United States Antimony Corporation — Q3 2016 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2016. The company operates antimony businesses in the U.S. and Mexico, precious-metals recovery, and a U.S. zeolite business. It filed as a smaller reporting company and reported 66,866,278 common shares outstanding at November 14, 2016.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $2.847 million | $3.505 million | $9.167 million | $9.853 million |
| Gross profit (loss) | ($42,000) | $232,000 | $355,000 | $221,000 |
| Net income (loss) | ($797,000) | ($136,000) | ($1.142 million) | $106,000 |
| Net loss available to common | ($809,000) | ($148,000) | ($1.179 million) | $70,000 |
Gross margin was approximately negative 1.5% in Q3 and 3.9% for the nine months. Q3 revenue fell about 19% year over year, while nine-month revenue fell about 7%. Antimony sales prices averaged $3.07 per pound in Q3 versus $4.06 a year earlier; pounds sold decreased about 2% in Q3 but increased about 23% for the nine months.
- Cash flow: Nine-month operating cash flow was $412,000, compared with $7,000 in 2015. Investing outflow, primarily capital spending, was $460,000; financing outflow was $42,000. Cash declined $90,000 to $43,000. The company also held $252,000 in certificates of deposit.
- Liquidity: Current assets were $1.718 million and current liabilities $3.214 million, leaving negative working capital of $1.497 million; the current ratio was approximately 0.53. Management cited $202,000 of credit lines, of which $100,000 was drawn, and expected about $150,000 of construction/improvement spending over the next 12 months.
- Debt and obligations: Long-term debt, including current maturities, was $1.883 million; bank notes were $100,000. Hillgrove advances payable were reported as $1.145 million on the balance sheet; the note separately states $1.134 million due at September 30. Additional mine purchase obligations include Soyatal and Guadalupe. Total liabilities were $6.251 million.
Changes and operating performance
- Q3 antimony revenue declined 26% year over year, primarily because of lower prices. Management reported lower production costs from cheaper raw materials and fuel, but said underused Mexican mines and mills continued to generate significant non-production costs.
- Nine-month 2015 net income included a $915,000 vendor credit for prior raw-material overcharges. Excluding this unusual gain, the comparative period was materially weaker than the headline profit suggests.
- Precious-metals revenue rose to $565,000 for the first nine months from $365,000. This included Hillgrove gold sales for which most proceeds were payable to Hillgrove. Zeolite generated $236,000 of nine-month net income, down from $267,000.
- Capital expenditures were $573,000 for the first nine months, versus $3.037 million in 2015, when Mexico expansion spending was substantially higher.
Outlook, risks, and unusual matters
- Management anticipated processing available Hillgrove concentrates through the end of 2016. Hillgrove had suspended Australian mining and could restart; the agreement also permits Hillgrove to suspend or terminate processing. USAC said it could use the furnaces for its own production if Hillgrove could not supply concentrates.
- Management expected Los Juarez production could begin in the second half of 2017, subject to permitting and completion of a cyanide leach circuit at Puerto Blanco. The company explicitly stated it claims no SEC-defined ore reserves at Los Juarez.
- Mexico’s tax authority notified the company on October 25, 2016 that its 2013 audit assessed $781,947 in taxes and penalties. The company recorded an estimated liability of $410,510 for the assessment, plus a U.S. tax liability; it hoped to pay over 24 months and might apply IVA tax deposits. The assessment could be higher, and other Mexican tax years could be audited.
- Management said current cash and expected operating cash flow should cover commitments and debt service for the next 12 months. This outlook should be viewed alongside negative working capital, low cash, and the contingent tax exposure.
- Disclosure controls were determined to be ineffective due to material weaknesses, including inadequate segregation of duties and prior audit adjustments for material misstatements. Management described CFO review procedures, but reported no significant changes in internal control during the quarter.
- Revenue is concentrated: three largest customers represented 36% of Q3 revenue and 37.8% for the nine months. Factored receivables are with recourse, and the CEO personally guarantees the amount due to the factor.
Important facts to verify
- Reconcile Q3 net loss: the financial statements report a $797,057 loss, while MD&A describes approximately $386,000 as net loss; that amount is close to the pre-tax loss and appears not to include the tax provision.
- Reconcile reported Q3 revenue: the statements show $2.847 million, while the MD&A segment/company-wide presentation includes differing Q3 totals. Confirm the correct comparative revenue and year-over-year change.
- Confirm the final Mexican tax assessment, the recorded liability, any settlement terms, and whether further tax years will be audited.
- Track cash generation, funding of planned capital work, debt maturities, and repayment terms for Hillgrove advances and mine purchase obligations.
- Monitor antimony prices, Mexican operating costs and furnace capacity, Hillgrove concentrate availability, and permits and construction needed for Los Juarez.
- Assess remediation of the disclosed control weaknesses and the reliability of future financial reporting.