Ramaco Resources, Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2017

or

For the transition period from                 to              

Commission File Number: 001-38003

RAMACO RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☒    No  ☐

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

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

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

As of November 7, 2017, the registrant had 39,559,366 shares of common stock outstanding.

RAMACO RESOURCES, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this report, regarding our strategy, future operations, financial position, 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” and elsewhere in the Annual Report of Ramaco Resources, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2016 (the “Annual Report”) and other filings with the Securities and Exchange Commission (“SEC”).

Forward-looking statements may include statements about:

We caution you that these forward-looking statements are subject to a number of risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of coal. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

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

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

GLOSSARY OF CERTAIN TERMS AND CONVENTIONS USED HEREIN

The terms defined in this section are used throughout this Quarterly Report:

PART I - FINANCIAL INFORMATION

Item 1.            Financial Statements

Ramaco Resources, Inc. 

Unaudited Condensed Consolidated Balance Sheets

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

Ramaco Resources, Inc.

Unaudited Condensed Consolidated Statements of Operations 

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

Ramaco Resources, Inc.

Unaudited Condensed Consolidated Statements of Equity 

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

Ramaco Resources, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows 

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

Ramaco Resources, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows 

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

 Ramaco Resources, Inc. 

Notes to Unaudited Condensed Consolidated Financial Statements

1.         Organization and Business

Ramaco Resources, Inc. (“Resources”) through its wholly owned subsidiary Ramaco Development LLC, is engaged in the business of production and sale of metallurgical coal in central and northern Appalachia. Resources was incorporated pursuant to the laws of the State of Delaware on October 24, 2016 to become a holding company for Ramaco Development, LLC which was previously a wholly-owned subsidiary of Ramaco Coal, LLC (formerly Ramaco Carbon, LLC).

Pursuant to the terms of a corporate reorganization (“Reorganization”) that was completed in connection with the closing of Resources’ initial public offering (“IPO”), all the interests in Ramaco Development, LLC were exchanged for newly issued common shares of Resources and as a result, Ramaco Development, LLC became a wholly-owned subsidiary of Resources. Therefore, the financial information for the period of January 1, 2017 through February 8, 2017, as contained in these financial statements, pertain to the historical financial statements and results of operations of Ramaco Development, LLC.

 The terms “Company,” “we,” “us,” “our,” and similar terms when used in the present tense, prospectively or for periods since our Reorganization on February 8, 2017, refer to the Company and its subsidiaries, and for historical periods prior to our Reorganization, refer to Ramaco Development, LLC.

  On February 8, 2017, Resources completed its IPO of common stock pursuant to a registration statement on Form S-1 (File 333-215363), as amended and declared effective by the SEC on February 2, 2017. Pursuant to the registration statement, the Company registered the offer and sale of 6,000,000 shares of $0.01 par value common stock, which included 3,800,000 shares of common stock sold by the Company and 2,200,000 shares of common stock sold by the selling stockholders.

Proceeds of the Company’s IPO, based on the public offering price of $13.50 per share, were approximately $51.3 million. After subtracting underwriting discounts and commissions of $3.6 million, the Company received net proceeds of approximately $47.7 million ($43.7 million net of offering expenses paid directly by the Company). The Company used $10.7 million of the net proceeds to repay the Ramaco Coal, LLC note payable in its entirety, including accrued interest thereon. All units of the Company’s then-outstanding convertible Series A preferred units automatically converted into an aggregate of 12,764,426 shares of common stock in connection with the Reorganization.

2.         Summary of Significant Accounting Policies  

Basis of Presentation—These interim financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain disclosures have been condensed or omitted from these financial statements. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements, and should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016.

All intercompany transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period’s consolidated financial statements and related footnotes to conform them to the current period presentation. In the opinion of the Company’s 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 condensed consolidated 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.

Reclassifications—The Company’s financial statements for prior periods include reclassifications that were made to conform to the current period presentation.

