Ramaco Resources, Inc. - Quarter Report: 2019 June (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

For the quarterly period ended June 30, 2019

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒    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 August 3, 2019, the registrant had 40,942,581 shares of common stock outstanding.

 

 

 

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

Forward-looking statements may include statements about:

 

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 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 Stockholders’ Equity

 

 

 

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

NOTE 1—DESCRIPTION OF BUSINESS

Ramaco Resources, Inc. is a Delaware corporation formed in October 2016. Our principal corporate offices are located in Lexington, Kentucky. Through our wholly-owned subsidiary, Ramaco Development, LLC, we are an operator and developer of high-quality, low-cost metallurgical coal in southern West Virginia, southwestern Virginia, and southwestern Pennsylvania.

Pursuant to the terms of a corporate reorganization (“Reorganization”) that was completed in connection with the closing of our initial public offering (“IPO”) on February 8, 2017, all the interests in Ramaco Development, LLC were exchanged for our newly issued common shares and as a result, Ramaco Development, LLC became our wholly-owned subsidiary. The terms “the Company,” “we,” “us,” “our,” and similar terms when used in the present tense, prospectively or for periods since our Reorganization, refer to Ramaco Resources, Inc. and its subsidiaries, and for historical periods prior to our Reorganization refer to Ramaco Development LLC and its subsidiaries. Intercompany balances and transactions between consolidated entities are eliminated.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

Revenue Recognition—Our primary source of revenue is from the sale of coal through contracts with steel and coke producers usually having durations of one year or less. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014‑09, Revenue from Contracts with Customers. This new standard supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014‑09 is to recognize revenues in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted ASU 2014‑09, Revenue from Contracts with Customers, on January 1, 2018 using the modified retrospective method. Before adoption of the new standard, revenue was recognized when risk of loss passed to our customer. The timing of revenue recognition for our coal sales remained consistent between the new and previous standards. There was no material impact on our consolidated financial statements from adopting the new standard but we have expanded disclosure about our revenues.

For periods subsequent to January 1, 2018, revenue is recognized when performance obligations under the terms of a contract with our customers are satisfied. This occurs when control of the coal is transferred to our customers. For coal shipments to domestic customers via rail or truck, control is generally transferred when the railcar or truck is loaded. Control is transferred for export coal shipments to customers via ocean vessel when the vessel is loaded at the port.

Our coal sales generally include up to 90‑day payment terms following the transfer of control of the goods to our customer. In the case of some of our foreign customers, our contracts also require that letters of credit are posted to

secure payment of any outstanding receivable to the Company. We do not include extended payment terms in our contracts. Our contracts with customers typically provide for minimum specifications or qualities of the coal we deliver. Variances from these specifications or qualities are settled by means of price adjustments. Generally, these price adjustments are settled within 30 days of delivery and are insignificant.

Earnings per Share—Basic earnings per share is calculated using our weighted-average outstanding common shares. Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock option awards as determined under the treasury stock method.

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

We invested excess cash amounts before its planned expenditure for capital projects in highly-rated securities with the primary objective of achieving competitive low risk interest rate return, while 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. The difference between the carrying amount and fair value of these securities was not material.

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.

Concentrations—During the three and six months ended June 30, 2019, sales to four customers accounted for approximately 55% of total revenue in each period. The total balance due from these four customers at June 30, 2019 was approximately 69% of total accounts receivable. During the three and six months ended June 30, 2018 sales to three  customers accounted for approximately 79% and 75% of total revenue, respectively.

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

 

NOTE 3—PROPERTY, PLANT AND EQUIPMENT

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

 

 

During the three months ended June 30, 2019, depreciation expense related to our plant and equipment totaled $3.4 million and amortization of our capitalized development costs totaled $1.4 million. During the three months ended June

30, 2018, depreciation expense related to our plant and equipment totaled $2.3 million and amortization of our capitalized development costs totaled $0.6 million.

During the six months ended June 30, 2019, depreciation expense related to our plant and equipment totaled $6.4 million and amortization of our capitalized development costs totaled $2.5 million. During the six months ended June 30, 2018, depreciation expense related to our plant and equipment totaled $4.4 million and amortization of our capitalized development costs totaled $1.0 million.

Capitalized amounts related to coal reserves at properties where we are not currently engaged in mining operations totaled $7.2 million as of June 30, 2019 and $5.5 million as of December 31, 2018.

