 24 monthly installments of $200 thousand. The outstanding principal balance of the Fletcher Equipment Loans was $3.3 million at June 30, 2022.
Komatsu Financial Limited Partnership Loan—On August 16, 2021, we entered into an equipment loan with Komatsu Financial Limited Partnership, as lender, in the principal amount of $1.0 million for the financing of surface equipment (the “Komatsu Equipment Loan”). The Komatsu Equipment Loan bears interest at 4.6% per annum and is payable in 36 monthly installments of $36 thousand for the first six months and then at $28 thousand until maturity. The outstanding principal balance of the Komatsu Equipment Loan was $0.7 million at June 30, 2022.
Brandeis Machinery & Supply Company—On January 11, 2022, we entered into equipment loans with Brandeis Machinery & Supply Company, as lender, in the principal amount of $1.4 million for the financing of surface equipment (the “Brandeis Equipment Loans”). The Brandeis Equipment Loans bear interest at 4.8% per annum and are payable in 48 monthly installments of $24 thousand. The outstanding principal balance of the Brandeis Equipment Loans was $0.9 million at June 30, 2022.
Ramaco Coal Deferred Purchase Price—On April 29, 2022, we acquired Ramaco Coal (see Note 12) and entered into an agreement whereby an investment fund managed by Yorktown Partners, as lender, providing financing for the acquisition in the principal amount of $55.0 million (the “Ramaco Coal Loan”). The Ramaco Coal Loan bears interest at 9% per annum and is payable in seven quarterly installments of $5 million for each quarter in 2022 and $10 million for each quarter in 2023 until maturity. The outstanding principal balance of the Ramaco Coal Loan was $50.0 million at June 30, 2022 and is secured by the membership interests of Ramaco Coal, LLC. In the event we make an initial public offering of the equity interests of all or substantially all of the acquired assets of Ramaco Coal, the seller shall have the option to convert up to fifty percent of the then outstanding principal balance, not to exceed $30 million, into a proportionate equity ownership in such initial public offering.
Critical Accounting Estimates
A discussion of our critical accounting policies is included in the Annual Report. There were no material changes to our critical accounting policies during the six months ended June 30, 2022.
Off-Balance Sheet Arrangements
At June 30, 2022, we had no material off-balance sheet arrangements.
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Non-GAAP Financial Measures
Adjusted EBITDA - Adjusted EBITDA is used as a supplemental non-GAAP financial measure by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance.
We define Adjusted EBITDA as net income plus net interest expense, stock-based compensation, depreciation and amortization expenses, income taxes and accretion of asset retirement obligations. A reconciliation of net income to Adjusted EBITDA is included below. Adjusted EBITDA is not intended to serve as an alternative to GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.
Three months ended June 30, | Six months ended June 30, | ||||||||||||
(In thousands) |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Reconciliation of Net Income to Adjusted EBITDA |
|
|
|
|
|
|
|
| |||||
Net income | $ | 33,280 | $ | 9,942 | $ | 74,751 | $ | 14,085 | |||||
Depreciation and amortization |
| 9,783 |
| 5,955 |
| 18,463 |
| 12,110 | |||||
Interest expense, net |
| 1,937 |
| 283 |
| 3,068 |
| 485 | |||||
Income tax expense (benefit) |
| 9,818 |
| 228 |
| 20,472 |
| 62 | |||||
EBITDA |
| 54,818 |
| 16,408 |
| 116,754 |
| 26,742 | |||||
Stock-based compensation |
| 2,286 |
| 1,522 |
| 4,173 |
| 2,577 | |||||
Accretion of asset retirement obligation |
| 755 |
| 154 |
| 990 |
| 305 | |||||
Adjusted EBITDA | $ | 57,859 | $ | 18,084 | $ | 121,917 | $ | 29,624 | |||||
Non-GAAP revenue per ton - Non-GAAP revenue per ton (FOB mine) is calculated as coal sales revenue less transportation costs, divided by tons sold. We believe revenue per ton (FOB mine) provides useful information to investors as it enables investors to compare revenue per ton we generate against similar measures made by other publicly-traded coal companies and more effectively monitor changes in coal prices from period to period excluding the impact of transportation costs which are beyond our control. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Revenue per ton sold (FOB mine) is not a measure of financial performance in accordance with GAAP and therefore should not be considered as an alternative to revenue under GAAP.
