UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020.

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                 TO                 

COMMISSION FILE NUMBER 1-13627

GOLDEN MINERALS COMPANY


(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE

26-4413382

(STATE OR OTHER JURISDICTION OF

(I.R.S. EMPLOYER

INCORPORATION OR ORGANIZATION)

IDENTIFICATION NO.)

350 INDIANA STREET, SUITE 650

GOLDEN, COLORADO

80401

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(ZIP CODE)

(303) 839-5060


(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Securities registered pursuant to Section 12(b) of the Act:

Tile of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 par value

AUMN

NYSE American

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 (§ 232.405 of this chapter) 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, 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:

Large accelerated filer 

Accelerated filer 

Non-accelerated filer  

Smaller reporting company 

Emerging growth company 

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 Act).  Yes     No  

At August 4, 2020, 148,712,652 shares of common stock, $0.01 par value per share, were issued and outstanding.


GOLDEN MINERALS COMPANY

FORM 10-Q

QUARTER ENDED June 30, 2020

INDEX

2


PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

GOLDEN MINERALS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in United States dollars)

(Unaudited)

June 30,

December 31,

    

2020

    

2019

 

(in thousands, except share data)

 

Assets

Current assets

Cash and cash equivalents (Note 5)

$

3,557

$

4,593

Lease receivables

 

353

 

448

Inventories, net (Note 8)

 

186

 

231

Derivative at fair value (Note 7)

128

254

Prepaid expenses and other assets (Note 6)

705

669

Total current assets

 

4,929

 

6,195

Property, plant and equipment, net (Note 10)

 

5,471

 

6,031

Other long term assets (Note 11)

 

1,013

 

1,131

Total assets

$

11,413

$

13,357

Liabilities and Equity

Current liabilities

Accounts payable and other accrued liabilities (Note 12)

$

1,152

$

2,127

Deferred revenue, current (Note 19)

227

472

Debt - related party (Note 13)

1,025

Other current liabilities (Note 14)

 

870

 

1,824

Total current liabilities

 

3,274

 

4,423

Asset retirement and reclamation liabilities (Note 15)

 

3,040

 

2,839

Other long term liabilities (Note 14)

 

412

 

494

Total liabilities

 

6,726

 

7,756

Commitments and contingencies (Note 22)

Equity (Note 18)

Common stock, $.01 par value, 200,000,000 shares authorized; 128,176,731 and 106,734,938 shares issued and outstanding respectively

 

1,282

 

1,067

Additional paid in capital

 

525,844

 

521,314

Accumulated deficit

 

(522,439)

 

(516,780)

Shareholders' equity

 

4,687

 

5,601

Total liabilities and equity

$

11,413

$

13,357

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

3


GOLDEN MINERALS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Expressed in United States dollars)

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

  

2020

    

2019

  

2020

  

2019

(in thousands except per share data)

(in thousands, except per share data)

Revenue:

Oxide plant lease (Note 19)

$

1,224

$

1,976

$

2,420

$

3,908

Total revenue

1,224

1,976

2,420

3,908

Costs and expenses:

Oxide plant lease costs (Note 19)

(420)

(613)

(984)

(1,210)

Exploration expense

 

(824)

 

(1,328)

 

(2,455)

 

(2,183)

El Quevar project expense

 

(245)

 

(686)

 

(493)

 

(1,001)

Velardeña care and maintenance costs

 

(192)

 

(452)

 

(655)

 

(969)

Administrative expense

 

(767)

 

(969)

 

(1,930)

 

(2,043)

Stock based compensation

 

(614)

 

(89)

 

(666)

 

(653)

Reclamation expense

 

(62)

 

(55)

 

(121)

 

(114)

Other operating (expense) income, net

 

(106)

 

71

 

(102)

 

179

Depreciation and amortization

 

(265)

 

(270)

 

(544)

 

(544)

Total costs and expenses

 

(3,495)

 

(4,391)

 

(7,950)

 

(8,538)

Loss from operations

 

(2,271)

 

(2,415)

 

(5,530)

 

(4,630)

Other expense:

Interest and other expense, net (Note 20)

 

(46)

 

(43)

 

(73)

 

(141)

Loss on foreign currency

 

(6)

 

 

(56)

 

(38)

Total other loss

(52)

(43)

(129)

(179)

Loss from operations before income taxes

 

(2,323)

 

(2,458)

 

(5,659)

 

(4,809)

Income taxes (Note 17)

Net loss

$

(2,323)

$

(2,458)

$

(5,659)

$

(4,809)

Net loss per common share — basic

Loss

$

(0.02)

$

(0.03)

$

(0.05)

$

(0.05)

Weighted average Common Stock outstanding - basic (1)

 

124,134,135

 

97,144,467

 

115,690,717

 

96,466,982


(1)Potentially dilutive shares for loss periods have not been included because to do so would be anti-dilutive.

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

4


GOLDEN MINERALS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in United States dollars)

(Unaudited)

Six Months Ended

 

June 30,

    

2020

    

2019

 

(in thousands)

 

Cash flows from operating activities:

Net cash used in operating activities (Note 21)

$

(6,113)

$

(1,785)

Cash flows from investing activities:

Proceeds from sale of assets

 

 

104

Acquisitions of property, plant and equipment

 

(2)

 

(27)

Net cash provided by (used in) investing activities

$

(2)

$

77

Cash flows from financing activities:

Proceeds from issuance of common stock, net of issuance costs

 

4,079

 

544

Proceeds from related party loan

1,000

Net cash from financing activities

$

5,079

$

544

Net decrease in cash and cash equivalents

 

(1,036)

 

(1,164)

Cash and cash equivalents, beginning of period

 

4,593

 

3,293

Cash and cash equivalents, end of period

$

3,557

$

2,129

See Note 21 for supplemental cash flow information.

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

5


GOLDEN MINERALS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Expressed in United States dollars)

(Unaudited)

    

    

    

    

    

    

 

 

Additional

 

Common Stock

Paid-in

Accumulated

Total

 

Shares

Amount

Capital

Deficit

Equity

 

(in thousands except share data)

 

Balance, December 31, 2018

 

95,620,796

$

955

$

517,806

$

(511,124)

$

7,637

Stock compensation accrued and shares issued for vested stock awards (Note 18)

312,000

3

426

429

Modification of previously awarded KELTIP Units (Note 18)

583

583

Shares issued under the at-the-market offering agreement, net (Note 18)

33,995

1

11

12

Shares issued under the Lincoln Park commitment purchase agreement, net (Note 18)

2,113,642

21

507

528

Net loss

 

 

 

(4,809)

 

(4,809)

Balance, June 30, 2019

98,080,433

$

980

$

519,333

$

(515,933)

$

4,380

Adjustment related to correction of immaterial error (Note 2)

(267)

(267)

Adjusted Balance, June 30, 2019

98,080,433

980

519,333

(516,200)

4,113

Balance, December 31, 2019

106,734,279

$

1,067

$

521,314

$

(516,780)

$

5,601

Stock compensation accrued (Note 18)

666

666

Shares issued under the at-the-market offering agreement, net (Note 18)

823,452

9

214

223

Shares issued under the Lincoln Park commitment purchase agreement, net (Note 18)

900,000

9

207

216

Subscription agreement (Note 18)

4,719,207

47

882

929

Offering and private placement agreement (Note 18)

15,000,000

150

2,561

2,711

Net loss

(5,659)

(5,659)

Balance, June 30, 2020

128,176,938

$

1,282

$

525,844

$

(522,439)

$

4,687

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

6


GOLDEN MINERALS COMPANY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in United States dollars)

(Unaudited)

1.     Basis of Preparation of Financial Statements and Nature of Operations

Golden Minerals Company (the “Company”), a Delaware corporation, has prepared these unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). The interim condensed consolidated financial statements do not include all disclosures required by GAAP for annual financial statements, but in the opinion of management, include all adjustments necessary for a fair presentation.  Certain prior period amounts have been reclassified to conform to current classifications. Interim results are not necessarily indicative of results for a full year; accordingly, these interim financial statements should be read in conjunction with the annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and filed with the SEC on February 27, 2020.

The Company is a mining company, holding a 100% interest in the Velardeña and Chicago precious metals mining properties and associated oxide and sulfide processing plants in the state of Durango, Mexico (the “Velardeña Properties”), a 100% interest in the El Quevar advanced exploration silver property in the province of Salta, Argentina (subject to the terms of the April 9, 2020, earn-in agreement (the “Earn-in Agreement”) pursuant to which Barrick Gold Corporation (“Barrick”) has the option to earn a 70% interest in the El Quevar project (see Notes 11 and 19), and a diversified portfolio of precious metals and other mineral exploration properties located primarily in or near historical precious metals producing regions of Argentina, Nevada and Mexico, including the 100%-owned Rodeo property in Durango State, Mexico. The Velardeña Properties and the El Quevar advanced exploration property are the Company’s only material properties.