 

NOTE 4—DEBT

Credit Facility

On November 2, 2018 the Company (together with its subsidiaries, and collectively the “Borrower”) entered into a Credit and Security Agreement (the “Credit Facility”) with KeyBank National Association (“KeyBank”). The Credit Facility consists of a $10.0 million term loan (the “Term Loan”) and up to $30.0 million revolving line of credit, including $1.0 million letter of credit availability (the “Revolving Credit Facility”). To secure the Credit Facility the Company pledged all personal property assets of Borrower, including, but not limited to accounts receivable, coal inventory, and certain surface mining equipment. Real property and improvements are excluded from the collateral package and are not encumbered in connection with the Credit Facility. The Company used the Credit Facility to repay existing notes payable and provide working capital. The Credit Facility has a maturity date of November 2, 2021.

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

The outstanding principal balance of the Term Loan is required to be repaid in monthly installments of approximately $0.4 million until fully repaid. As of June 30, 2019, the outstanding principal balance of the Term Loan was $7.1 million and the carrying amount was $7.0 million. As of December 31, 2018, the outstanding principal balance of the Term Loan was $9.6 million and the carrying amount was $9.5 million. As of June 30, 2019,  $8.0 million was outstanding on the Revolving Credit Facility. There was no outstanding balance on the Revolving Credit Facility at December 31, 2018.

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

 

NOTE 5—EQUITY

As of June 30, 2019, we had 40,942,581 shares of common stock outstanding.

Stock-Based Compensation

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

Total compensation costs recognized for all stock-based compensation was $1.1 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively.

Total compensation costs recognized for all stock-based compensation was $2.0 million and $1.2 million for the six months ended June 30, 2019 and 2018, respectively.

Share Options – A total of 937,424 options for the purchase of shares of the Company’s common stock were granted to two executives on August 31, 2016 at a purchase price of $5.34 per share. Stock-based compensation expense totaling $2.1 million was recognized during 2017 for the accelerated vesting of these options in our IPO. The options have a ten-year term from the grant date. The options remain outstanding and unexercised and were not in-the-money at June 30, 2019.

Restricted Shares—We grant restricted stock to certain senior executives, key employees and directors. The shares vest over one to three years from the date of grant. During the vesting period, the participants have voting rights and may receive dividends, but the shares may not be sold, assigned, transferred, pledged or otherwise encumbered. Additionally, granted but unvested shares are forfeited upon termination of employment, unless an employee enters into another written arrangement with the Company. The fair value of the restricted shares on the date of the grant is amortized ratably over the service period. Compensation expense related to these awards totaled $1.1 million and $2.0 million for the three and six months ended June 30, 2019, respectively. As of June 30, 2019, there was $6.6 million of total unrecognized compensation cost related to unvested restricted stock to be recognized over a weighted-average period of 1.6 years.

The following table summarizes restricted awards outstanding as of June 30, 2019, as well as activity during the period:

 

 

 

NOTE 6—COMMITMENTS AND CONTINGENCIES

Surety Bond

As of June 30, 2019,  our asset retirement obligations totaled $13.2 million and we had total corresponding reclamation bonding requirements of $12.8 million, which were supported by surety bonds.

Purchase Commitments

We secure the ability to transport coal through rail contracts and export terminals that are sometimes funded through take-or-pay arrangements. As of June 30, 2019,  commitments under take-or-pay arrangements totaled approximately $2.3 million through March 31, 2020.

Litigation

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

 

NOTE 7—REVENUES

Our revenues are derived from contracts for the sale of coal which is recognized at the point in time control is transferred to our customer. Generally, domestic sales contracts have terms of about one year and the pricing is typically

fixed. Export sales have spot or term contracts and pricing can either be by fixed-price or a price derived against index-based pricing mechanisms. Disaggregated information about our revenues is presented below:

 

 

As of June 30, 2019, the Company has outstanding performance obligations for the remainder of 2019 of approximately 0.8 million tons for contracts having fixed pricing and 0.1 million tons for contracts to export customers with index-based pricing mechanisms. Additionally, the Company has outstanding performance obligations beyond 2019 of approximately 0.1 million tons for export contracts with index-based pricing mechanisms.

 

NOTE 8—INCOME TAXES

Income tax provisions for interim quarterly periods are based on an estimated annual effective income tax rate calculated separately from the effect of significant, infrequent or unusual items related specifically to interim periods. Income tax expense for the three months ended June 30, 2019 was $2.2 million, an effective tax rate of 17.0%, compared to $0.6 million, an effective tax rate of 5.9% for the three months ended June 30, 2018.     Income tax expense for the six months ended June 30, 2019 was $3.5 million, an effective tax rate of 16.8% compared to expense of $1.4 million, an effective tax rate of 8.2% for the six months ended June 30, 2018. The primary difference between the statutory rate of 21% and the actual rate is related to permanent differences for state income taxes, non-deductible expenses and the difference in depletion expense between U.S. GAAP and federal income tax purposes.