Recent Accounting Pronouncements—In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, and in August 2015 the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company plans to adopt this standard on January 1, 2018 and intends to elect the modified retrospective method of adoption. The Company does not anticipate a significant impact on our financial statements and disclosures. Our evaluation is not final and we continue to assess the impact the updated standard will have on our revenue contracts.

In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company expects to adopt ASU No. 2016-02 for the fiscal year beginning January 1, 2019 and is in the process of assessing the impact that this new guidance is expected to have on the Company’s results of operations, financial condition and/or financial statement disclosures.

In September 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses. ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently assessing the impact this accounting standard will have on its financial statements and related disclosures.

3.       Property, Plant and Equipment

The Company’s property, plant and equipment consist of the following:

In the quarter ended September 30, 2017, depreciation expense related to the Company’s plant and equipment totaled $754,450 and amortization of its capitalized development expenses totaled $113,518. Depreciation expense related to the Company’s plant and equipment for the nine months ended September 30, 2017 totaled $1,118,656 and amortization of its capitalized development expenses totaled $216,327. The Company began commercial mining operations in January 2017.

On March 29, 2017, the Company acquired approximately 14,762 acres of coal properties in Tazewell and Buchanan Counties, Virginia and McDowell County, West Virginia. As part of the transaction, the Company acquired several coal leaseholds adjacent to its Knox Creek operations. The Company paid $125,000 for the properties, a portion of which is recoupable from future production, and agreed to pay an overriding royalty on production from properties not already subleased.

4.         Fair Value of Financial Instruments

The carrying amounts and fair values of the Company’s financial assets and liabilities were as follows:

The Company invests in highly-rated securities with the primary objective of minimizing the potential risk of principal loss. Fair values were determined for each individual security based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the securities. At September 30, 2017, four securities had total unrealized losses of approximately $15,453. The Company considers the declines in market value of its marketable securities investment portfolio to be temporary in nature. When evaluating an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis.  

The Company uses a market approach to determine the fair value of its fixed-rate debt using observable market data, which results in a Level 2 fair-value measurement.

The Company’s 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, the Company’s credit adjusted discount rate, inflation rates and estimated date of reclamation.  

5.         Asset Retirement Obligations 

Changes in the carrying amount of our asset retirement obligations were as follows:

6.         Related Party Transactions

Mineral Lease and Surface Rights Agreements—Much of the coal reserves and surface rights that the Company controls were acquired through a series of mineral leases and surface rights agreements with Ramaco Coal, LLC. These agreements generally have terms running through exhaustion of all the mineable and merchantable coal covered by the respective lease. The agreements call for the Company to pay minimum annual royalties or throughput payments on a monthly, or in one case an annual, basis. The Company pays royalties or throughput payments on all coal mined and sold from the agreements based on a percentage of the gross selling price received for the coal mined by the Company. Payments of minimum coal royalties and throughput payments commenced in 2017 pursuant to the terms of the various agreements. Minimum royalties of $350,002 were paid in the three months ended September 30, 2017 of which $103,082 was recouped through credit against earned royalties for the quarter. For the nine months ended September 30, 2017, minimum royalties of $766,762 were paid of which $199,091 was recouped through credit against earned royalties for that period.

7.         Equity and Equity-Based Compensation

At December 31, 2016, Ramaco Development, LLC had 8,000,000 common units and 4,538,836 preferred units issued and outstanding. On February 8, 2017, in connection with the Company’s IPO, a corporate reorganization occurred and each unit of Ramaco Development, LLC was converted into approximately 2.81 shares of common stock in Resources and as a result, the Company issued 35,262,576 shares of common stock. The Company issued an additional 3,800,000 shares of common stock in the IPO. After the corporate reorganization and the completion of the IPO discussed above, the Company is authorized to issue up to a total of 260,000,000 shares of its common stock with a par value $0.01 per share, and 50,000,000 shares of its preferred stock with a par value of $0.01 per share. Holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders and to receive ratably in proportion to the shares of common stock held by them any dividends declared from time to time by the board of directors. Our common stock has no preferences or rights of conversion, exchange, pre-exemption or other subscription rights. At September 30, 2017, we had 39,509,311 shares of our common stock issued and outstanding. We had no preferred shares issued or outstanding at September 30, 2017.