The Company remains focused on commencing mining operations at the Rodeo property as well as evaluating and searching for other mining opportunities in North America (including Mexico) with near term prospects of mining, and particularly for properties within reasonable haulage distances of our processing plants at the Velardeña Properties. The Company is also focused on advancing our El Quevar exploration property in Argentina through the Earn-in Agreement with Barrick and on advancing selected properties in our portfolio of approximately 12 properties, located in Mexico, Nevada and Argentina. The Company is also reviewing strategic opportunities, focusing primarily on development or operating properties in North America, including Mexico.

During November 2015 the Company suspended mining and sulfide processing activities at its Velardeña Properties in order to conserve the asset until the Company is able to develop mining and processing plans that at then current prices for silver and gold indicate a sustainable positive operating margin (defined as revenues less costs of sales) or the Company is able to locate, acquire and develop alternative mineral sources that could be economically mined and transported to the Velardeña Properties for processing.  The Company maintains a core group of employees at the Velardeña Properties, most of whom have been assigned to operate and provide administrative support for the oxide plant, which is leased to a subsidiary of Hecla Mining Company (“Hecla”) (see Note 19). The employees at the Velardeña Properties also include an exploration group and an operations and administrative group to continue to advance the Company’s plans in Mexico, including the start-up of mining operations at the Rodeo property, and to provide oversight for corporate compliance activities as well as maintaining and safeguarding the longer-term value of the Velardeña Properties assets.

The Company is considered an exploration stage company under SEC criteria since it has not yet demonstrated the existence of proven or probable mineral reserves, as defined by SEC Industry Guide 7, at any of its properties. Until such time, if ever, that the Company demonstrates the existence of proven or probable reserves pursuant to SEC Industry Guide 7, we expect to remain as an exploration stage company.

2.

Correction of Immaterial Error – Income Taxes

In the third quarter 2019, the Company became aware that it had failed to timely file withholding tax returns and pay taxes that were due at the end of 2017 and 2018 relating to return of capital distributions made to the Company by one of the Company’s wholly-owned subsidiaries (see Note 17).  The effect of correcting this error was to reduce beginning retained earnings by $267,000 with $154,000 and $113,000 accruing to 2018 and 2019, respectively. The $267,000

7


adjustment to retained earnings is reflected in the accompanying Condensed Consolidated Statements of Changes in Equity.  

The Company evaluated the materiality of the error described above from a qualitative and quantitative perspective. Based on such evaluation, the Company concluded that the correction would not be material to any individual prior period, nor did it have an effect on the trend of financial results, taking into account the requirements of the SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in 2019 Financial Statements (“SAB 108”).

3.     New Accounting Pronouncements

During the first quarter 2020 the Company adopted ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. As the Company’s principle credit risk is related to its Lease Receivables the adoption of this update did not result in a material impact on the Company’s consolidated financial position or results of operations.

During the first quarter 2019 the Company adopted ASU 2016-02, “Leases” (“ASU 2016-02”) and ASU No. 2018-11 “Leases (Topic 842)” (“ASU 2018-11”), which require lessees to recognize a right-of-use asset and a lease liability for all leases with terms greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For a lessor, the accounting applied is largely unchanged from previous guidance. The Company currently leases administrative offices in the U.S. and in several foreign locations under lease agreements that typically exceed one year.  The Company has elected the modified retrospective method of adopting ASU 2016-02 (see Note 4).  

4.     Change in Accounting Principle

Leases

Effective January 1, 2019 the Company adopted ASU 2016-02 and ASU 2018-11, which requires lessees to recognize a right-of-use asset and a lease liability for all leases with terms greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For a lessor, the accounting applied is largely unchanged from previous guidance. The Company currently leases administrative offices in the U.S. and in several foreign locations under lease agreements that typically exceed one year. The Company has elected the modified retrospective method of adopting ASU 2016-02 per Topic 842. The Company has elected to apply several practical expedients available under the application of ASU 2016-02 and ASU 2018-11, which allowed the Company to forego reassessing the classification of existing or expiring leases, evaluating whether any existing or expiring contracts contain leases or reassessing previously recorded indirect costs.  The Company did not elect the practical expedient permitting the combination of lease and non lease components of the contract.  The adoption of ASU 2016-02 and ASU 2018-11 at January 1, 2019 resulted in only a negligible difference to amounts already recorded by the Company in its Consolidated Balance Sheets as of December 31, 2018, and as a result the Company did not record an adjustment to the beginning balance of retained earnings at January 1, 2019, as required under the modified retrospective method.

The Company took possession of new office space and began a new long-term lease for its principal headquarters office with an effective commencement date of June 1, 2019. The new office lease will expire five years and eight full calendar months following the commencement date. There are no options to extend the lease beyond the stated term. The Company recorded a right of use asset of approximately $465,000 and a lease liability of approximately $450,000 in the second quarter of 2019 based on the net present value of the future lease payments discounted at 9.5%, which represents the Company’s incremental borrowing rate for purposes of applying the guidance of Topic 842. As required, the Company will recognize a single lease cost on a straight-line basis.

The Company also has long-term office leases in Mexico and Argentina that expired in 2019 and recorded a combined lease liability of approximately $45,000 and combined right of use asset of approximately $45,000 relating to both of those leases at January 1, 2019. In November 2019, the Company renewed its Mexican office lease for four years and recorded a right of use asset and lease liability of approximately $174,000. In December 2019, the Company also

8


renewed its Argentina office lease for two years and recorded a right of use asset and lease liability of approximately $18,000.

The Company has included its right of use assets for the office leases described above in “Other long-term assets” (Note 11) and its office lease liabilities in “Other liabilities”, short term and long term (Note 14), in the Company’s Consolidated Balance Sheets for the periods ended June 30, 2020 and December 31, 2019.

5.     Cash and Cash Equivalents and Short-term Investments

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments include investments with maturities greater than three months, but not exceeding 12 months, or highly liquid investments with maturities greater than 12 months that the Company intends to liquidate during the next 12 months for working capital needs.

Credit Risk

The Company invests substantially all of its excess cash with high credit-quality financial institutions or in U.S. government or debt securities.  Credit risk is the risk that a third party might fail to fulfill its performance obligations under the terms of a financial instrument. For cash and equivalents and investments, credit risk represents the carrying amount on the balance sheet. The Company mitigates credit risk for cash and equivalents and investments by placing its funds and investments with high credit-quality financial institutions, limiting the amount of exposure to each of the financial institutions, monitoring the financial condition of the financial institutions and investing only in government and corporate securities rated “investment grade” or better.  The Company invests with financial institutions that maintain a net worth of not less than $1 billion and are members in good standing of the Securities Investor Protection Corporation.

6.     Prepaid Expenses and Other Assets

Prepaid expenses and other current assets at June 30, 2020 and December 31, 2019 consist of the following:

    

June 30,

    

December 31,

2020

    

2019

(in thousands)

 

Prepaid insurance

$

389

$

494

Recoupable deposits and other

 

316

 

175

$

705

$

669

The 2020 recoupable deposits and other includes a receivable from Barrick for reimbursement of costs of approximately $0.1 million related to the Earn-in Agreement (see Note 10).

7.     Derivative at Fair Value

On December 3, 2019 the Company entered into an amendment to the plant lease agreement with Hecla, reducing the variable per tonne fee contained in the lease agreement from $22.00 to $11.00. Under certain silver price and delivered ore head grade limits, as fully discussed in Note 19, the variable per tonne fee could be increased back to the previous $22.00 per tonne. Pursuant to ASC Topics 815-Derivatives and Hedging (“ASC 815”) and 842-Leases (“ASC 842”), arrangements with variable lease payments must be evaluated to assess whether they contain embedded derivatives. If embedded derivatives are not “clearly and closely related” to the lease contract, they must be bifurcated and accounted for separately from the host contract. The Company determined that the potential for the Company to receive an additional $11.00 variable per tonne fee if certain conditions relating to the silver price and delivered ore head grades are met does not qualify for the “clearly and closely related” exception, and as a result, the potential additional $11.00 variable per tonne fee constitutes a derivative that must be valued and accounted for apart from the host lease contract. Per the guidance of ASC 842, the Company has determined that the amendment to the lease agreement constituted a modification that must be accounted for as a new lease commencing on December 2, 2019, the date the amendment was agreed upon by both parties and expiring on December 31, 2020. The Company is treating the fair value of the derivative received at the time of the modification to the lease agreement as an upfront lease payment that will be amortized over the remaining life of the lease on a straight line basis (see Note 16 for a discussion of the valuation method used to compute the fair value of the derivative). At June 30, 2020 and December 31, 2019, the Company had recorded a “Derivative at fair value” asset of approximately $128,000 and approximately $254,000, respectively. At June 30, 2020 and December 31, 2019, the

9


Company had also recorded “Deferred Revenue” of approximately $90,000 and $180,000, related to the amended lease agreement. At June 30, 2020 the Company recognized a reduction to “Revenue - plant lease” on the Company’s Condensed Consolidated Statements of Operations and a decrease to the derivative of approximately $125,000 related to the change in the fair value of the derivative between the December 31, 2019 and June 30, 2020. During the first six months of 2020, the Company also recognized approximately $90,000 “Revenue - plant lease” on the Company’s Condensed Consolidated Statements of Operations related to the amortization of deferred revenue.

8.     Inventories, net

Inventories at the Velardeña Properties at June 30, 2020 and December 31, 2019 consist of the following:

June 30,

December 31,

 

    

2020

    

2019

 

(in thousands)

Material and supplies

$

186

$

231

$

186

$

231

The material and supplies inventory at June 30, 2020 and December 31, 2019 is reduced by a $0.2 million obsolescence allowance.

9.

Value added tax receivable, net

The Company has recorded value added tax (“VAT”) paid in Mexico and related to the Velardeña Properties as a recoverable asset. Mexico law allows for certain VAT payments to be recovered through ongoing applications for refunds. At June 30, 2020, the Company has also recorded approximately $23,000 of VAT receivable as a reduction to VAT payable in Mexico, which appears in “Accounts payable and other accrued liabilities” on the Condensed Consolidated Balance Sheets.

The Company has also paid VAT in Mexico as well as other countries, primarily related to exploration projects, which has been charged to expense as incurred because of the uncertainty of recoverability.

8.

10.     Property, Plant and Equipment, Net

The components of property, plant and equipment are as follows:

June 30,

December 31,

    

2020

    

2019

 

(in thousands)

 

Mineral properties

$

9,353

$

9,353

Exploration properties

2,418

2,518

Royalty properties

 

200

 

200

Buildings

 

3,755

 

3,755

Mining equipment and machinery

 

16,051

 

16,049

Other furniture and equipment

 

885

 

884

Asset retirement cost

 

948

 

866

 

33,610

 

33,625

Less: Accumulated depreciation and amortization

 

(28,139)

 

(27,594)

$

5,471

$

6,031

El Quevar Earn-In Agreement

On April 9, 2020, the Company and several of its directly and indirectly wholly-owned subsidiaries entered into the Earn In Agreement with Barrick, pursuant to which Barrick has acquired an option (the “Option”) to earn a 70% interest in the Company’s El Quevar project located in the Salta Province of Argentina. Pursuant to the terms of the Earn-In Agreement, in order to earn an undivided 70% interest in the El Quevar project, Barrick must: (A) incur a total of $10 million in work expenditures over a total of eight years ($0.5 million per year in years one and two, $1 million per year in years three, four and five, and $2 million per year in years six, seven and eight); (B) deliver to the Company a National

10


Instrument 43-101 compliant pre-feasibility study pursuant to the parameters set forth in the Earn-In Agreement; and (C) deliver a written notice to exercise the Option to the Company within the term of the Earn-In Agreement. Barrick may withdraw from the Earn-In Agreement at any time after spending a minimum of $1 million in work expenditures and upon providing 30 days’ notice to the Company. The Company will form a new entity (“NewCo”) that will hold the El Quevar properties. Upon satisfaction of the earn-in conditions and exercise of the Option, NewCo will be 70% owned by Barrick and 30% owned by the Company. Funding of NewCo will be based on Barrick’s and the Company’s respective ownership and industry standard dilution mechanisms will apply in the case of funding shortfalls by either shareholder.

In connection with the Earn-In Agreement, the Company and Barrick also entered into a Subscription Agreement (the “Subscription Agreement”) dated as of April 9, 2020 pursuant to which Barrick purchased 4,719,207 shares of the Company’s common stock at a purchase price of $0.2119 per share in a private placement transaction (see Note 18).

Property Abandonment

During the second quarter 2020, the Company allowed certain concessions related to the Company’s immaterial Abelena exploration project in Mexico to expire. The concessions had a carrying value of $0.1 million and the Company recorded a $0.1 million loss included in Other operating (expense) income, net on the accompanying Condensed Consolidated Statement of Operations.

Equipment Related to the Oxide Plant Lease

Certain assets of the Company are related to the lease of the Velardeña oxide plant to Hecla (see Note 19). The net book value of the equipment involved in the lease was approximately $0.5 million at both June 30, 2020 and December 31, 2019.  

11.Other Long-Term Assets

Other long-term assets at June 30, 2020 and December 31, 2019 consist of the following:

    

June 30,

    

December 31,

2020

2019

(in thousands)

 

Deferred offering costs

$

479

$

511

Right of use assets

 

534

 

620

$

1,013

$

1,131

The deferred offering costs are associated with the LPC Program and the ATM Agreement (see Note 18). The right of use assets are related to certain office leases (see Note 4).

12.     Accounts Payable and Other Accrued Liabilities

The Company’s accounts payable and other accrued liabilities consist of the following:

June 30,

December 31,

2020

2019

 

(in thousands)

 

Accounts payable and accruals

$

504

$

710

Accrued employee compensation and benefits

645

724

Value added tax payable

3

401

Income taxes payable

 

 

292

$

1,152

$

2,127

June 30, 2020

Accounts payable and accruals at June 30, 2020 are primarily related to amounts due to contractors and suppliers in the amounts of $0.2 million related to the Company’s Velardeña Properties and $0.3 million related to exploration and corporate administrative activities.

11


Accrued employee compensation and benefits at June 30, 2020 consist of $0.2 million of accrued vacation payable and $0.4 million related to withholding taxes and benefits payable. Included in the $0.6 million of accrued employee compensation and benefits is $0.4 million related to activities at the Velardeña Properties.

December 31, 2019

Accounts payable and accruals at December 31, 2019 are primarily related to amounts due to contractors and suppliers in the amounts of $0.3 million related to the Company’s Velardeña Properties and $0.3 million related to corporate administrative and exploration activities.

Accrued employee compensation and benefits at December 31, 2019 consist of $0.2 million of accrued vacation payable and $0.5 million related to withholding taxes and benefits payable. Included in the $0.7 million of accrued employee compensation and benefits is $0.5 million related to activities at the Velardeña Properties.

The VAT payable is primarily related to VAT collected on the sale of the Mogotes and Pistachon properties in Mexico in December 2019, with such amount being remitted to the Mexican government in January 2020. The Company has recorded VAT paid in Mexico and related to the Velardeña Properties as a recoverable asset. At December 31, 2019, the Company recorded approximately $73,000 of VAT receivable as a reduction to VAT payable presented in the table above. The VAT was paid during the first quarter 2020.

The income taxes payable are related to certain Canadian taxes due on capital distributions the Company received from its Canadian subsidiary (see Note 17). The taxes were paid in February 2020.

13.     Debt – Related Party

On March 30, 2020, in response to potential economic and market uncertainties caused by the COVID-19 pandemic, the Company entered into a Short-Term Loan Agreement (the “Loan Agreement”) with Sentient Global Resources Fund IV , L.P., a Cayman Islands exempted limited partnership (“Sentient”), pursuant to which Sentient granted to the Company an unsecured loan in an amount equal to $1,000,000 (the “Sentient Loan”). Sentient is a private equity fund, and together with certain other Sentient equity funds, Sentient is the Company’s largest stockholder, holding in the aggregate approximately 32% of the Company’s outstanding common stock. The Sentient Loan bears interest at a rate of 10% per annum and the loan is due in full, together with accrued interest and any other amount outstanding under the Loan Agreement, on December 31, 2020. The Loan Agreement contains customary representations, warranties, and other provisions.  The loan Agreement does not contain any prepayment penalties. At June 30, 2020 the Debt – related party amount includes approximately $25,000 of accrued interest.

14.     Other Liabilities

Other Current Liabilities

The following table sets forth the Company’s other current liabilities at June 30, 2020 and December 31, 2019:

June 30,

December 31,

    

2020

2019

(in thousands)

Autlán refundable deposit

$

489

$

1,251

Premium financing

264

455

Office lease liability

 

117

 

118

$

870

$

1,824

The Autlán refundable deposit is the remaining principal plus interest liability related to the deposit received for the proposed sale of our Velardeña Properties and other mineral concessions to Autlán in 2019. On September 11, 2019, the Company announced that Autlán exercised its right to terminate the agreement for the purchase of the properties. As a result of termination of the agreement, the Company is required to repay the original $1.5 million deposit amount by making monthly payments of $257,000, commencing on December 9, 2019, until the deposit amount is repaid with interest at approximately 11% per annum. Through June 30, 2020 the Company paid Autlán approximately $1.0 million against

12


the original $1.5 million deposit, including interest of approximately $57,000, leaving a balance due at June 30, 2020 of approximately $0.5 million, including accrued interest. The Company recorded approximately $38,000 of interest expense for the six months ended June 30, 2020 related to the Autlán refundable deposit. On April 7, 2020, the Company and Autlán agreed to reduce the monthly payments to $81,000 and the interest rate applicable to the unpaid repayment amount will be increased from 11% per annum to 12% per annum, effective on April 9, 2020. The remaining balance is now due in full by December 2020.  

The premium financing consists of the remaining balance, plus accrued interest, related to premiums payable for the Company’s directors and officers insurance and general liability insurance. In June 2019, the Company financed $151,000 of its premium for general liability insurance. The premium was payable in twelve equal payments at an interest rate of 5.74% per annum. At June 30, 2020, there was no remaining balance. In December 2019 the Company financed $482,000 of its premium for directors and officers insurance. The premium is payable in twelve equal payments at an interest rate of 5.74% per annum. At June 30, 2020 the remaining balance, plus accrued interest, was approximately $264,000.

The office lease liability is related to lease liabilities for office space at the Company’s principal headquarters in Golden, Colorado and in Mexico and Argentina (see Note 4).

Other Long-Term Liabilities

Other long-term liabilities of $0.4 million and $0.5 million for the periods ended June 30, 2020 and December 31, 2019, respectively, are primarily related to a lease liability for office space at the Company’s principal headquarters in Golden (see Note 4).

15.     Asset Retirement Obligation and Reclamation Liabilities

The Company retained the services of a mining engineering firm to prepare a detailed closure plan for the Velardeña Properties. The plan was completed during the second quarter 2012 and indicated that the Company had an ARO and offsetting ARC of approximately $1.9 million at that time.

The Company will continue to accrue additional estimated ARO amounts based on an asset retirement plan as activities requiring future reclamation and remediation occur.  During the first six months of 2020, the Company recognized approximately $121,000 of accretion expense.

The following table summarizes activity in the Velardeña Properties ARO:

Six Months Ended

 

June 30,

    

2020

    

2019

 

(in thousands)

 

Beginning balance

$

2,825

$

2,660

Changes in estimates, and other

 

82

 

(60)

Accretion expense

 

121

 

55

Ending balance

$

3,028

$

2,655

The change in estimates of the ARO recorded during 2020 and 2019 are primarily the result of changes in assumptions related to inflation factors used in the determination of future cash flows.

The ARO set forth on the accompanying Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019 includes a nominal amount of reclamation liability related to activities at the El Quevar project in Argentina.

16.     Fair Value Measurements

Financial assets and liabilities and nonfinancial assets and liabilities are measured at fair value under a framework of a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value into three broad levels.  This hierarchy gives the highest priority to quoted prices (unadjusted) in active markets and the lowest priority to unobservable inputs.  Further, financial assets and liabilities should be classified by level in their entirety based upon the

13


lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy per ASC 820 are as follows:

Level 1:  Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2:  Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.

Level 3:  Unobservable inputs due to the fact that there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.

The following table summarizes the Company’s financial assets and liabilities at fair value on a recurring basis at June 30, 2020 and December 31, 2019, by respective level of the fair value hierarchy:

    

Level 1

    

Level 2

    

Level 3

    

Total

 

(in thousands)

 

At June 30, 2020

Assets:

Cash and cash equivalents

$

3,557

$

$

$

3,557

Derivative at fair value

 

 

 

128

 

128

$

3,557

$

$

128

$

3,685

At December 31, 2019

Assets:

Cash and cash equivalents

$

4,593

$

$

$

4,593

Derivative at fair value

 

 

 

254

 

254

$

4,593

$

$

254

$

4,847

The Company’s cash equivalents, comprised principally of U.S. treasury securities, are classified within Level 1 of the fair value hierarchy.

The “Derivative at Fair Value” asset on the Consolidated Balance Sheets is related to the amendment to the Hecla plant lease agreement (see Note 19). The Company has determined that the portion of the variable lease payment that is based on the average price of silver and the average grade of material processed during a given month represents an embedded derivative (see Note 7). The Company assesses the fair value of the derivative at the end of each reporting period, with changes in the value recorded as an increase or decrease to “Oxide Plant Revenue” on the Company’s Consolidated Statements of Operations. The derivative asset was recorded at fair value as of December 2, 2019, the effective date of the lease amendment, and at December 31, 2019 and June 30, 2020, based primarily on a valuation performed by a third-party expert using a Monte Carlo simulation and an option pricing model to calculate the potential discounted cash flow from the derivative based on the probability that the price of silver will have an average price for any given month during 2020 that equals or exceeds $20.00 per ounce or a grade processed equal to or exceeding 1,000 grams per tonne combined with a risk adjusted estimate of material to be processed.  The valuation falls within Level 3 of the fair value hierarchy. The valuation policies are approved by the Chief Financial Officer who reviews and approves the inputs used in the fair value calculations and the changes in fair value measurements from period to period for reasonableness. Fair value measurements are discussed with the Company’s Chief Executive Officer, as deemed appropriate. The valuation model primarily takes into consideration the potential discounted cash flow from the derivative based on the probability that the price of silver will have an average price for any given month during 2020 that equals or exceeds $20.00 per ounce or a grade processed equal to or exceeding 1,000 grams per tonne combined with a risk adjusted estimate of material to be processed.

At June 30, 2020 and December 31, 2019, the Company did not have any financial assets or liabilities classified within Level 2 of the fair value hierarchy.

Non-recurring Fair Value Measurements

There were no non-recurring fair value measurements at June 30, 2020 or December 31, 2019.

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17.     Income Taxes

The Company accounts for income taxes in accordance with the provisions of ASC 740, “Income Taxes” (“ASC 740”), on a tax jurisdictional basis.  For the six months ended June 30, 2020 and June 30, 2019 the Company did not recognized any income tax expense. The Company operates in jurisdictions that have generated ordinary losses on a year-to-date basis. However, the Company is unable to recognize a benefit for those losses, except as described in this paragraph, thus an estimated effective tax rate has not been used to report the year-to-date results.

In accordance with ASC 740, the Company presents deferred tax assets net of its deferred tax liabilities on a tax jurisdictional basis on its Condensed Consolidated Balance Sheets. As of June 30, 2020 and as of December 31, 2019, the Company had no net deferred tax assets or net deferred tax liabilities reported on its balance sheet.

In the third quarter 2019, the Company became aware that it had failed to timely file withholding tax returns and pay taxes that were due relating to return of capital distributions made to the Company by ECU Silver Mining Inc. (the Company’s wholly-owned Canadian subsidiary) at the end of 2017 and 2018.  The capital distributions constituted dividends under Canadian tax law, subject to a 5% withholding tax.  The Canadian withholding taxes, which constituted taxes on income for the months of December 2017 and December 2018, totaled approximately $284,000, including an estimate of interest due of approximately $20,000 on the late filing. The Company has treated the income tax expense related to this liability as the correction of an accounting error and has adjusted the beginning balance of retained earnings (Note 2).  In February 2020 the Company applied to enter into the Canadian Revenue Agency’s Voluntary Disclosure Program, whereby the Company paid the taxes and the estimated interest due and requested abatement of any penalties or additional interest that may apply.  If the Canada Revenue Agency denies the Company’s request for abatement, additional interest and penalties could be assessed.

The Company, a Delaware corporation, and its subsidiaries file tax returns in the United States and in various foreign jurisdictions. The tax rules and regulations in these countries are highly complex and subject to interpretation. The Company’s income tax returns are subject to examination by the relevant taxing authorities and in connection with such examinations, disputes can arise with the taxing authorities over the interpretation or application of certain tax rules within the country involved.  In accordance with ASC 740, the Company identifies and evaluates uncertain tax positions, and recognizes the impact of uncertain tax positions for which there is less than a more-likely-than-not probability of the position being upheld upon review by the relevant taxing authority.  Such positions are deemed to be “unrecognized tax benefits” which require additional disclosure and recognition of a liability within the financial statements.  The Company had no unrecognized tax benefits at June 30, 2020 or December 31, 2019.

18.     Equity

Subscription agreement

In connection with the Earn-In Agreement (see Note 11), the Company and Barrick also entered into the Subscription Agreement dated as of April 9, 2020 pursuant to which Barrick purchased 4,719,207 shares of the Company’s common stock at a purchase price of $0.2119 per share in a private placement transaction. The Shares were offered and sold without registration under the Securities Act of 1933, as amended (the “Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Act and/or Regulation D promulgated thereunder. The net proceeds of the Subscription Agreement of approximately $0.9 million were recorded in equity and appear as a separate line item in the Condensed Consolidated Statements of Changes in Equity.

Offering and private placement

On April 20, 2020, the Company entered into a securities purchase agreement with certain institutional investors providing for the issuance and sale of 15,000,000 shares of the Company’s common stock at a price of $0.20 per share, and in a concurrent private placement transaction, the issuance of an aggregate of 11,250,000 warrants, ultimately consisting of 7,500,000 series A warrants and 3,750,000 series B warrants (collectively, the “Warrants”), to purchase up to 11,250,000 shares of our common stock at an exercise price of $0.30 per share, for aggregate gross proceeds of $3.0 million (the “Offering”). Each Warrant is exercisable six months from the date of issuance on April 22, 2020 and has a term expiring five years after such initial exercise date. The Warrants contain so-called full-ratchet anti-dilution provisions which may be triggered upon any future issuance by the Company of shares of its common stock or common stock

15


equivalents at a per share price below the then-exercise price of the Warrant, subject to certain exceptions; provided, however, that with respect to the Series B warrants, the adjusted exercise price will not be less than $0.26.

The net proceeds of the Offering were recorded in equity and appear as a separate line item in the Condensed Consolidated Statements of Changes in Equity. Total costs for the Offering were approximately $334,000, including listing fees, legal and other costs, and the placement agent fee of six percent of aggregate gross proceeds, however, a reduced fee was accepted with respect to one investor. All such costs were recorded as a reduction to “Additional paid in capital” on the Condensed Consolidated Balance Sheets.  Using the Black Scholes model, and assuming no triggering events take place to reduce the exercise price of the warrants, the fair value of the combined Series A and Series B warrants issued was approximately $1.9 million on April 22, 2020, the date of issuance of the warrants. The Black Scholes inputs included the closing stock price on April 22, 2020 (the date of issuance of the warrants) of $0.24, the exercise price and exercise period of the warrants, the Company’s applicable volatility rate for the period of the Warrants of 95%, and the applicable risk-free rate of 0.41%.

