Ramaco Resources(METC) - 2020 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements Forward-Looking Statements The company's forward-looking statements are based on current expectations and subject to various risks and uncertainties - Forward-looking statements are identified by words like "could," "believe," "anticipate," "intend," "estimate," "expect," "project" and similar expressions[9] - Key risks include the impact of the COVID-19 pandemic, anticipated production levels, economic conditions in metallurgical coal and steel industries, and regulatory changes[10] - The company operates in a competitive and rapidly changing environment, and actual results could differ materially and adversely from those anticipated[12] Part I. Financial Information Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and accompanying notes detailing operations and accounting policies Unaudited Condensed Consolidated Balance Sheets The balance sheets show an increase in total assets and stockholders' equity, driven by higher cash and inventories Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Total Current Assets | $54,175 | $44,323 | | Total Assets | $242,101 | $226,813 | | Total Current Liabilities | $27,837 | $26,411 | | Total Liabilities | $65,568 | $56,730 | | Total Stockholders' Equity | $176,533 | $170,083 | - Cash and cash equivalents increased from $5,532 thousand at December 31, 2019, to $9,759 thousand at June 30, 2020[18] - Inventories increased significantly from $15,261 thousand to $25,455 thousand, reflecting a build-up[18] Unaudited Condensed Consolidated Statements of Operations The company's revenue and net income declined significantly compared to the prior year, shifting from operating income to an operating loss Condensed Consolidated Statements of Operations Highlights (in thousands, except per share) | Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $36,374 | $65,761 | $78,310 | $123,221 | | Total Costs and Expenses | $40,673 | $52,872 | $81,468 | $102,083 | | Operating Income (Loss) | $(4,299) | $12,889 | $(3,158) | $21,138 | | Other Income | $8,504 | $194 | $9,714 | $492 | | Net Income | $2,652 | $10,613 | $4,614 | $17,496 | | Basic EPS | $0.06 | $0.26 | $0.11 | $0.43 | - Revenue decreased significantly by 44.7% for the three months ended June 30, 2020, and by 36.4% for the six months ended June 30, 2020, compared to the prior year periods[20] - The company reported an operating loss of $4,299 thousand for the three months and $3,158 thousand for the six months ended June 30, 2020, a substantial decline from operating income in the prior year[20] - Other income saw a significant increase, primarily due to the recognition of $7.3 million from the PPP Loan forgiveness[20] Unaudited Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased during the first half of 2020, primarily driven by net income and stock-based compensation Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Metric | Balance at January 1, 2020 | Balance at June 30, 2020 | | :----------------------- | :------------------------- | :----------------------- | | Common Stock | $410 | $426 | | Additional Paid-in Capital | $154,957 | $156,777 | | Retained Earnings | $14,716 | $19,330 | | Total Stockholders' Equity | $170,083 | $176,533 | - Stockholders' equity increased from $170,083 thousand at January 1, 2020, to $176,533 thousand at June 30, 2020, driven by net income and stock-based compensation[24] Unaudited Condensed Consolidated Statements of Cash Flows Operating cash flow decreased while financing cash flow increased significantly due to proceeds from borrowings, including the PPP Loan Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net Cash from Operating Activities | $6,833 | $13,031 | | Purchases of Property, Plant and Equipment | $(18,019) | $(19,737) | | Net Cash from Financing Activities | $15,528 | $5,213 | | Net Change in Cash and Cash Equivalents | $4,342 | $(1,493) | | Cash and Cash Equivalents, End of Period | $11,207 | $5,887 | - Net cash from operating activities decreased by 47.6% to $6,833 thousand for the six months ended June 30, 2020, compared to the same period in 2019[28] - Net cash from financing activities significantly increased to $15,528 thousand, primarily due to proceeds from the PPP Loan ($8.4 million) and other borrowings[28] Notes to Unaudited Condensed Consolidated Financial Statements Note 1 – Business The company's metallurgical coal operations were adversely affected by COVID-19, leading to customer delays, reduced demand, and operational adjustments - Two customers delayed or curtailed contractual obligations, expected to reduce total contracted sales volumes for 2020 by up to 12%[33] - Actions taken in response to COVID-19 include a two-week operational furlough of 203 employees, temporary 30% salary reductions for certain executives, partial closure of the Berwind mine, and