Equity-Based Compensation—On August 31, 2016, Ramaco Development, LLC granted two executives an aggregate of 333,334 options (166,667 each) for the purchase of common units at an exercise price of $15 per unit. The options have a ten-year term from the grant date. The options to purchase common units were converted into 937,424 options to purchase shares of the Company’s common stock. Vesting of these options was accelerated in our IPO pursuant to their terms. The Company recognized the remaining $2,144,333 of equity-based compensation expense during the three months ended March 31, 2017 for this accelerated vesting.

On June 28, 2017, the Company granted a total of 446,735 shares of restricted stock awards to six executives and the three independent directors. The fair market value, based on the closing price of the stock on the day of the grant, was $5.82 per share. The awards to the executives vest in full on December 31, 2019 and the awards to the independent directors vest in full on December 31, 2017. The Company will recognize $2,600,000 in equity-based compensation through the vesting dates. The Company has assumed zero forfeitures. The Company recognized $320,007 of equity-based compensation expense during the three months ended September 30, 2017 for these awards.

8.         Commitments and Contingencies

Leases—The Company leases office space in Lexington, Kentucky. The lease term expires in March 2022. Monthly rents under the lease are $6,053. Remaining commitments under the lease over its term are $308,703.

The Company leases office space in South Charleston, West Virginia for its operations management. The lease term expires on May 17, 2020. Monthly rents are $4,725. Total commitments remaining under the lease over its term are $146,475.

Environmental Liabilities—Environmental liabilities are recognized when the expenditures are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and undiscounted site-specific costs. Generally, such recognition would coincide with a commitment to a formal plan of action. No amounts have been recognized for environmental liabilities. 

Surety Bond—In accordance with state laws, the Company is required to post reclamation bonds to assure that reclamation work is completed. Reclamation bonds outstanding at September 30, 2017 totaled approximately $12.2 million. 

Construction Commitments—On September 2, 2016, the Company entered into a fixed price contract with a West Virginia contractor for the construction of a coal preparation plant, coal loadout and associated belting and storage facilities on the Elk Creek property for $27.8 million. A remaining $1.7 million under the contract is yet to be billed.

9.         Earnings (Loss) Per Share

The following table is a calculation of the pro forma net loss per basic and diluted share for the three months and nine months ended September 30, 2017 and 2016.

(1) Adjustment has been made to the pro forma loss to addback interest expense associated with the note payable to Ramaco Coal, LLC which was repaid in full using proceeds from the IPO.

(2) Excludes 937,424 shares in 2016 periods issuable upon the exercise of outstanding options held by certain of our executive management because their effect would be antidilutive. Similarly, assumed conversion of then outstanding Series A preferred units is excluded in the 2016 periods because their effect would be antidilutive.

Pro forma share and per share information presented have been adjusted to reflect the shares issued as a result of the Reorganization and IPO.

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

On February 8, 2017, in connection with the closing of our initial public offering (“IPO”), we completed a corporate reorganization (the “Reorganization”) pursuant to which all the interests in Ramaco Development, LLC (“Ramaco Development”), our accounting predecessor, were exchanged for newly issued shares of common stock of the Company and as a result, Ramaco Development became a wholly-owned subsidiary of the Company. As such, the financial information presented in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the period from January 1, 2017 through February 8, 2017, as contained in the financial statements for the nine months ended September 30, 2017, pertain to the historical financial statements and results of operations of Ramaco Development.