Registered direct offering

On July 17, 2019, the Company entered into an agreement with certain institutional investors providing for the issuance and sale of 8,653,846 shares of the Company’s common stock at a price of $0.26 per share, and in a concurrent private placement transaction, the issuance of 8,653,846 Series A warrants to purchase up to 8,653,846 shares of the Company’s common stock at an exercise price of $0.35 per share, for aggregate gross proceeds of $2.25 million (the “Offering”).  Each Series A warrant became exercisable on January 17, 2020 and will expire on January 17, 2025, five years from the initial exercise date. Each of the investors in the Offering held warrants that were issued by the Company in May 2016 and were exercisable until November 2021 at an exercise price of $0.75 per share. In connection with the Offering, the Company also agreed to exchange, on a one-for-one basis, the May 2016 warrants for Series B warrants to purchase 4,500,000 shares of common stock at an exercise price of $0.35 per share. Each Series B warrant became exercisable on January 17, 2020 and will expire on May 20, 2022 but are otherwise subject to the same terms and conditions as the Series A warrants.  

The net proceeds of the Offering were recorded in equity and appear as a separate line item in the Condensed Consolidated Statements of Changes in Equity. Total costs for the Offering were approximately $0.3 million, including the placement agent fee of six percent of aggregate gross proceeds, listing fees and legal and other costs. Such costs were recorded as a reduction to “Additional paid in capital” on the Condensed Consolidated Balance Sheets.  Using the Black Scholes model, the fair value of the Series A warrants issued was approximately $2.1 million and the incremental fair value of the Series B warrants, when compared to the warrants that they replaced, was approximately $0.3 million. The Black Scholes inputs for the Series A warrants included the closing stock price on July 16, 2019 (the day preceding the date the Company entered into the agreement to issue the shares) of $0.33, the exercise price and exercise period of the warrants, the Company’s applicable volatility rate for the period of the Series A warrants of 95%, and the applicable risk-free rate of 1.9%.  The Black Scholes inputs for the Series B warrants included the closing stock price on July 16, 2019 of $0.33, the exercise price and exercise period of the warrants, the Company’s applicable volatility rate for the period of the Series B warrants of 88%, and the applicable risk-free rate of 1.9%.

Commitment purchase agreement

On May 9, 2018, the Company entered into a commitment purchase agreement (the “Commitment Purchase Agreement”) with LPC, pursuant to which the Company, at its sole discretion, has the right to sell up to $10.0 million of the Company’s common stock to LPC, subject to certain limitations and conditions contained in the Commitment Purchase Agreement (the “LPC Program”).  The Company closed on the Commitment Purchase Agreement in July 2018.

Subject to the terms of the Commitment Purchase Agreement, the Company will control the timing and amount of any future sale of the Company’s common stock to LPC. LPC has no right to require any sales by the Company under the Commitment Purchase Agreement but is obligated to make purchases at the Company’s sole direction, as governed by such agreement. There are no upper limits to the price LPC may be obligated to pay to purchase common stock from the Company and the purchase price of the shares will be based on the prevailing market prices of the Company’s shares at the time of each sale to LPC. LPC has agreed not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares of common stock. The Company has the right to terminate the Commitment Purchase Agreement at any time, at its discretion, without any cost or penalty.

16


During the six months ended June 30, 2020 the Company sold 900,000 shares of common stock to LPC under the Commitment Purchase Agreement at an average sales price per share of approximately $0.27, resulting in net proceeds of approximately $216,000.  In addition, approximately $24,000 of Commitment Purchase Agreement costs were amortized, resulting in a remaining balance of $353,000 of deferred LPC Program costs, recorded in “Other long-term assets” on the Condensed Consolidated Balance Sheets as of June 30, 2020.

During the six months ended June 30, 2019 the Company sold 2,113,642 shares of common stock to LPC under the Commitment Purchase Agreement at an average sales price per share of approximately $0.28, resulting in net proceeds of approximately $590,000.  In addition, approximately $58,000 of Commitment Purchase Agreement costs were amortized.  There are currently12.2 million shares remaining available for issuance under the LPC Program.

At the Market Offering Agreement

In December 2016, the Company entered into an at-the-market offering agreement (as amended from time to time, the “ATM Agreement”) with H. C. Wainwright & Co., LLC (“Wainwright”), under which the Company may, from time to time, issue and sell shares of the Company’s common stock through Wainwright as sales manager in an at-the-market offering under a prospectus supplement for aggregate sales proceeds of up to $5.0 million (the “ATM Program”) or a maximum of 10 million shares.  On November 23, 2018 the Company entered into a second amendment of the ATM Agreement extending the agreement until the earlier of December 20, 2020, or the date that the ATM Agreement is terminated in accordance with the terms therein. The common stock will be distributed at the market prices prevailing at the time of sale. As a result, prices of the common stock sold under the ATM Program may vary as between purchasers and during the period of distribution. The ATM Agreement provides that Wainwright will be entitled to compensation for its services at a commission rate of 2.0% of the gross sales price per share of common stock sold. 

During the first six months of 2020, the Company sold an aggregate of 823,452 shares of common stock under the ATM Agreement at an average price of $0.28 per share of common stock for net proceeds of approximately $223,000.  In addition, approximately $8,000 of deferred ATM Program costs were amortized, resulting in a remaining balance of $129,000 of deferred ATM Program costs, recorded in “Prepaid expenses and other assets” on the Condensed Consolidated Balance Sheets as of June 30, 2020.

During the first six months of 2019, the Company sold an aggregate of 33,995 shares of common stock under the ATM Agreement at an average price of $0.34 per share of common stock for total proceeds of approximately $11,000.  There are currently 8.1 million shares remaining available for issuance under the ATM Program.

Equity Incentive Plans

Under the Company’s Amended and Restated 2009 Equity Incentive Plan (the “Equity Plan”) awards of the Company’s common stock may be made to officers, directors, employees, consultants and agents of the Company and its subsidiaries.  The Company recognizes stock-based compensation costs using a graded vesting attribution method whereby costs are recognized over the requisite service period for each separately vesting portion of the award.

The following table summarizes the status of the Company’s restricted stock grants issued under the Equity Plan at June 30, 2020 and the changes during the six months then ended:

    

    

Weighted 

 

Average Grant 

 

 Date Fair 

 

Number of 

 Value Per 

 

Restricted Stock Grants

Shares

 Share

 

Outstanding at December 31, 2019

318,003

$

0.45

Granted during the period

 

 

Restrictions lifted during the period

 

(164,000)

 

0.31

Forfeited during the period

 

 

Outstanding June 30, 2020

154,003

$

0.29

For the six months ended June 30, 2020 the Company recognized approximately $15,000 of compensation expense related to the restricted stock grants.  The Company expects to recognize additional compensation expense related to these

17


awards of approximately $30,000 over the next 12 months. The restrictions lifted during the period are related to grants made to 7 employees in prior years.

The following table summarizes the status of the Company’s stock option grants issued under the Equity Plan at June 30, 2020 and the changes during the six months then ended:

    

    

Weighted

 

Average

 

Exercise

 

Number of 

Price Per 

 

Equity Plan Options

Shares

Share

 

Outstanding at December 31, 2019

30,310

$

8.06

Granted during the period

 

 

Forfeited or expired during period

 

(30,310)

$

8.06

Exercised during period

 

Outstanding June 30, 2020

$

Exercisable at end of period

 

$

Granted and vested

 

$

As of June 30, 2020, all of the prior stock options granted had expired.

Also, pursuant to the Equity Plan, the Company’s Board of Directors adopted the Non-Employee Director’s Deferred Compensation and Equity Award Plan (the “Deferred Compensation Plan”).  Pursuant to the Deferred Compensation Plan the non-employee directors receive a portion of their compensation in the form of Restricted Stock Units (“RSUs”) issued under the Equity Plan. The RSUs generally vest on the first anniversary of the grant and each vested RSU entitles the director to receive one unrestricted share of common stock upon the termination of the director’s board service.

The following table summarizes the status of the RSU grants issued under the Deferred Compensation Plan June 30, 2020 and the changes during the six months then ended:

    

    

Weighted 

Average Grant 

 Date Fair 

Number of 

 Value Per 

Restricted Stock Units

Shares

 Share

Outstanding at December 31, 2019

2,830,038

$

0.78

Granted during the period

 

780,000

 

0.40

Restrictions lifted during the period

 

 

Forfeited during the period

 

 

Outstanding June 30, 2020

3,610,038

$

0.70

For the six months ended June 30, 2020 the Company recognized approximately $186,000 of compensation expense related to the RSU grants. The Company expects to recognize additional compensation expense related to the RSU grants of approximately $182,000 over the next 12 months. Included in the RSUs granted during the period were 300,000 RSUs awarded to the directors in lieu of the annual cash retainer. Such RSUs vested upon grant and the Company recorded $120,000 of compensation expense related to the grant.

Key Employee Long-Term Incentive Plan

The Company’s 2013 Key Employee Long-Term Incentive Plan (the “KELTIP”) provides for the grant of units (“KELTIP Units”) to certain officers and key employees of the Company, which units will, once vested, entitle such officers and employees to receive an amount, in cash or in Company common stock (such method of settlement at the sole discretion of the Board of Directors) issued pursuant to the Company’s Equity Plan, measured generally by the price of the Company’s common stock on the settlement date. KELTIP Units are not an actual equity interest in the Company and are solely unfunded and unsecured obligations of the Company that are not transferable and do not provide the holder with any stockholder rights. Payment of the settlement amount of vested KELTIP Units is deferred generally until the earlier of a change of control of the Company or the date the grantee ceases to serve as an officer or employee of the Company.

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On February 26, 2019, the Company awarded a total of 705,000 KELTIP Units to two officers of the Company.  Due to the Company’s desire to preserve its limited current cash reserves for funding expenditures related to its portfolio of exploration projects, the Company determined it no longer had the current intent to settle any of its outstanding KELTIP Units in cash. The Company now intends to settle all of the KELTIP Units, including those previously issued, in common stock of the Company, an option that the Board of Directors holds in its sole discretion so long as sufficient shares remain available under the Equity Plan.  As a result, the Company recorded $254,000 of compensation expense, included in “Stock based compensation” in the Condensed Consolidated Statement of Operations for the KELTIP Units awarded on February 26, 2019 with a similar amount recorded as “Additional Paid-in Capital” in the Condensed Consolidated Statements of Changes in Equity.  The Company has treated the previously awarded KELTIP Units as effectively modified at February 26, 2019.  The Company marked-to-market the prior KELTIP Units as of that date and recorded approximately $227,000 of additional compensation expense, included in “Stock based compensation” in the Condensed Consolidated Statement of Operations and recorded approximately $583,000 as “Additional Paid-in Capital” in the Condensed Consolidated Statements of Changes in Equity, an amount representing the sum of the compensation expense recorded on February 26, 2019 and the liability for the KELTIP Units recorded at December 31, 2018. All KELTIP Units were recorded in equity at June 30, 2019.

On May 21, 2020, the Company awarded a total of 1,400,000 KELTIP Units to two officers of the Company and recognized compensation expense of approximately $448,000. There were 3,725,000 and 2,325,000 KELTIP Units outstanding at June 30, 2020 and December 31,2019, respectively.

Common stock warrants

The following table summarizes the status of the Company’s common stock warrants at June 30, 2020 and the changes during the six months then ended:

Weighted 

 

Number of

Average Exercise 

Underlying

Price Per

Common Stock Warrants 

Shares

Share

Outstanding at December 31, 2019

14,653,846

$

0.39

Granted during the period

 

Series A warrants

7,500,000

0.30

Series B warrants

3,750,000

0.30

Dilution adjustment

 

 

Expired during period

Exercised during period

 

 

Outstanding June 30, 2020

25,903,846

$

0.35

The warrants relate to prior and current registered offerings and private placements of the Company’s stock.

As discussed above, on April 20, 2020, the Company entered into a securities purchase agreement with certain institutional investors providing for the issuance and sale of 15,000,000 shares of the Company’s common stock and in a concurrent private placement transaction, the issuance of an aggregate of 11,250,000 warrants, ultimately consisting of 7,500,000 series A warrants and 3,750,000 series B warrants.

Also as discussed above, on July 10, 2019, the Company issued 8,653,846 registered shares of common stock in a registered direct offering. In connection with the offering, each investor received an unregistered Series A warrant to purchase a share of common stock for each share of common stock purchased. Each Series A warrant is exercisable six months from the date of issuance and has a term expiring in January 2025.

In May 2016, the Company issued 8.0 million registered shares of common stock at a purchase price of $0.50 per share in a registered direct offering resulting in gross proceeds of $4.0 million. In connection with the offering, each investor received an unregistered warrant to purchase three-quarters of a share of common stock for each share of common stock purchased. The resulting 6,000,000 warrant shares have an exercise price of $0.75 per share, became exercisable on November 7, 2016 and were exercisable until November 6, 2021, five years from the initial exercise date. In connection with the July 2019 registered direct offering discussed above, the Company agreed to exchange, on a one-for-one basis, 4,500,000 of the May 2016 warrants for Series B warrants to purchase 4,500,000 shares of common stock at an exercise

19


price of $0.35 per share. Each Series B warrant is exercisable six months from the date of issuance and has a term expiring in May 2022.

All outstanding warrants are recorded in equity at June 30, 2020 and December 31, 2019.

19.      Revenue, Deferred Revenue and Related Costs Oxide Plant Lease and Oxide Plant Lease Costs

For the six months ended June 30, 2020 the Company recorded revenue of approximately $2.4 million and related costs of approximately $1.0 million associated with the lease of the Velardeña Properties oxide plant. The Company recognizes oxide plant lease fees and reimbursements for labor, utility and other costs as “Revenue: Oxide plant lease” in the Condensed Consolidated Statements of Operations following the guidance of ASC 842.  ASC 842 supports recording as gross revenue the reimbursement of expenses incurred directly by the Company in performing its obligations under the lease in situations where the entity has control over the specific goods or services transferred to a customer as a principal versus as an agent. The actual costs incurred for reimbursed direct labor and utility costs are reported as “Oxide plant lease costs” in the Condensed Consolidated Statements of Operations. The Company recognizes lease fees during the period the fees are earned per the terms of the lease.

On August 2, 2017, the Company granted Hecla an option to extend the oxide plant lease for an additional period of up to two years ending no later than December 31, 2020 (the “Extension Period”) in exchange for a $1.0 million upfront cash payment and the purchase of $1.0 million, or approximately 1.8 million shares, of the Company’s common stock, issued at par at a price of $0.55 per share, based on an undiscounted 30-day volume weighted average stock price.  The option and lease extension were memorialized in (i) an Option Agreement dated August 2, 2017 among the Company and Hecla Mining Company (the “Option Agreement”), and (ii) a Second Amendment to Master Agreement and Lease Agreement dated August 2, 2017 among Minera William S.A. de C.V., an indirect subsidiary of the Company, and Minera Hecla S.A.  de C.V., an indirect subsidiary of Hecla Mining Company (the “Second Amendment”). Under the Second Amendment, Hecla had an option to extend the lease to December 31, 2020 by exercising the option no later than October 3, 2018.  On October 1, 2018 Hecla exercised the Second Amendment option and extended the lease to December 31, 2020.  All of the fixed fees and throughput related charges remain the same as under the original lease.  Similar volume limitations apply to any required future tailings expansions, which Hecla will fund, leaving unused at the end of the lease

20


term an agreed amount of capacity in the expanded tailings facility.  Pursuant to the Second Amendment, Hecla has the right to terminate the lease during the Extension Period for any reason with 120 days’ notice.  

On December 2, 2019 the Company and Hecla entered into a Third Amendment to the Master Agreement and Lease Agreement dated August 2, 2017. Under the terms of the Third Amendment, the Company has agreed to reduce the per tonne fee payable by Hecla for the duration of the lease term, commencing on January 1, 2020 from $22.00 per tonne to $11.00 per tonne. However, the Company will receive $22.00 per tonne processed during any month in which one of the following conditions occur: (1) the Comex daily silver spot closing average price for such month is equal to or greater than $20.00 per ounce, or (2) the mill head grade average from the metallurgical balance for such month is equal to or greater than 1,000 grams per ton equivalent silver head grade. If either of the conditions are met in any month, Hecla will pay the $22.00 fee on all amounts processed in the oxide plant during such month. The reduced fee only applies to the tonnage-based payments under the Lease Agreement; the monthly lease payment of $125,000 per month is not affected by the Third Amendment. Under the terms of the Lease Agreement, Hecla had the right to terminate the Lease Agreement at any time upon 120 days written notice. The Third Amendment extended the advance notice required to 150 days.  Moreover, the lease permits Hecla to terminate the lease upon ten days notice if Hecla is unable to use the plant due to a government ordered shut down for a period of more than 90 continuous days.

On July 7, 2020 the Company received notification from Hecla terminating the agreement effective November 30, 2020.

The Company will recognize the $1.0 million of income from granting the option over the expected life of the lease from beginning from the date of the Second Amendment dated August 2, 2017 through November 30, 2020 on a straight-line basis, including such income in “Revenue: Oxide plant lease” in the Condensed Consolidated Statements of Operations.  During the six months ended June 30, 2020 the Company recognized approximately $0.2 million of amortized income related to the upfront cash payment. As of June 30, 2020, the unamortized portion of the lease option totaled approximately $0.1 million, recorded as short term “Deferred revenue” on the Condensed Consolidated Balance Sheets.  