 

 

NOTE 9—EARNINGS PER SHARE

The following is the computation of basic and diluted EPS for the three and six months ended June 30, 2019 and 2018. EPS is reported under the treasury stock method.

 

 

 

NOTE 10—RELATED PARTY TRANSACTIONS

Mineral Lease and Surface Rights Agreements

Much of the coal reserves and surface rights that we control were acquired through a series of mineral leases and surface rights agreements with Ramaco Coal, LLC, a related party. Payments of minimum royalties and throughput payments commenced in 2017 pursuant to the terms of the agreements. Under these agreements, minimum royalties are paid in arrears each month to the extent that the earned production royalties for such month are less than the required

minimums. Amounts due to Ramaco Coal, LLC of $0.8 million and $2.9 million at June 30, 2019 and December 31, 2018, respectively, are included in Accounts Payable in the condensed consolidated balance sheet and represent production royalty payables.

On-going Administrative Services

Under a Mutual Services Agreement dated December 22, 2017 but effective as of March 31, 2018, the Company and Ramaco Coal, LLC agreed to share the services of certain party’s employees. Each party will pay the other a fee on a quarterly basis for such services calculated as the annual base salary of each employee providing services multiplied by the percentage of time each employee spent providing services for the other party. The services will be provided for 12‑month terms, but may be terminated by either party at the end of any 12‑month term by providing written notice at least 30 days prior to the end of the then-current term. During the six months ended June 30, 2019, the Company billed $4,000 to Ramaco Coal, LLC for use of services.   

 

* * * * *

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

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

Business Overview

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

We sell substantially all of our metallurgical coal production to steel producers. Metallurgical coal, which is converted to coke, is a critical input in the steel production process. Metallurgical coal markets remained strong in the second quarter of 2019, as economic growth continued to support international coking coal prices. However, subsequent to the second quarter of 2019, certain China ports began to put restrictions on imported coal. Between these restrictions and the ongoing trade dispute between China and the U.S., metallurgical coal prices dropped meaningfully at the start of the third quarter of 2019. While we believe longer-term supply/demand dynamics generally remain tight, implications for metallurgical coal markets and the global economy as a whole remain uncertain.

Second Quarter 2019 Overview

Results of Operations

 

 

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

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

 

 

Coal sales in the second quarter of 2019 were approximately $0.5 million higher than in the second quarter of 2018 due to higher realized prices, offset partially by decreased sales of purchased coal.

Cost of sales. Our cost of sales totaled $43.2 million for the three months ended June 30, 2019 as compared with $47.9 million for the same period in 2018.  This decrease was primarily driven by lower purchased-coal sales volume, partially offset by increased costs per ton.

The total cash cost per ton sold (FOB mine) for the second quarter of 2019  was approximately $71 for our produced coal and approximately $122 for coal we purchased from third parties. The $71  cash costs per ton for produced coal in the second quarter of 2019  were up from approximately $56 in the second quarter of 2018. The increase was partially due to sales-related costs, such as royalties and severance taxes, due to higher sales prices in the 2019 period. Temporary adverse roof conditions at the Eagle mine during the 2019 period, as well as a slight increase in the percentage of

production from the Berwind Development Mine also contributed to increased overall cost per ton on Company produced coal.

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

Depreciation and amortization. Our depreciation and amortization costs for the second quarter of 2019 were  $4.8 million as compared with $3.0 million for the second quarter of 2018. Increased depreciation and amortization costs result from our growth and expanded operations over the past year.

Selling, general and administrative. Selling, general and administrative expenses were $4.7 million for the thre months ended June 30, 2019 as compared with $3.7 million for the same period in 2018. This increase was primarily due to an increase of $0.4 million in stock-based compensation expense.  The majority of the Company’s stock-based compensation awards vest over a three-year period and expense is recognized over that vesting period. As a newly public company in 2017, we implemented a stock-based compensation program. Once our stock-based compensation program has been in place for three years, we will typically have three tranches of awards expensed annually.

Other income. Other income was $0.2 million for the second quarter of 2019, as compared with $0.5 million for the second quarter of 2018. This decrease was primarily due to a decrease in rail rebates received during the second quarter of 2019.

Interest expense, net. Interest expense, net was $0.3 million in both the three months ended June 30, 2019 and 2018.