Overview

We are an operator and developer of high-quality, low-cost metallurgical coal in southern West Virginia, southwestern Virginia, and southwestern Pennsylvania. We have a near-term development portfolio of four long-lived projects: Elk Creek, Berwind, RAM Mine and Knox Creek. While we commenced initial production of metallurgical coal in late December 2016, commercial production from our first mines occurred in January 2017, at which time we began to generate revenue from production.

Overall Trends and Outlook

We expect our business to be affected by key trends in the metallurgical coal industry. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results.

The overall outlook of the metallurgical coal business is dependent on a variety of factors such as pricing, regulatory uncertainties, other countries’ governmental policies and global economic conditions. Coal consumption and production in the United States has been driven in recent periods by several market dynamics and trends, such as the global economy, a strong U.S. dollar and accelerating production cuts. In addition to those outlined below, please consider the risk factors in “Item 1A. Risk Factors” in our Annual Report for additional detail on the risks affecting the coal industry.

Reserve Estimates

Coal is economically recoverable when the price at which coal can be sold exceeds the costs and expenses of mining and selling the coal. We base our reserve information on geologic data, coal ownership information and current and proposed mine plans. Reserve estimates are periodically updated to reflect past coal production, if any, new drilling information, other geologic or mining data, and changes to coal price expectations or the cost of production and sale. There are numerous uncertainties inherent in estimating quantities and qualities of coal and costs to mine recoverable reserves, including many factors beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain and depend on a variety of factors. Actual production, revenues and expenditures with respect to our future coal reserves will vary from estimates, and these variances may be material. As a result, our estimates may not accurately reflect our actual future coal reserves.

Production

We are in the early stages of the development of our mining properties. Our ability to sell the coal we mine is dependent on the completion of the preparation plant and load out on the Elk Creek property. Delays in the completion of this project have resulted in lost coal sales and increased costs to date. As of September 30, 2017, we had two operating mines at Elk Creek and three other mines under development.  The preparation plant at Elk Creek became operational in late-October 2017. We expect to incur significant capital expenditures until we have completed the development of our properties. In addition, the development of our properties involves numerous regulatory, environmental, political and legal uncertainties that are beyond our control and that may cause delays in, or increase the costs associated with, their completion. In connection with the development of our properties, we may encounter unexpected difficulties, such as shortages of materials, unexpected operational events, cost overruns and facility or equipment malfunctions.

Pricing

Sales commitments in the metallurgical coal market are typically not long-term in nature and are generally no longer than one year in duration. Most metallurgical coal transactions in the United States are done on a calendar year basis, where both prices and volumes are fixed in the third and fourth quarter for the following calendar year. Globally the market is evolving to shorter term pricing.

Metallurgical coal has been an extremely volatile commodity over the past 10 years, as steel production growth in Asia underpinned demand growth, while the market experienced three supply shocks from flooding events in Australia’s Queensland and a fourth in 2016 caused by a reduction in Chinese domestic production. U.S. metallurgical coal exports fell from 46.0 million tons in 2015 to 40.9 million tons in 2016. However, premium global quarterly coal benchmark prices have rebounded significantly since early 2016, rising from $81 per MT in the first quarter of 2016 to $285 in the fourth quarter of 2016. Metallurgical coal prices are very sensitive to multiple factors affecting supply and demand. In early April, we saw spot prices surge upwards to $300 and more in response to the supply disruptions in Australia caused by Cyclone Debbie. In addition, spot pricing of metallurgical coal is going through some significant changes almost daily because of changes in Chinese government policies affecting the number of working days at Chinese coal mines, continued closure of small, unsanctioned, coal mines in China, and the reduction of Chinese steel production from antiquated induction furnaces. This volatility appears to be changing the manner in which metallurgical coal prices are being set. Recently, large Japanese steel producers opted for private price negotiations with key Australian coal producers. This may lead to a much less meaningful benchmark marker or its disappearance altogether. This will make it much more difficult for both buyers and suppliers of metallurgical coal to reach a consensus on price and likely lead to further increased volatility. We believe future spot and short-term pricing will be volatile in response to changing Chinese policies, new production having been recently brought online and idled metallurgical coal mines have been recently restarted in Mozambique, Australia, the United States and Canada, changing world economies, and the strengthening of the U.S. dollar making non-domestic producers more competitive. Supplies may not remain low, and demand may decrease or overcapacity may resume, which could cause declines in the prices of and demand for coal, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Steel Industry

Substantially all of the metallurgical coal that we expect to produce will be sold to steel producers. Therefore, demand for our metallurgical coal will be highly correlated to the steel industry. The steel industry’s demand for metallurgical coal is affected by a number of factors including the cyclical nature of that industry’s business, technological developments in the steel-making process and the availability of substitutes for steel such as aluminum, composites and plastics. A significant reduction in the demand for steel products would reduce the demand for metallurgical coal, which would have a material adverse effect upon our business. Similarly, if less expensive ingredients could be used in substitution for metallurgical coal in the integrated steel mill process, the demand for metallurgical coal would materially decrease, which would also materially adversely affect demand for our metallurgical coal.

Factors Affecting Comparability of Future Results

You should read management’s discussion and analysis of our financial condition and results of operations in conjunction with our historical financial statements included elsewhere in this Quarterly Report. Below are the period-to-period comparisons of our historical results and the analysis of our financial condition. In addition to the impact of the risk factors referred to in “Item 1A. Risk Factors” in our Annual Report, our future results could differ materially from our historical results due to a variety of factors, including the following:

Initial Public Offering. On February 8, 2017, the Company completed its IPO. Pursuant to a registration statement on Form S-1, the Company registered the offer and sale of 6,000,000 shares of $0.01 par value common stock, which included 3,800,000 shares of stock sold by the Company and 2,200,000 shares of common stock sold by the selling stockholders.

Proceeds of the IPO were approximately $51.3 million. After subtracting underwriting discounts and commissions of $3.6 million, the Company received net proceeds of approximately $43.7 million (net of offering expenses paid directly by the Company). The Company used $10.7 million of the net proceeds to repay the Ramaco Coal, LLC note payable in its entirety. All shares of the Company’s then-outstanding convertible Series A preferred units automatically converted into an aggregate of 12,764,426 shares of common stock in connection with the Reorganization.

Revenue. The Company began reporting revenue from the sale of the Company’s coal production as well as the sale of third party coal in the first quarter of 2017. This reported revenue continued to increase in the third quarter of 2017 as the Company expanded its presence in the domestic and export metallurgical markets. No coal mining revenue is reflected in our financial statements for the three months and nine months ended September 30, 2016. Commercial production from our first mines occurred in January 2017, at which time we began to generate revenue from production.

Production Costs. Production costs are the costs incurred in our operations to produce and process metallurgical coal and are primarily comprised of mining costs, labor, supplies and repairs, power, rental, lease and royalty expense. For the nine months ended September 30, 2017, the Company has experienced higher trucking and third-party processing costs while construction of the preparation plant and load-out facilities was underway. No coal production costs are reflected in our financial statements for the three months and nine months ended September 30, 2016.

Selling, general and administrative expenses. We expect to incur approximately $2.5 million per year in incremental selling, general and administrative expenses as a result of becoming a publicly traded company. These costs include expenses associated with our annual and quarterly reporting, investor relations, registrar and transfer agent fees, incremental insurance costs, and accounting and legal services. Not all of these differences in selling, general and administrative expenses are reflected in our financial statements for the three months and nine months ended September 30, 2016.

Additionally, terms of our outstanding stock options issued to executive management provided for vesting upon the completion of the IPO. Share-based compensation expense is recognized quarterly over the vesting term of these awards. The Company recognized the remaining $2.1 million of compensation expense associated with these awards in the first quarter of 2017, the quarter in which the IPO occurred.

EBITDA and ADJUSTED EBITDA

EBITDA and Adjusted EBITDA are intended to provide additional information only and do not have any standard meaning prescribed in generally accepted accounting principles in the United States (“U.S. GAAP”). A quantitative reconciliation of historical net income (loss) to Adjusted EBITDA is found in the table below. EBITDA represents net income (loss) before: (1) interest income (expense) net, (2) income tax provision, (3) depreciation and depletion and (4) amortization. Adjusted EBITDA represents EBITDA as further adjusted for accretion, which represents non-cash increases in asset retirement obligation liabilities resulting from passage of time, equity-based compensation expense and specifically identified items that management believes do not directly reflect our core operations. The Company uses Adjusted EBITDA to measure the operating performance of its mines and to allocate resources to its various projects. Furthermore, analogous measures are used by industry analysts and investors to evaluate the Company’s operating performance.

Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. We recognize that using Adjusted EBITDA as a performance measure has inherent limitations as compared to net income (loss), EPS, or other U.S. GAAP financial measures, as these non-GAAP measures exclude certain items, including items that are recurring in nature and may be meaningful to investors. As a result of the exclusions, Adjusted EBITDA should not be considered in isolation and does not purport to be an alternative to net income (loss), EPS or other U.S. GAAP financial measures as a measure of our operating performance.

A quantitative reconciliation for each of the periods presented of net income (loss) to Adjusted EBITDA is found below.

Three Months Ended September 30, 2017 Compared To The Three Months Ended September 30, 2016

Adjusted EBITDA

For the three months ended September 30, 2017, we reported a net loss of $6,235,543 compared to a net loss of $1,532,698 for the three months ended September 30, 2016. We had Adjusted EBITDA of ($5,023,114) for the three months ended September 30, 2017 compared to ($1,260,474) for the same period of 2016.

Set forth below is a reconciliation of Adjusted EBITDA to net loss for the three months ended September 30, 2017 and 2016:

Revenues. For the three months ended September 30, 2017, the Company had revenues of $14,404,979 from the sale of coal and no revenue from processing of coal for third parties. The Company ceased processing third party coal in April 2017 and has no current plans to begin those operations again. For the three months ended September 30, 2017, the Company sold 100,992 tons of its mined coal and 55,767 tons of third party coal. We generated no revenue from the sale of coal for the three months ended September 30, 2016 while the Company was continuing the development of its mineral properties. For the three months ended September 30, 2016, the Company did have revenues from coal processing for third parties of $1,465,121.

Cost of sales. For the three months ended September 30, 2017, our cost of sales was $14,751,276. We have incurred higher trucking and third-party processing costs during construction of our own facilities. We had no cost of coal sold and $384,254 cost of coal processing services for the three months ended September 30, 2016.

Other operating costs and expenses. Other operating costs and expenses increased to $1,308,400 for the three months ended September 30, 2017 from $0 for the same period of 2016. The increase was principally attributable to the increased non-mine specific engineering and other outside services.

Asset retirement obligation accretion. Our asset retirement obligation (“ARO”) accretion increased to $101,276 for the three months ended September 30, 2017 from $94,519 for the same period of 2016 reflecting activities at the Knox Creek preparation plant and impoundment, as well as commencement of mining at the Elk Creek properties in 2017.

Depreciation,depletion, and amortization. Depreciation expense related to the Company’s plant and equipment totaled $754,450 for the three months ended September 30, 2017. Amortization of capitalized development costs totaled $113,518 in the three months ended September 30, 2017. Depreciation expense recorded for the three months ended September 30, 2016 was $60,519 and there was no amortization of development costs since there was no coal production from the properties being developed.

Professional fees. Our professional fees decreased to $480,905 for the three months ended September 30, 2017 from $737,380 for the same period of 2016. The decrease primarily reflects reduced expenses associated with the Company’s exploration activities partially offset by the expenses associated with being a publicly traded coal company.

General and administrative expenses. General and administrative expenses increased to $3,237,682 for the three months ended September 30, 2017 from $1,671,855 for the same period of 2016. A major portion of the increase was attributable to the continued building of our corporate organization.

Nine Months Ended September 30, 2017 Compared To The Nine Months Ended September 30, 2016

Adjusted EBITDA

For the nine months ended September 30, 2017, we reported a net loss of $12,816,658 compared to a net loss of $5,980,062 for the nine months ended September 30, 2016. We had adjusted EBITDA of ($8,988,755) for the nine months ended September 30, 2017 compared to ($5,656,858) for the same period of 2016.

Set forth below is a reconciliation of Adjusted EBITDA to net loss for the nine months ended September 30, 2017 and 2016:

Revenues. For the nine months ended September 30, 2017, the Company had revenues of $34,779,079 from the sale of coal and $2,237,674 from processing of coal for third parties. For the nine months ended September 30, 2017, the Company sold 210,152 tons of its mined coal and 130,685 tons of third party coal. We generated no coal sales for the nine months ended September 30, 2016. We generated $1,465,121 from processing coal for third parties for the nine months ended September 30, 2016.

Cost of coal sold and cost of coal processing. For the nine months ended September 30, 2017, our cost of coal sold was $35,564,686 and our cost of coal processing services was $2,212,403. We have incurred higher trucking and third-party processing costs during construction of our own facilities.

Other operating costs and expenses. Other operating costs and expenses increased to $1,477,340 for the nine months ended September 30, 2017 from $91,605 for the same period of 2016. The increase was principally attributable to the increased non-mine specific engineering and other outside services.

Asset retirement obligation accretion. Our ARO accretion increased to $303,829 for the nine months ended September 30, 2017 from $134,788 for the same period of 2016. The increase reflects commencement of mining activities at the Elk Creek properties, operations at the Knox Creek preparation plant and impoundment, and continuing development of additional mines, all of which results in increased accretion expense being recognized over time due to the increased activity.

Depreciation, depletion and amortization. Depreciation expense related to the Company’s plant and equipment totaled $1,118,656 for the nine months ended September 30, 2017. Amortization of capitalized development costs totaled $216,327 in the nine months ended September 30, 2017. The Company recorded depreciation expense of $60,519 for the nine months ended September 30, 2016 and there was no amortization since there was no coal production from the properties being developed. 

Professional fees. Our professional fees decreased to $1,067,845 for the nine months ended September 30, 2017 from $4,149,017 for the same period of 2016. The decrease primarily reflects the expensing of approximately $3.1 million of deferred offering costs when the planned offering to which they relate was abandoned in 2016.

Selling, general and administrative expenses. Selling, general and administrative expenses increased to $8,291,489 for the nine months ended September 30, 2017 from $2,565,997 for the same period of 2016. A major portion of the $5,726,492 increase was due to $2,465,340 in equity-based compensation and most of the remaining balance was attributable to the continuing building of our corporate organization.

Liquidity and Capital Resources

Capital Resources

Our primary sources of cash while we have been in the exploration and development stage of our business was our former parent company Ramaco Coal, LLC, and, after our preferred equity offering in 2016, Yorktown and ECP, through a combination of equity infusions and loans. On February 8, 2017, we closed our IPO which provided an additional approximately $33 million of liquidity after expenses and full repayment of the Note Payable to Ramaco Coal, LLC . As of September 30, 2017, our available liquidity was $29.1 million, comprised of cash and investments. We expect to fund our capital and liquidity requirements with cash and investments on hand and projected cash flow from operations and possibly a short-term credit facility.

Factors that could adversely impact our future liquidity and ability to carry out our capital expenditure program include the following:

In the longer term, if future cash flows are not expected to be sufficient to meet our liquidity needs, 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.

