United States Antimony Corporation — Q3 2011 Form 10-Q
Business context and period. The unaudited consolidated report covers the quarter and nine months ended September 30, 2011. The company operates antimony and zeolite businesses, with antimony operations in the United States and Mexico. Mexico processes material to an intermediate stage; revenue is recorded after finishing in the United States.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $3.332 million | $2.660 million | $9.262 million | $6.165 million |
| Gross profit | $826,326 | $422,413 | $1.349 million | $790,678 |
| Gross margin | 24.8% | 15.9% | 14.6% | 12.8% |
| Operating income | $762,980 | $325,966 | $990,170 | $482,048 |
| Net income | $708,073 | $85,815 | $839,866 | $206,281 |
| Net margin | 21.3% | 3.2% | 9.1% | 3.3% |
| Basic and diluted EPS | $0.01 | Nil | $0.01 | Nil |
Cash flow, liquidity and debt. For the nine months, operating cash flow was $674,816 (prior year $303,362); investing cash use was $1.745 million (prior year $792,351), mainly for property, plant and equipment; financing provided $1.132 million (prior year $349,643), primarily through common-stock sales. Cash rose to $511,070 from $448,861 at year-end 2010. September 30 current assets were $2.981 million and current liabilities $1.520 million, or working capital of approximately $1.461 million. Total debt was $257,209, including $84,012 current, versus $127,796 at December 31, 2010. Capital expenditures were $2.074 million for the nine months.
Changes and operating drivers
- Quarterly revenue increased about 25%; nine-month revenue increased about 50%. Antimony drove the growth: nine-month antimony revenue rose 76%, largely as average selling price increased to $6.49 per pound from $3.58, while pounds sold declined. The filing attributes higher prices to demand and higher production costs to more expensive raw materials.
- Zeolite revenue declined about 29% in Q3 and 17% for the nine months, despite higher average selling prices. Increased production, labor, maintenance and freight costs weighed on results.
- Management attributed much of the Q3 year-over-year earnings improvement to a $769,636 supplier credit relating to an incorrect interpretation of the supply contract and over-remitted ore settlements. The post-period agreement was treated as a recognized subsequent event: $490,443 reduced supplier payables and $279,193 was recorded as an other receivable at September 30 and subsequently applied to purchases.
- Inventories increased to $1.242 million from $143,291 at year-end, primarily reflecting antimony ore, metal and oxide. Property, plant and equipment increased to $5.622 million from $3.845 million.
Outlook, risks and unusual items
- The filing gives no quantified financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Antimony sales were concentrated: three customers accounted for approximately 62% of antimony sales in Q3 and the first nine months of 2011. The filing warns that loss of key customers could adversely affect the business.
- Mexico recorded no segment revenue while incurring antimony costs; nine-month Mexico antimony gross loss was $1.034 million. The filing does not provide a clear timetable for reaching commercial sales there.
- Disclosure controls were deemed ineffective because of material weaknesses, including inadequate segregation of duties and material audit adjustments identified in the prior year-end audit. The company reported hiring a CPA as CFO and planned independent review of material transactions and consultation with experts on complex matters.
- Environmental reclamation and remediation costs accrued were $107,500; management says potential losses above accruals cannot currently be reasonably estimated. A royalty lawsuit was settled, reducing accrued liabilities by approximately $28,000. Unsettled MSHA proposed assessments of $73,225 were accrued.
- At September 30, common shares issued and outstanding were 59,349,300, while shares outstanding plus reserved exceeded the 60 million authorized by 449,300. Series D preferred stock is convertible into common shares subject to authorized-share availability. Management said it did not plan near-term common-stock sales and intended to pursue an increase in authorized shares in Q4 2011.
Important facts for investors to verify
- Whether the supplier credit was fully realized and how much of Q3 profitability it represents; assess results excluding this unusual benefit.
- Progress in remediating control weaknesses and whether subsequent filings demonstrate effective controls.
- Plans and approvals for additional authorized shares, including implications for preferred-stock conversion and potential dilution.
- Antimony customer concentration, raw-material costs, and the timing and economics of Mexico operations.
- Changes in environmental obligations, the accrued MSHA assessments, and any effects of the royalty settlement.