Three months ended June 30, 2022 | Three months ended June 30, 2021 | |||||||||||||||||
Company | Purchased | Company | Purchased | |||||||||||||||
(In thousands, except per ton amounts) |
| Produced |
| Coal |
| Total |
| Produced |
| Coal |
| Total | ||||||
Revenue | $ | 137,714 | $ | 941 | $ | 138,655 | $ | 73,211 | $ | 2,846 | $ | 76,057 | ||||||
Less: Adjustments to reconcile to Non-GAAP revenue (FOB mine) | ||||||||||||||||||
Transportation costs |
| (13,461) |
| — |
| (13,461) |
| (9,273) |
| (549) |
| (9,822) | ||||||
Non-GAAP revenue (FOB mine) | $ | 124,253 | $ | 941 | $ | 125,194 | $ | 63,938 | $ | 2,297 | $ | 66,235 | ||||||
Tons sold |
| 578 |
| 5 |
| 584 |
| 664 |
| 21 |
| 686 | ||||||
Revenue per ton sold (FOB mine) | $ | 215 | $ | 186 | $ | 215 | $ | 96 | $ | 109 | $ | 97 | ||||||
Six months ended June 30, 2022 | Six months ended June 30, 2021 | |||||||||||||||||
| Company |
| Purchased |
|
| Company |
| Purchased |
| |||||||||
(In thousands, except per ton amounts) |
| Produced |
| Coal | Total |
| Produced |
| Coal | Total | ||||||||
Revenue | $ | 288,643 | $ | 4,894 | $ | 293,537 | $ | 115,004 | $ | 4,507 | $ | 119,511 | ||||||
Less: Adjustments to reconcile to Non-GAAP revenue (FOB mine) | ||||||||||||||||||
Transportation costs |
| (30,593) |
| (239) |
| (30,832) |
| (15,077) |
| (969) |
| (16,046) | ||||||
Non-GAAP revenue (FOB mine) | $ | 258,050 | $ | 4,655 | $ | 262,705 | $ | 99,927 | $ | 3,538 | $ | 103,465 | ||||||
Tons sold |
| 1,151 |
| 16 |
| 1,167 |
| 1,071 |
| 37 |
| 1,108 | ||||||
Revenue per ton sold (FOB mine) | $ | 224 | $ | 299 | $ | 225 | $ | 93 | $ | 96 | $ | 93 | ||||||
26
Non-GAAP cash cost per ton sold - Non-GAAP cash cost per ton sold is calculated as cash cost of sales less transportation costs, divided by tons sold. We believe cash cost per ton sold provides useful information to investors as it enables investors to compare our cash cost per ton against similar measures made by other publicly-traded coal companies and more effectively monitor changes in coal cost from period to period excluding the impact of transportation costs which are beyond our control. The adjustments made to arrive at these measures are significant in understanding and assessing our financial condition. Cash cost per ton sold is not a measure of financial performance in accordance with GAAP and therefore should not be considered as an alternative to cost of sales under GAAP.
Three months ended June 30, 2022 | Three months ended June 30, 2021 | |||||||||||||||||
Company | Purchased | Company | Purchased | |||||||||||||||
(In thousands, except per ton amounts) |
| Produced |
| Coal |
| Total |
| Produced |
| Coal |
| Total | ||||||
Cost of sales | $ | 75,857 | $ | 787 | $ | 76,644 | $ | 55,298 | $ | 2,464 | $ | 57,762 | ||||||
Less: Adjustments to reconcile to Non-GAAP cash cost of sales | ||||||||||||||||||
Transportation costs |
| (13,459) |
| — |
| (13,459) |
| (9,274) |
| (549) |
| (9,823) | ||||||
Non-GAAP cash cost of sales | $ | 62,398 | $ | 787 | $ | 63,185 | $ | 46,024 | $ | 1,915 | $ | 47,939 | ||||||
Tons sold |
| 578 |
| 5 |
| 584 |
| 664 |
| 21 |
| 686 | ||||||
Cash cost per ton sold | $ | 108 | $ | 155 | $ | 108 | $ | 69 | $ | 91 | $ | 70 | ||||||
Six months ended June 30, 2022 | Six months ended June 30, 2021 | |||||||||||||||||
| Company |
| Purchased |
|
| Company |
| Purchased |
| |||||||||
(In thousands, except per ton amounts) |
| Produced |
| Coal | Total |
| Produced |
| Coal | Total | ||||||||
Cost of sales | $ | 153,720 | $ | 4,177 | $ | 157,897 | $ | 84,932 | $ | 4,026 | $ | 88,958 | ||||||
Less: Adjustments to reconcile to Non-GAAP cash cost of sales | ||||||||||||||||||
Transportation costs |
| (30,595) |
| (238) |
| (30,833) |
| (15,074) |
| (970) |
| (16,044) | ||||||
Non-GAAP cash cost of sales | $ | 123,125 | $ | 3,939 | $ | 127,064 | $ | 69,858 | $ | 3,056 | $ | 72,914 | ||||||
Tons sold |
| 1,151 |
| 16 |
| 1,167 |
| 1,071 |
| 37 |
| 1,108 | ||||||
Cash cost per ton sold | $ | 107 | $ | 253 | $ | 109 | $ | 65 | $ | 83 | $ | 66 | ||||||
27
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk are included in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of our Annual Report.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report, at the reasonable assurance level.
Remediation of Previously Reported Material Weaknesses
As described in “Item 9A. Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2021, we previously identified a material weakness in our internal controls relating to information technology systems that support the Company’s financial reporting process. We executed a remediation plan to address the control deficiency that led to this material weakness. The remediation actions were as follows:
Information technology general controls
| ● | Modified controls over user access; |
| ● | Implemented additional controls designed to detect issues that may arise over user access and segregation of duties conflicts. |
As of June 30, 2022, we concluded that the control modifications and additional controls related to user access to information technology systems have been satisfactorily implemented and has operated effectively for a sufficient period of time. Therefore, we concluded that the previously identified material weakness has been remediated as of June 30, 2022.
Changes in Internal Control over Financial Reporting
Except as otherwise described herein, there were no significant changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Disclosure Controls and Procedures
Our senior members of management do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Due to the nature of our business, we may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. While the outcome of these proceedings cannot be predicted with certainty, in the opinion of our management, there are no pending litigation, disputes or claims against us which, if decided adversely, individually or in the aggregate, will have a material adverse effect on our financial condition, cash flows or results of operations. For a description of our legal proceedings, see Note 7 to the Condensed Consolidated Financial Statements included in Part I of this Quarterly Report.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” included in our Annual Report and the risk factors and other cautionary statements contained in our other SEC filings, which could materially affect our business, financial condition, cash flows or future results of operations.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in our Annual Report and our Form 10-Q for the quarter ended March 31, 2022, filed with the SEC on May 13, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
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 Quarterly Report.
Item 5. Other Information
Not applicable.
29
Item 6. Exhibits
2.1 | |||
*10.1 | |||
*31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
*31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
**32.1 | |||
**32.2 | |||
*95.1 | |||
*101.INS | Inline 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 Labels Linkbase Document | ||
*101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||
* Exhibit filed herewith.
** Furnished herewith. Pursuant to SEC Release No. 33-8212, this certification will be treated as “accompanying” this Quarterly Report and not “filed” as part of such report for purposes of Section 18 of the Exchange Act or otherwise subject to the liability under Section 18 of the Exchange Act, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act, except to the extent that the registrant specifically incorporates it by reference.
30
SIGNATURES
Pursuant to the requirements 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.
RAMACO RESOURCES, INC. | ||
August 9, 2022 | By: | /s/ Randall W. Atkins |
Randall W. Atkins | ||
Chairman, Chief Executive Officer and Director | ||
(Principal Executive Officer) | ||
August 9, 2022 | By: | /s/ Jeremy R. Sussman |
Jeremy R. Sussman | ||
Chief Financial Officer | ||
(Principal Financial Officer) | ||
31