Our board of directors has adopted a policy of considering paying regular and special cash dividends, in amounts to be determined. Although our dividend policy will depend upon our future liquidity needs, we currently intend to pay dividends in amounts that will continue to allow us to fund acquisitions that we expect to be accretive to earnings and cash flows, as determined by management and our board of directors.

Cash and Investments

We follow a diversified investment approach for our cash and investments by maintaining such funds in accounts or certificates of deposit issued by federally insured financial institutions and debt securities of U.S. Government agencies. We had $19,859,952 of investments as of September 30, 2017. The maturities of these investments were:

Statement of Cash Flows

      The net change in cash and cash equivalents for the nine months ended September 30, 2017 and 2016 were as follows:

Cash flows from operating activities. The cash used in operating activities for the nine months ended September 30, 2017 and 2016 was primarily the result of net losses incurred.

Cash flows from investing activities. For the nine months ended September 30, 2017, the Company’s net cash used in investing activities was $12.7 million compared to $67.4 million used in the nine months ended September 30, 2016. Net cash used in investing activities for the nine months ended September 30, 2017 includes the investment of $53.3 million in mining equipment, processing facilities and mine development, partially funded with the net proceeds received from maturities of investment securities of $40.6 million.

Cash flows from financing activities. Net cash generated from financing activities in the nine months ended September 30, 2017 and 2016 were $29.3 million and $87.7 million respectively. The increase in net cash from financing activities in the nine months ended September 30, 2017 arose from the issuance of common stock in our IPO less offering costs, repayment of debt and distibutions on our Series A preferred units. The increase in the nine months ended September 30, 2016 was primarily attributable to the net proceeds of the issuance of our Series A preferred units.

Capital Requirements

Our primary use of cash currently includes capital expenditures for mine development, construction of our preparation plant and load out facility and for ongoing operating expenses. We expect that we will be required to expend approximately $136.0 million through 2022 to fully develop our current projects. Through September 30, 2017, we have invested approximately $85 million in these projects.

Management believes that current cash and investments on hand, along with cash flow from operations will be sufficient to meet its capital expenditure and operating plans through 2020. We expect to fund any new reserve acquisitions from cash on hand, cash from operations and if needed, future issuances of debt or equity securities.

Critical Accounting Policies and Estimates

There have not been any material changes during the three months ended September 30, 2017, to the methodology applied by management for critical accounting policies previously disclosed in our Annual Report. Please read “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report for further description of the Company’s critical accounting policies.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, and in August 2015 the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. Early adoption of one year prior to the required effective date is permitted. ASU 2014-09 allows adoption using either of two methods: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. The Company plans to adopt this standard on January 1, 2018 and intends to elect the modified retrospective method of adoption. The Company does not anticipate a significant impact on our financial statements and disclosures. Our evaluation is not final and we continue to assess the impact the updated standard will have on our revenue contracts.

In February 2016, the FASB issued ASU 2016-02, Leases, which aims to make leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This ASU is effective for all interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company expects to adopt ASU No. 2016-02 for the fiscal year beginning January 1, 2019 and is in the process of assessing the impact that this new guidance is expected to have on the Company’s results of operations, financial condition and/or financial statement disclosures.

In September 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses. ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently assessing the impact this accounting standard will have on its financial statements and related disclosures.

Off-Balance Sheet Arrangements

As of September 30, 2017, we had no material off-balance sheet arrangements.

In the ordinary course of our business, we are not exposed to market risks, such as those that may arise from changes in interest rates or changes in foreign currency exchange rates or that may otherwise arise. We expect that our sales contracts for our metallurgical coal will be short-term and therefore, we will be exposed to fluctuations in market pricing. 

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.

Changes in Internal Control over Financial Reporting

There were no 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 September 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.   OTHER INFORMATION

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.

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 businesses, financial condition or future results. 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 or our other SEC filings.

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.

The exhibits required to be filed by Item 6 are set forth in the Exhibit Index accompanying this Quarterly Report.

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. 

Index to Exhibits

29