deferral of non-essential capital expenditures[37][94] - The company borrowed an additional $13.2 million under two promissory notes to improve liquidity and limit employee furloughs[36] Note 2 – Summary of Significant Accounting Policies This note outlines key accounting policies, including the treatment of the PPP Loan as a government grant and significant customer concentrations - The company is self-insured for workers' compensation claims, with an estimated aggregate liability of $1.2 million at June 30, 2020[43] - The SBA Paycheck Protection Program Loan (PPP Loan) is accounted for as an in-substance government grant, with proceeds recognized as income when related costs are incurred[44] - Sales to four customers accounted for approximately 73% of total revenue for Q2 2020, and sales to two customers accounted for approximately 50% for H1 2020, indicating significant customer concentration[48] - The adoption of ASU 2016-13 (Credit Losses) and ASU 2018-15 (Internal-Use Software) effective January 1, 2020, did not have a material impact on the consolidated financial statements[49][50] Note 3 – Property, Plant and Equipment This note details the composition of and changes in property, plant, and equipment, along with depreciation and amortization expenses Property, Plant and Equipment, Net (in thousands) | Category | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Plant and equipment | $154,337 | $142,773 | | Construction in process | $6,650 | $11,986 | | Capitalized mine development cost | $67,831 | $58,773 | | Less: accumulated depreciation | $(45,673) | $(35,330) | | Total property, plant and equipment, net | $183,145 | $178,202 | Depreciation and Amortization Expense (in thousands) | Period | 2020 | 2019 | | :-------------------------------- | :--- | :--- | | Three months ended June 30, | $5,341 | $4,822 | | Six months ended June 30, | $10,343 | $8,938 | - Capitalized amounts related to coal reserves at non-mining properties totaled $14.8 million at June 30, 2020, up from $12.7 million at December 31, 2019[52] Note 4 – Debt The company's debt instruments include a Revolving Credit Facility, a Term Loan, and an Equipment Financing Loan, with all covenants met - The Revolving Credit Facility includes a $10.0 million term loan and up to $30.0 million revolving line of credit, with $8.0 million outstanding and $22.0 million available as of June 30, 2020[54][55] - The Term Loan had an outstanding principal balance of $8.3 million at June 30, 2020, bearing interest at LIBOR + 5.15%[56] - An Equipment Financing Loan of approximately $4.7 million was entered into on April 16, 2020, with an outstanding balance of $4.5 million at June 30, 2020[58] Note 5 – SBA Paycheck Protection Program Loan The company received an $8.4 million PPP Loan, with $7.3 million recognized as other income due to anticipated forgiveness - Received $8.4 million PPP Loan on April 20, 2020, with a 1% interest rate and maturity on April 16, 2022[59][60] - Approximately $7.3 million of PPP Loan proceeds were used for eligible expenses by June 30, 2020, and recognized as other income due to anticipated forgiveness[64] - The remaining $1.1 million of the PPP Loan is recorded as deferred income, with full forgiveness expected as eligible expenditures continue to be incurred[65] Note 6 – Equity This note describes the company's stock-based compensation plan, detailing restricted stock awards and related expenses - 3.3 million shares were available for future awards under the stock-based compensation plan at June 30, 2020[66] - Compensation expense related to restricted stock awards was $1.1 million for the three months and $2.0 million for the six months ended June 30, 2020[68] - As of June 30, 2020, there was $7.8 million of total unrecognized compensation cost related to unvested restricted stock, to be recognized over a weighted-average period of 2.4 years[68] Restricted Awards Activity (Shares and Weighted Average Grant Date Fair Value) | Metric | Shares | Weighted Average Grant Date Fair Value | | :----------------------- | :------- | :------------------------------------- | | Outstanding at Dec 31, 2019 | 1,628,241 | $6.32 | | Granted | 1,763,172 | $3.04 | | Vested | (419,844) | $6.17 | | Outstanding at June 30, 2020 | 2,971,569 | $4.40 | Note 7 – Commitments and Contingencies The company has reclamation bonding requirements, contingent transportation commitments, and is involved in ongoing litigation regarding a silo failure - Total reclamation bonding requirements were $15.1 million, supported by surety bonds, as of June 30, 2020[70] - Contingent liabilities under take-or-pay transportation arrangements totaled $4.1 million, expiring March 31, 2021[71] - The company is involved in litigation against Federal Insurance Company and ACE American Insurance Company regarding a partial structural failure of a coal storage silo in November 2018[74] Note 8 – Revenue Revenue from both domestic and export coal sales declined significantly, with future performance obligations subject to potential delays Coal Sales Revenue (in thousands) | Category | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Domestic revenues | $20,686 | $39,544 | $51,218 | $76,116 | | Export revenues | $15,688 | $26,217 | $27,092 | $47,105 | | Total revenues | $36,374 | $65,761 | $78,310 | $123,221 | - As of June 30, 2020, outstanding performance obligations for the remainder of 2020 included 0.8 million tons at an average fixed price of $93/ton and 0.1 million tons with index-based pricing[75] - 0.2 million tons at $91/ton may not ship in 2020 due to material adverse change and force majeure notices received[75] Note 9 – Income Taxes The company's effective tax rate is calculated on a discrete basis for interim periods, influenced by state taxes and permanent differences - Recognized $0.4 million of tax expense for the excess of book expense over the tax deduction for vested restricted stock awards during the three months ended June 30, 2020[77] - Effective tax rate (excluding discrete items) was 21% for Q2 2020 and 16% for H1 2020, compared to 17% for both periods in 2019[77] - The primary difference from the federal statutory rate of 21% is related to state taxes, permanent differences for non-deductible expenses, and depletion expense differences[77] Note 10 – Earnings Per Share Both basic and diluted earnings per share (EPS) experienced a significant decline in 2020 compared to the same periods in 2019 Earnings Per Share (in thousands, except per share amounts) | Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $2,652 | $10,613 | $4,614 | $17,496 | | Basic EPS | $0.06 | $0.26 | $0.11 | $0.43 | | Diluted EPS | $0.06 | $0.26 | $0.11 | $0.43 | - Diluted EPS for both three and six months ended June 30, 2020, excludes 937,424 options to purchase common stock as their effect would be anti-dilutive[79] Note 11 – Related Party Transactions This note discloses transactions with Ramaco Coal, LLC, primarily concerning production royalty payables and payments - Production royalty payables to Ramaco Coal, LLC were $0.3 million at June 30, 2020, and $0.5 million at December 31, 2019[80] - Royalties paid to Ramaco Coal, LLC totaled $1.1 million for the three months and $2.3 million for the six months ended June 30, 2020[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the adverse impact of COVID-19 on financial results, operations, and liquidity, along with non-GAAP performance measures Overview The COVID-19 pandemic severely impacted Q2 2020 results, causing reduced demand, customer delays, and operational adjustments to preserve liquidity - The company's primary revenue source is metallurgical coal sales, with a 265-million-ton reserve base as of December 31, 2019[83] - COVID-19 caused a severe global economic slowdown, leading to declining demand and reductions in spot prices for metallurgical coal[85][87] - Customer contractual obligations are expected to be delayed or curtailed, reducing total contracted sales volumes for 2020 by up to 12%[86] - Operational responses included a two-week furlough for 203 employees, 30% temporary salary reductions for executives, and deferral of non-essential capital expenditures[88][89][94] Results of Operations Net income and Adjusted EBITDA declined significantly due to lower sales volumes and realized pricing, though other income increased from PPP Loan forgiveness Consolidated Statement of Operations Data (in thousands) | Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $36,374 | $65,761 | $78,310 | $123,221 | | Operating income (loss) | $(4,299) | $12,889 | $(3,158) | $21,138 | | Net income | $2,652 | $10,613 | $4,614 | $17,496 | | Adjusted EBITDA | $10,811 | $19,093 | $19,228 | $32,778 | - Net income decreased by 75% and Adjusted EBITDA by 43% in Q2 2020 compared to Q2 2019, due to lower realized pricing and volumes[95] - Revenue per ton sold (FOB mine) declined 22% from $116/ton in Q2 2019 to $91/ton in Q2 2020, and 17% from $111/ton in H1 2019 to $92/ton in H1 2020[97][107] - Coal sales volumes decreased by 31% (QoQ) and 22% (YoY) for the three and six months ended June 30, 2020, respectively[97][107] - Other income increased significantly to $8.5 million (Q2 2020) and $9.7 million (H1 2020), primarily due to $7.3 million recognized from the anticipated forgiveness of the PPP Loan[102][112] Liquidity and Capital Resources The company maintained liquidity through cash reserves, credit availability, and new borrowings while funding significant capital expenditures - At June 30, 2020, cash and cash equivalents were $9.8 million, with $22.0 million available under existing credit agreements[117] - Cash flows from operating activities were $6.8 million for the first six months of 2020, negatively impacted by a $4.5 million build-up