The Company has determined that the ability to receive the higher $22.00 per tonne fee, as described above, creates a derivative asset. The Company treated the derivative asset as an upfront lease payment that will be amortized over the remaining life of the lease and also recorded deferred revenue equal to the value of the derivative asset, as more fully described in Note 7. The amortization of the upfront lease payment and the increase in the derivative asset at December 31, 2019 were recorded as an increase of approximately $74,000 to “Revenue: Oxide plant lease” in the Consolidated Statements of Operations for the period ended December 31, 2019.  For the six-month period ended June 30, 2020 the amortization of the upfront lease payment and the decrease in the derivative asset (Note 7) were recorded as a net decrease of approximately $125,000 to “Revenue: Oxide plant lease” in the Consolidated Statements of Operations.

Hecla has a one-time right of first refusal to continue to lease the plant following a termination notice through December 31, 2020 if the Company decides to use the oxide plant for its own purposes before December 31, 2020.

For the six months ended June 30, 2019 the Company recorded revenue of approximately $3.9 million and related costs of approximately $1.2 million associated with the lease of the Velardeña Properties oxide plant. During the six months ended June 30, 2019 the Company also recognized approximately $0.2 million of amortized income related to the upfront cash payment from Hecla, as discussed above.

20.     Interest and Other Expense, Net

For the six months ended June 30, 2020 the Company recognized approximately $0.1 million Interest and Other Expense primarily related to amounts payable to Sentient and Autlán (see Notes 13 and 14).

For the six months ended June 30, 2019 the Company recognized approximately $0.1 million of Interest and Other Expense primarily related to the mark-to-market of Golden Tag shares held by the Company at that time.  All the Golden Tag shares were sold during the third quarter 2019.  

21


21.     Supplemental Cash Flow Information

The following table reconciles net loss for the period to cash used in operations:

Six Months Ended June 30,

 

    

2020

    

2019

 

(in thousands)

 

Cash flows from operating activities:

Net loss

$

(5,659)

$

(4,809)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

 

544

 

544

Accretion of asset retirement obligation

 

121

 

111

Decrease in derivative at fair value

125

Loss (gain) on trading securities

 

 

158

Asset write off

 

100

 

19

Gain on sale of assets

 

 

(104)

Stock compensation

 

666

 

653

Changes in operating assets and liabilities from continuing operations:

Decrease (increase) in lease receivable

95

(29)

(Increase) decrease in prepaid expenses and other assets

 

(516)

 

144

(Increase) decrease in inventories

 

45

 

(2)

Increase in value added tax recoverable, net

 

 

(3)

Decrease (increase) in other long term assets

 

598

 

(465)

Decrease in reclamation liability

 

(2)

 

(63)

(Decrease) increase in accounts payable and accrued liabilities

 

(950)

 

130

(Decrease) increase in other current liabilities

(953)

1,689

Decrease in deferred revenue

(245)

(146)

(Decrease) increase in other long term liabilities

 

(82)

 

388

Net cash used in operating activities

$

(6,113)

$

(1,785)

The following table sets forth supplemental cash flow information and non-cash transactions:

Six Months Ended June 30,

 

    

2020

    

2019

 

(in thousands)

 

Supplemental disclosure:

Interest paid

$

64

$

Income taxes paid

$

284

$

Supplemental disclosure of non-cash transactions:

Deferred equity offering costs amortized

$

32

$

58

22.     Commitments and Contingencies

At June 30, 2020 and December 31, 2019, the Company had no gain or loss contingencies.  The Company has certain purchase and lease commitments as set forth in the Company’s Form 10-K for the year ended December 31, 2019.

23.     Segment Information

The Company’s sole activity is the mining, construction and exploration of mineral properties containing precious metals. The Company’s reportable segments are based upon the Company’s revenue producing activities and cash consuming activities. The Company reports two segments, one for its Velardeña Properties in Mexico and the other comprised of non-revenue producing activities including exploration, construction and general and administrative activities. Intercompany revenue and expense amounts have been eliminated within each segment in order to report on the basis that management uses internally for evaluating segment performance.

22


The financial information relating to the Company’s segments is as follows:

 

Exploration, El

 

Costs

Depreciation,

Quevar, Velardeña 

 

Three Months Ended

Applicable

Depletion and

and Administrative

Pre-Tax (gain)

Capital

 

June 30, 2020

    

Revenue

    

to Sales

    

Amortization

    

Expense

    

loss

    

Total Assets

    

Expenditures

 

Velardeña Properties

 

$

1,224

 

$

420

 

$

196

 

$

324

 

$

(232)

 

$

Corporate, Exploration and Other

69

1,704

2,555

1

 

$

1,224

 

$

420

 

$

265

 

$

2,028

 

$

2,323

 

$

1

Six Months Ended

June 30, 2020

Velardeña Properties

 

$

2,420

$

984

$

400

$

981

$

139

$

4,267

 

$

1

Corporate, Exploration and Other

 

 

144

 

4,552

 

5,520

 

7,146

1

 

$

2,420

 

$

984

 

$

544

 

$

5,533

 

$

5,659

 

$

11,413

 

$

2

Three Months Ended

June 30, 2019

Velardeña Properties

 

$

1,976

 

$

613

 

$

189

 

$

848

 

$

(362)

 

$

1

Corporate, Exploration and Other

81

2,588

2,820

1

 

$

1,976

 

$

613

 

$

270

 

$

3,436

 

$

2,458

 

$

2

Six Months Ended

June 30, 2019

Velardeña Properties

 

$

3,908

 

$

1,210

 

$

391

 

$

1,482

 

$

(678)

 

$

4,744

 

$

1

Corporate, Exploration and Other

153

4,714

5,487

6,390

26

 

$

3,908

 

$

1,210

 

$

544

 

$

6,196

 

$

4,809

 

$

11,134

 

$

27

24.     Related Party Transactions

The following sets forth information regarding transactions between the Company (and its subsidiaries) and its officers, directors and significant stockholders.

Administrative Services, Lease of Equipment:

Beginning in August 2016, the Company began providing limited accounting and other administrative services to Minera Indé, an indirect subsidiary of Sentient.  At June 30, 2020, Sentient, through the Sentient executive funds, holds approximately 32% of the Company’s 128.2 million shares of issued and outstanding common stock.  The services are provided locally in Mexico by the administrative staff in the Company’s Mexico office. The Company charges Minera Indé $15,000 per month for the services, which provides reimbursement to the Company for its costs incurred plus a small profit margin. Amounts received under the arrangement reduce costs incurred for exploration. The Company’s Board of Directors and Audit Committee approved the agreement. For the six months ended June 30, 2020 and 2019 the Company charged Minera Indé approximately $90,000 for services, offsetting costs that are recorded in “Exploration expense” in the Condensed Consolidated Statements of Operations.

Beginning in July 2020, the Company has agreed to lease certain nonessential mining equipment to Minera Indé over a three-month period for $20,000.  The lease could be extended beyond three months for $3,000 per month. The Audit Committee approved the agreement.

Debt – Related Party

On March 30, 2020, the Company entered into a short-term loan agreement with Sentient whereby the Company received an unsecured loan in the amount of $1,000,000. The Sentient Loan bears interest at a rate of 10% per annum and the loan is due in full, together with accrued interest and any other amount outstanding under the loan agreement, on December 31, 2020. See Note 13 for a full description of the loan.

25. Subsequent Events

COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of the respiratory disease caused by the new coronavirus as “pandemic”.  As of the date of issuance of the condensed consolidated financial statements, the

23


Company’s financial condition has not been significantly impacted, however, the Company continues to monitor the situation.  No impairments were recorded as of the condensed consolidated balance sheet date, however, due to uncertainty surrounding the situation, management’s judgment regarding this could change in the future.  In addition, while the Company’s results of operation, cash flows, and financial condition could be negatively impacted, the extent of the impact cannot be reasonably estimated at this time.

Sale of Santa Maria Property

On July 14, 2020, the Company entered into a binding letter of intent (“Letter of Intent”) with Fabled Copper Corp. (“Fabled”) for a potential transaction pursuant to which Fabled would acquire the Company’s option to earn a 100% interest in the Santa Maria mining claims located in Chihuahua, Mexico (the “Option”). The Letter of Intent provides that entry into a definitive agreement regarding the Option (the “Definitive Agreement”) is subject to, among other contingencies, (i) a 10 business-day period during which Fabled will conduct its due diligence, (ii) the ability of Fabled to secure financing of not less than CAD$4,000,000, and (iii) acceptance by the TSX Venture Exchange of the proposed transaction.

As consideration for the Option, Fabled will (i) pay $500,000 in cash to the Company upon closing and will issue to the Company 1,000,000 shares of Fabled’s common stock; (ii) pay $1,500,000 in cash to the Company on the one year anniversary date following the closing; (iii) pay $2,000,000 in cash to the Company on the two year anniversary date following the closing; and (iv) upon exercise of the Option, grant the Company a 1% net smelter return royalty on the Santa Maria and Punto Com concessions.

The Letter of Intent contains standard representations, warranties, covenants, and other terms customary in similar transactions. The Company and Fabled have agreed to use their commercially reasonable best efforts to enter into the Definitive Agreement on or before August 12, 2020 and prepare all necessary documentation and apply for and obtain TSX Venture Exchange approval and all other consents, orders or approvals as required or desirable to complete the potential transaction regarding the Option. None of the consideration described above is payable until the Definitive Agreement is executed. The Company had previously expensed all costs associated with the two properties and will record income from the agreement as cash is received.