Income tax expense. For the three months ended June 30, 2019, we recognized income tax expense of $2.2 million, or an effective income tax rate of 17.0%.  For the three months ended June 30, 2018 we recognized tax expense of $0.6 million, or an effective rate of 5.9%. Our estimated full year effective tax rate for 2019 is comprised of the expected statutory tax expense offset by tax benefits for percentage depletion. Cash taxes paid for 2019 are expected to be less than $0.4 million. Significant depletion and depreciation expense and utilization of net operating loss carryforwards combine to substantially reduce our expected cash taxes.

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

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

 

Coal sales in the six months ended June 30, 2019 were approximately $2.0 million higher than in the six months ended June 30, 2018 due to higher realized prices, offset partially by decreased sales of purchased coal.

Cost of sales. Our cost of sales totaled $84.2 million for the six months ended June 30, 2019 as compared with $92.2 million for the same period in 2018.  This decrease was primarily driven by lower purchased-coal sales volume, partially offset by increased costs per ton.

The total cash cost per ton sold (FOB mine) for the first half of 2019 was approximately $69 for our produced coal and approximately $114 for coal we purchased from third parties. The $69 cash costs per ton for produced coal in the second quarter of 2019 were up from approximately $60 in the first half of 2018. The increase was partially due to sales-related costs, such as royalties and severance taxes, due to higher sales prices in the 2019 period. Temporary adverse roof conditions at the Eagle mine during the second quarter of 2019, as well as a slight increase in the percentage of production from the Berwind Development Mine also contributed to increased overall cost per ton on Company produced coal.

Asset retirement obligation accretion. Asset retirement obligation accretion was $0.3 million and $0.2 million for the six months ended June 30, 2019 and 2018, respectively.

Depreciation and amortization. Our depreciation and amortization costs for the six months ended June 30, 2019 were $8.9 million as compared with $5.4 million for the six months ended June 30, 2018. Increased depreciation and amortization costs resulted from our growth and expanded operations over the past year.

Selling, general and administrative. Selling, general and administrative expenses were $8.7 million for the six months ended June 30, 2019 as compared with $7.1 million for the same period in 2018. This increase was primarily due to an increase of $0.7 million in stock-based compensation expense.  The majority of the Company’s stock-based compensation awards vest over a three-year period and expense is recognized over that vesting period. As a newly public company in 2017, we implemented a stock-based compensation program. Once our stock-based compensation program has been in place for three years, we will typically have three tranches of awards expensed annually.

Other income. Other income was $0.5 million for the six months ended June 30, 2019, as compared with $1.0 million for the same period in 2018. This decrease was primarily due to a decrease in rail rebates received during the 2019 period.

Interest expense, net. Interest expense, net was $0.6 million for the six months ended June 30, 2019 as compared with $0.4 million in the prior year period. This increase was driven by a larger amount of outstanding debt during the current year period as compared to the prior year period.

Income tax expense. For the six months ended June 30, 2019, we recognized income tax expense of $3.5 million, or an effective income tax rate of 16.8%. Our estimated full year effective tax rate for 2019 is comprised of the expected statutory tax expense offset by tax benefits for percentage depletion. Cash taxes paid for 2019 are expected to be less than $0.4 million. Significant depletion and depreciation expense and utilization of net operating loss carryforwards combine to substantially reduce our expected cash taxes. For the six months ended June 30, 2018 we recognized tax expense of $1.4 million, or an effective rate of 8.2%.

 

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA is used as a supplemental non-GAAP financial measure by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Adjusted EBITDA is useful because it allows us to more effectively evaluate our operating performance.

We define Adjusted EBITDA as net income (loss) plus net interest expense, stock-based compensation, depreciation and amortization expenses and any transaction related costs. A reconciliation of income (loss), net of income taxes, to Adjusted EBITDA is included below. Adjusted EBITDA is not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.

The table below shows how we calculate Adjusted EBITDA:

 

 

Non-GAAP revenue per ton

Non-GAAP revenue per ton (FOB mine) is calculated as coal sales revenues less transportation costs, divided by tons sold. We believe revenue per ton (FOB mine) provides useful information to investors as it enables investors to compare revenue per ton generated by the Company against similar measures made by other publicly-traded coal companies and more effectively monitor changes in coal prices from period to period excluding the impact of transportation costs which are beyond our control. The adjustments made to arrive at these measures are significant in understanding and assessing the Company’s financial condition.  Revenue per ton sold (FOB mine) is not a measure of financial performance in accordance with U.S. GAAP and therefore should not be considered as an alternative to revenues under U.S. GAAP.  The table below shows how we calculate Non-GAAP revenue per ton: