Ramaco Resources(METCB) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, significant accounting policies, debt, equity, commitments, revenue, income taxes, earnings per share, and related party transactions Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet (in thousands) | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------------- | :------------ | :---------------- | | Assets | | | | Total current assets | $54,175 | $44,323 | | Property, plant and equipment – net | $183,145 | $178,202 | | Total Assets | $242,101 | $226,813 | | Liabilities | | | | Total current liabilities | $27,837 | $26,411 | | Total liabilities | $65,568 | $56,730 | | Stockholders' Equity | | | | Total stockholders' equity | $176,533 | $170,083 | | Total Liabilities and Stockholders' Equity | $242,101 | $226,813 | Unaudited Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (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 | | Diluted EPS | $0.06 | $0.26 | $0.11 | $0.43 | Unaudited Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Common Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Total Stockholders' Equity | | :--------------------------- | :----------- | :------------------------- | :-------------------------- | :------------------------- | | Balance at January 1, 2020 | $410 | $154,957 | $14,716 | $170,083 | | Stock-based compensation | $17 | $906 | — | $923 | | Net income | — | — | $1,962 | $1,962 | | Balance at March 31, 2020 | $427 | $155,863 | $16,678 | $172,968 | | Restricted stock surrendered | $(1) | $(192) | — | $(193) | | Stock-based compensation | — | $1,106 | — | $1,106 | | Net income | — | — | $2,652 | $2,652 | | Balance at June 30, 2020 | $426 | $156,777 | $19,330 | $176,533 | | Balance at January 1, 2019 | $401 | $150,926 | $(10,218) | $141,109 | | Stock-based compensation | $7 | $887 | — | $894 | | Net income | — | — | $6,883 | $6,883 | | Balance at March 31, 2019 | $408 | $151,813 | $(3,335) | $148,886 | | Stock-based compensation | $1 | $1,059 | — | $1,060 | | Net income | — | — | $10,613 | $10,613 | | Balance at June 30, 2019 | $409 | $152,872 | $7,278 | $160,559 | Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (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 | Notes to Unaudited Condensed Consolidated Financial Statements NOTE 1—BUSINESS - The company is an operator and developer of high-quality, low-cost metallurgical coal in southern West Virginia, southwestern Virginia, and southwestern Pennsylvania[31] - The COVID-19 pandemic has adversely affected the company, leading to customer delays/curtailments reducing 2020 contracted sales volumes by up to 12%[33] - In response to COVID-19, the company implemented a two-week operational furlough for 203 employees, temporary 30% executive salary reductions for certain executives, partial closure of the Berwind mine affecting 44 jobs, and reduction/deferral of non-essential capital expenditures[35][37] - 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 - The company classifies highly-liquid instruments with original maturity of three months or less as cash equivalents[42] - Self-insured losses for workers' compensation claims are accrued based on estimates, 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 initially recognized as deferred income liability and subsequently reduced as income is recognized over the period related costs are incurred[44] - Sales to four customers accounted for approximately 73% of total revenue for the three months ended June 30, 2020, and sales to two customers accounted for approximately 50% for the six months ended June 30, 2020[48] - The company adopted ASU 2016-13 (Financial Instruments—Credit Losses) and ASU 2018-15 (Internal-Use Software) effective January 1, 2020, with no material impact on consolidated financial statements[49][50] NOTE 3—PROPERTY, PLANT AND EQUIPMENT Property, Plant and Equipment (in thousands) | Metric | 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 and amortization | $(45,673) | $(35,330) | | Total property, plant and equipment, net | $183,145 | $178,202 | Depreciation and Amortization (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 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Depreciation of plant and equipment | $4,240 | $3,416 | $8,415 | $6,436 | | Amortization of capitalized mine development costs | $1,101 | $1,406 | $1,928 | $2,502 | | Total depreciation and amortization | $5,341 | $4,822 | $10,343 | $8,938 | NOTE 4—DEBT - The company has a Revolving Credit Facility with KeyBank, amended on February 20, 2020, consisting of a $10.0 million term loan and up to $30.0 million revolving line of credit, maturing December 31, 2023[54][55] - As of June 30, 2020, $8.0 million was outstanding on the Revolving Credit Facility with $22.0 million remaining availability, and the Term Loan had an outstanding principal balance of $8.3 million[55][56] - An Equipment Financing Loan of approximately $4.7 million was entered into on April 16, 2020, with an outstanding principal balance of $4.5 million at June 30, 2020[58] NOTE 5—SBA PAYCHECK PROTECTION PROGRAM LOAN - On April 20, 2020, the company received approximately $8.4 million from a PPP Loan, used to retain employees, maintain payroll, and make lease, interest, and utility payments[59] - The PPP Loan matures on April 16, 2022, bears 1% interest, and may be forgiven by the SBA based on documented expenditures for payroll, rent, mortgage interest, and utilities[60][61] - Approximately $7.3 million of PPP Loan proceeds used for eligible expenses through June 30, 2020, has been recognized as other income, with the remaining $1.1 million presented as deferred income[64][65] NOTE 6—EQUITY - The company has a stock-based compensation plan with 3.3 million shares available for future awards at June 30, 2020[66] - Compensation expense related to restricted stock awards totaled $1.1 million and $2.0 million for the three and six months ended June 30, 2020, respectively[68] Restricted Awards Activity | Metric | Shares | Weighted Average Grant Date Fair Value | | :-------------------------- | :------- | :------------------------------------- | | Outstanding at December 31, 2019 | 1,628,241 | $6.32 | | Granted | 1,763,172 | $3.04 | | Vested | (419,844) | $6.17 | | Forfeited | — | — | | Outstanding at June 30, 2020 | 2,971,569 | $4.40 | NOTE 7—COMMITMENTS AND CONTINGENCIES - As of June 30, 2020, the company had $15.1 million in reclamation bonding requirements supported by surety bonds and $0.3 million in surety bonds for performance obligations[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 an insurance claim for a partial silo structural failure in November 2018, with a trial scheduled for December 8, 2020[74] NOTE 8—REVENUE Disaggregated Revenue (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 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | 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 approximately 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 of the fixed-price contracts at $91/ton may not ship in 2020 due to material adverse change and force majeure notices[75] NOTE 9—INCOME TAXES - The effective tax rate for the three and six months ended June 30, 2020, excluding a discrete item for restricted stock awards, was 21% and 16%, respectively[77] - The effective tax rate for the three and six months ended June 30, 2019, was 17% each period[77] NOTE 10—EARNINGS PER SHARE 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 | | Weighted average shares used to compute basic EPS | 42,704 | 40,869 | 42,232 | 40,737 | | Dilutive effect of share-based awards | — | 96 | — | 73 | | Weighted average shares used to compute diluted EPS | 42,704 | 40,965 | 42,232 | 40,810 | | Basic EPS | $0.06 | $0.26 | $0.11 | $0.43 | | Diluted EPS | $0.06 | $0.26 | $0.11 | $0.43 | NOTE 11—RELATED PARTY TRANSACTIONS - The company acquired coal reserves and surface rights through mineral leases and surface rights agreements with Ramaco Coal, LLC, a related party[80] - Royalties paid to Ramaco Coal, LLC totaled $1.1 million and $2.3 million for the three and six months ended June 30, 2020, respectively[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, highlighting the impact of the COVID-19 pandemic on revenue, costs, and liquidity, detailing operational responses, financial results for the quarter and six-month periods, and the company's capital resources and non-GAAP financial measures Overview - The company is a metallurgical coal operator with a 265-million-ton reserve base and plans to grow production to 4-4.5 million clean tons, subject to market conditions[83] - The COVID-19 pandemic significantly impacted Q2 2020 results, leading to a global economic slowdown, reduced demand, and lower spot prices for metallurgical coal[85][87] - Customer contractual obligations for 2020 sales volumes are expected to be reduced by up to 12% due to COVID-19[86] - Company responses include a two-week employee furlough, 30% executive salary reductions, partial closure of the Berwind mine (affecting 44 jobs), and deferral of non-essential capital expenditures[88][89][94] Results of Operations 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 | | 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 | | Adjusted EBITDA | $10,811 | $19,093 | $19,228 | $32,778 | - Net income and Adjusted EBITDA in Q2 2020 were 75% and 43% lower, respectively, than Q2 2019, due to lower realized pricing and volumes[95] Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019 Coal Sales Revenue (Three Months Ended June 30, in thousands) | Metric | 2020 | 2019 | Increase (Decrease) | | :-------------------- | :----- | :----- | :------------------ | | Company Produced Revenue | $36,374 | $62,516 | $(26,142) | | Company Produced Tons Sold | 362 | 499 | (137) | | Purchased from Third Parties Revenue | $— | $3,245 | $(3,245) | | Purchased from Third Parties Tons Sold | — | 26 | (26) | - Coal sales revenue decreased by 42% to $36.4 million in Q2 2020, driven by lower sales volumes (31% decrease) and a 22% decline in revenue per ton sold (FOB mine) to $91/ton[96][97] - Cost of sales decreased to $30.1 million in Q2 2020 due to lower sales volumes, while cash cost per ton sold (FOB mine) slightly increased to $74[99] - Other income increased significantly to $8.5 million in Q2 2020, primarily due to the recognition of $7.3 million from the anticipated forgiveness of the PPP Loan[102] Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019 Coal Sales Revenue (Six Months Ended June 30, in thousands) | Metric | 2020 | 2019 | Increase (Decrease) | | :-------------------- | :----- | :----- | :------------------ | | Company Produced Revenue | $78,310 | $115,216 | $(36,906) | | Company Produced Tons Sold | 778 | 942 | (164) | | Purchased from Third Parties Revenue | $— | $8,005 | $(8,005) | | Purchased from Third Parties Tons Sold | — | 61 | (61) | - Coal sales revenue decreased by 32% to $78.3 million for the six months ended June 30, 2020, due to lower sales volumes (22% decrease) and a 17% decline in revenue per ton sold (FOB mine) to $92/ton[107] - Cost of sales decreased to $61.1 million, primarily due to lower sales volumes, while cash cost per ton sold (FOB mine) decreased to $70[109] - Other income increased to $9.7 million, largely driven by the $7.3 million recognized from the anticipated forgiveness of the PPP Loan[112] Liquidity and Capital Resources - At June 30, 2020, the company had $9.8 million in cash and cash equivalents and $22.0 million available under existing credit agreements[117] - Significant cash uses in the first six months of 2020 included $18.0 million in capital expenditures, primarily for mine development and infrastructure[118] - Net borrowings of $16.3 million were made to increase cash position and fund capital expenditures during the COVID-19 pandemic[120] - The company believes current cash, operating cash flows, and available credit will be sufficient to meet capital and operating plans, but is also exploring further capital expenditure reductions and alternative financing[119][120][121] - The company's indebtedness includes a Revolving Credit Facility ($8.0 million outstanding, $22.0 million available), a Term Loan ($8.3 million outstanding), and an Equipment Financing Loan ($4.5 million outstanding), all in compliance with covenants[122][123][124][125][126] - The $8.4 million PPP Loan was received on April 20, 2020, to support employment and payroll, with a significant portion expected to be forgiven[127][129][132][133] Off-Balance Sheet Arrangements - As of June 30, 2020, the company had no material off-balance sheet arrangements[134] Non-GAAP Financial Measures - Adjusted EBITDA is defined as net income plus net interest expense, stock-based compensation, depreciation and amortization expenses, and any transaction-related costs, used to evaluate operating performance[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 | | Depreciation and amortization | $5,341 | $4,822 | $10,343 | $8,938 | | Interest expense, net | $293 | $302 | $572 | $609 | | Income taxes | $1,260 | $2,168 | $1,370 | $3,525 | | EBITDA | $9,546 | $17,905 | $16,899 | $30,568 | | Stock-based compensation | $1,106 | $1,060 | $2,029 | $1,954 | | Accretion of asset retirement obligation | $159 | $128 | $300 | $256 | | Adjusted EBITDA | $10,811 | $19,093 | $19,228 | $32,778 | - Non-GAAP revenue per ton (FOB mine) and cash cost per ton sold are presented to allow comparison with other coal companies and monitor coal price/cost changes excluding transportation costs[138][140] Non-GAAP Revenue per Ton Sold (FOB mine) (in thousands, except per ton 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 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Revenue | $36,374 | $65,761 | $78,310 | $123,221 | | Less: Transportation costs | $(3,454) | $(4,737) | $(6,560) | $(12,087) | | Non-GAAP revenue (FOB mine) | $32,920 | $61,024 | $71,750 | $111,134 | | Tons sold | 362 | 525 | 778 | 1,003 | | Revenue per ton sold (FOB mine) | $91 | $116 | $92 | $111 | Non-GAAP Cash Cost per Ton Sold (FOB mine) (in thousands, except per ton 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 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of sales | $30,134 | $43,219 | $61,069 | $84,225 | | Less: Transportation costs | $(3,181) | $(4,737) | $(6,307) | $(12,019) | | Non-GAAP cash cost of sales | $26,953 | $38,482 | $54,762 | $72,206 | | Tons sold | 362 | 525 | 778 | 1,003 | | Cash cost per ton sold | $74 | $73 | $70 | $72 | Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to the company's Annual Report on Form 10-K for detailed quantitative and qualitative disclosures regarding market risk - Quantitative and qualitative disclosures about market risk are included in Item 7A of the Annual Report on Form 10-K for the year ended December 31, 2019[142] Item 4. Controls and Procedures This section details the effectiveness of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Disclosure Controls and Procedures - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, at a reasonable assurance level[143][144] Changes in Internal Control over Financial Reporting - There were no significant changes in the company's internal control over financial reporting during the quarter ended June 30, 2020, that materially affected or are reasonably likely to materially affect it[146] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section states that the company is involved in routine litigation but does not expect any material adverse effects on its financial condition, cash flows, or results of operations - The company may be subject to routine litigation, but management believes no pending matters will have a material adverse effect on financial condition, cash flows, or results of operations[149] Item 1A. Risk Factors This section updates the risk factors, primarily focusing on the adverse impacts of the COVID-19 pandemic on business operations, customer demand, and financial condition, as well as risks associated with customer concentration and potential challenges to the company's Paycheck Protection Program loan eligibility - The global spread of COVID-19 has created significant volatility, uncertainty, and economic disruption, leading to a slowdown in the global economy, declines in metallurgical coal prices, and reduced demand for steel[152][153] - Company actions in response to COVID-19 include employee furloughs, executive salary reductions, partial mine closure, and capital expenditure deferrals[154] - Two customers have declared material adverse change or force majeure, reducing or delaying planned metallurgical coal purchases by up to 12% of total contracted sales volumes for 2020[156] - The company has two customers accounting for approximately 50% of total revenue for the six months ended June 30, 2020, posing a risk if purchases are significantly reduced[159][161] - There is a risk that the federal government or private plaintiffs may challenge the company's eligibility for the $8.4 million PPP Loan, potentially leading to civil and criminal penalties if certifications are deemed not in good faith[162][164] Item 4. Mine Safety Disclosures This section indicates that information regarding mine safety violations and other regulatory matters is provided in Exhibit 95.1 of this Quarterly Report - Mine safety disclosures are included in Exhibit 95.1 to this Quarterly Report[166] Item 6. Exhibits This section lists all exhibits filed or furnished with the Quarterly Report, including certifications, mine safety disclosures, and XBRL documents - The report includes certifications from the CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act), Mine Safety Disclosure (Exhibit 95.1), and various XBRL taxonomy documents[168] SIGNATURES - The report is signed by Michael D. Bauersachs, President and Chief Executive Officer, and Jeremy R. Sussman, Chief Financial Officer, on August 6, 2020[173]