of inventories[120] - Capital expenditures totaled $18.0 million, primarily for the Berwind mine development and Elk Creek mining complex infrastructure[118] - Net borrowings of $16.3 million were made to increase cash position and fund capital expenditures during the COVID-19 pandemic[120] Indebtedness The company's debt profile includes credit facilities, an equipment loan, and a PPP loan expected to be fully forgiven - Revolving Credit Facility: $8.0 million outstanding at June 30, 2020, with $22.0 million availability[123] - Term Loan: $8.3 million outstanding at June 30, 2020, interest at LIBOR + 5.15%[124] - Equipment Financing Loan: $4.5 million outstanding at June 30, 2020, interest at 7.45% per annum[126] - PPP Loan: $8.4 million received April 20, 2020, with $7.3 million recognized as other income due to anticipated forgiveness for eligible expenses[127][130][132] Off-Balance Sheet Arrangements The company had no material off-balance sheet arrangements as of June 30, 2020 - No material off-balance sheet arrangements as of June 30, 2020[134] Non-GAAP Financial Measures This section defines and reconciles non-GAAP measures like Adjusted EBITDA and cash cost per ton to evaluate operating performance - Adjusted EBITDA is defined as net income plus net interest expense, stock-based compensation, depreciation and amortization expenses, and any transaction-related costs[136] Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $2,652 | $10,613 | $4,614 | $17,496 | | EBITDA | $9,546 | $17,905 | $16,899 | $30,568 | | Adjusted EBITDA | $10,811 | $19,093 | $19,228 | $32,778 | - Non-GAAP revenue per ton (FOB mine) decreased from $116/ton in Q2 2019 to $91/ton in Q2 2020, and from $111/ton in H1 2019 to $92/ton in H1 2020[139] - Non-GAAP cash cost per ton sold was $74/ton in Q2 2020 (vs $73/ton in Q2 2019) and $70/ton in H1 2020 (vs $72/ton in H1 2019)[141] Item 3. Quantitative and Qualitative Disclosures about Market Risk Disclosures about market risk are incorporated by reference from the company's 2019 Annual Report on Form 10-K - Quantitative and qualitative disclosures about market risk are incorporated by reference from the Annual Report on Form 10-K for the year ended December 31, 2019[142] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no significant changes to internal controls during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020, at the reasonable assurance level[143][144] - No significant changes in internal control over financial reporting occurred during the quarter ended June 30, 2020, that materially affected internal controls[146] Part II. Other Information Item 1. Legal Proceedings The company is subject to routine litigation, none of which is expected to have a material adverse effect on its financial condition - No pending litigation, disputes, or claims are expected to have a material adverse effect on the company's financial condition, cash flows, or results of operations[149] - For a description of legal proceedings, refer to Note 7 to the Condensed Consolidated Financial Statements[149] Item 1A. Risk Factors This section updates risk factors, focusing on the adverse impacts of the COVID-19 pandemic and risks related to the PPP Loan - The COVID-19 pandemic has caused significant volatility, economic disruption, and a decline in metallurgical coal prices and demand for steel[152][153] - Customer concentration is a significant risk, with two customers accounting for approximately 50% of total revenue for the six months ended June 30, 2020[159] - Customer delays or curtailments due to COVID-19 are expected to reduce total contracted sales volumes for 2020 by up to 12%[156][160] - There is a risk that the company's eligibility for the PPP Loan could be challenged, potentially leading to civil and criminal penalties[164] - Uncertainty remains regarding future changes in PPP loan rules and regulations, which could affect loan forgiveness[165] Item 4. Mine Safety Disclosures Information regarding mine safety violations and regulatory matters is included in Exhibit 95.1 of this report - Mine safety disclosures are provided in Exhibit 95.1 of this Quarterly Report[166] Item 6. Exhibits This section lists the exhibits filed with the report, including officer certifications, mine safety disclosures, and XBRL documents - Includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[168] - Mine Safety Disclosure is filed as Exhibit 95.1[168] - XBRL Instance Document and Taxonomy Extension Documents are included as Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, and 101.PRE[168] Signatures Signatures This section contains the certifying signatures of the company's principal executive and financial officers as of August 6, 2020 - The report was signed by Michael D. Bauersachs, President and Chief Executive Officer, and Jeremy R. Sussman, Chief Financial Officer, on August 6, 2020[173]