Public offering

On July 21, 2020, the Company entered into an Amended and Restated Underwriting Agreement (the “Underwriting Agreement”) with H.C. Wainwright & Co., LLC as representative of the underwriters named in Schedule I thereto (the “Underwriters”), providing for the issuance and sale by the Company in a firm commitment offering (the “Offering”) of 17,857,143 shares of common stock at a price to the public of $0.42 per share (the “Offering Shares”). In addition, the Company granted the Underwriters an option to purchase, at the public offering price per share of common stock, up to an additional 2,678,571 shares of common stock, exercisable for 30 days from the date of the Underwriting Agreement (the “Option Shares”).  The Offering Shares and Option Shares were registered pursuant to the Company’s registration statement on Form S-3 (File No. 333-220461), and a prospectus supplement thereto filed with the Securities and Exchange Commission.  The Underwriters acquired the Offering Shares and the full amount of the Option Shares from the Company with an underwriting discount of six percent (6%) and the Company also agreed to reimburse them for customary fees and expenses.  After the underwriting discount of 6% and total offering expenses of approximately $225,000 the company received net proceeds of approximately $7.9 million from the sale of the Offering Shares and the Option Shares.  The Company intends to use the proceeds from the Offering for working capital requirements and general corporate purposes.  The sale of the Offering Shares and Option Shares closed on July 24, 2020.

24


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

Our Company

We were incorporated in Delaware in March 2009 under the Delaware General Corporation Law. During the six months ended June 30, 2020, our principal source of revenue was from the lease of our oxide plant located near Velardeña, Durango, Mexico. We incurred net operating losses for the six months ended June 30, 2020 and 2019.

We remain focused on evaluating and searching for mining opportunities in North America (including Mexico) with near term prospects of mining, and particularly for properties within reasonable haulage distances of our Velardeña Properties. We are also focused on advancing our El Quevar exploration property in Argentina through the Earn-In Agreement with Barrick and on advancing selected properties in our portfolio of approximately 12 properties, located in Mexico, Nevada and Argentina. We are also reviewing strategic opportunities, focusing primarily on development or operating properties in North America, including Mexico.

This discussion should be read in conjunction with Management’s Discussion and Analysis included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 27, 2020.

2020 Highlights

COVID-19 uncertainties

We have undertaken several initiatives in response to COVID-19 related economic and financial market uncertainties.

We are following World Health Organization protocols and local government rules and recommendations at all of our projects and corporate offices. Office employees are working remotely wherever possible. In compliance with a directive of the Mexican Federal Government to suspend all non-essential activities, including mining, in response to the COVID-19 pandemic, we suspended mining activities at our Velardeña Properties (Durango State, Mexico) during portions of April and May 2020.  Work was conducted jointly with Hecla to shut down the oxide mill that Hecla presently leases from us. Per the terms of the existing lease agreement, Hecla continued to pay the fixed monthly fee of $125,000 during the temporary shutdown, as well as pay for certain shutdown-related costs. We did not, however, receive the variable component of revenue that is tied to tonnes of ore milled per month during the temporary shutdown.

On March 30, 2020, we entered into the Sentient Loan, whereby Sentient granted us an unsecured loan in an amount equal to $1,000,000. Sentient is our largest stockholder, holding in the aggregate approximately 32% of our outstanding common stock as of June 30, 2020. The Sentient Loan bears interest at a rate of 10% per annum and is due in full, together with accrued interest and any other amount outstanding under the loan agreement, on December 31, 2020. The Loan Agreement contains customary representations, warranties, and other provisions.

We also reached an agreement in April 2020 with Autlán to extend the time to repay the then remaining $0.8 million related to the $1.5 million refundable deposit received for the proposed sale of our Velardeña Properties and other assets in June 2019 through December 2020. Through June 30, 2020, we have paid Autlán approximately $1.0 million against the original $1.5 million deposit plus interest, leaving a balance due at June 30, 2020 of approximately $0.5 million, including accrued interest.

Rodeo Property

We are advancing our Rodeo project in Durango State, Mexico.  Our proposed mine plan for the Rodeo project contemplates the processing of mined material at our Velardeña oxide mill, which is located approximately 115 kilometers via road from the Rodeo project. The oxide mill is currently leased by Hecla through November 30, 2020. The preliminary mine plan included in the April 2020 Preliminary Economic Assessment (“PEA”) calls for an open pit mining operation with material transported to our Velardeña oxide plant. Our oxide plant at Velardeña is a typical agitated leach plant that can handle up to 550-tpd of throughput. The plant is equipped with a modern doré refinery, and the attached tailings facility recently underwent a major expansion. According to the PEA, daily throughput is estimated to be approximately 480 tonnes per day and the estimated mine life is estimated to be approximately nine quarters (2.25 years). We are planning

25


for mining excavation at the project to be completed using a regional contractor, while we will provide overall mine management and engineering which includes in-pit technicians who will determine whether material is suitable for process or placement on the waste dump.  Our assay lab, located in Velardeña, Durango will be used for the project’s assaying requirements.

A 34-hole, 1,413-meter drilling program to further verify the continuity of the high-grade core of the deposit was completed on August 1, 2020. The results of this program, once analyzed, will enable us to finalize the initial start-up mine plan and will also provide further metallurgical data in order to confirm recovery assumptions and enable the appropriate setup of the oxide plant. Analysis of the drill core and results is ongoing and is expected to be completed during the third quarter 2020. We have submitted applications to SEMARNAT, the environmental protection agency in Mexico, for the necessary permits to allow us to commence mining at the project. We currently expect to receive the required permits near the end of 2020; however, there can be no assurance that the permits will be issued according to this timeline.

Assuming that the results of our confirmatory drilling program are satisfactory, we anticipate that mining at the Rodeo project could commence promptly following receipt of the necessary government approvals. We have begun the search for additional key mine and plant supervisory personnel who will support the existing workforce that’s in place for the oxide plant lease with Hecla. Selection of the mining (excavation) contractor is also underway. Following termination of the Hecla lease on November 30, 2020, we expect that the existing oxide plant workforce will begin preparing the plant to receive mined material from Rodeo. We currently anticipate that the oxide plant will be ready to commence milling and processing operations to produce doré during the first quarter 2021, but also anticipate being able to stockpile material should mining activities at Rodeo begin before the oxide mill is fully prepared to accept mined material. As outlined in the PEA, the doré produced is expected to be comprised of approximately 25% gold and 65% to 70% silver and to be of a quality that is readily marketable and saleable to refineries located either in Mexico or internationally, consistent with standard commercial terms. As described in the PEA, we estimate spending approximately $1.5 million on capital, pre-production mining costs, working capital and other start-up activities prior to the receipt of revenue from the Rodeo mine.

Velardeña Oxide Plant Lease Agreement

During the six months ended June 30, 2020, Hecla processed approximately 52,000 tonnes of material through the oxide plant, resulting in total revenues to us of approximately $2.4 million, comprised of approximately $1.4 million for direct plant charges and fixed fees and approximately $1.0 million for other net reimbursable costs related to the services we provide under the lease. Hecla is responsible for the ongoing operation and maintenance of the oxide plant. The $1.0 million of reimbursable costs are also reported as plant lease costs, resulting in net operating margin of approximately $1.4 million for the six months ended June 30, 2020.

On October 1, 2018, Hecla exercised its option, pursuant to an agreement entered into with us in August 2017, to extend the lease of our Velardeña oxide plant until December 31, 2020. On December 2, 2019 we entered into an additional amendment of the lease agreement with Hecla to reduce the per tonne fee payable by Hecla for the duration of the lease term, commencing on January 1, 2020, from $22.00 per tonne to $11.00 per tonne, however, the per tonne fee reverts back to $22 per tonne for any month in which either of the following conditions are met:  (1) the Comex daily silver spot closing average price for such month is $20.00 per ounce or greater, or (2) the mill head grade average from the metallurgical balance for such month is 1,000 grams per ton equivalent silver head grade or greater. If either condition is met in any month, Hecla will pay the higher fee of $22.00 per tonne on all amounts processed in the oxide plant during such month. The reduced fee only applies to the tonnage-based payments under the lease agreement; the monthly lease payment of $125,000 per month is not affected by the amendment. On July 7, 2020 the Company received notification from Hecla terminating the lease agreement effective November 30, 2020.  Hecla has a one-time right of first refusal to continue to lease the plant following a termination notice through December 31, 2020 if we decide to use the oxide plant for our own purposes before December 31, 2020.

We expect Hecla to continue to process material at approximately 400 tonnes per day during the remainder of the agreement through November 30, 2020, which would generate a net operating margin to us, net of reimbursable costs, of approximately $2.7 million for the year ended December 31, 2020. The actual net operating margin received from the oxide plant may be negatively impacted if further interruptions due to COVID-19 occur. Moreover, the lease permits Hecla to terminate the lease upon ten days notice if Hecla is unable to use the plant due to a government ordered shutdown for a period of more than 90 continuous days.

26


El Quevar

On April 9, 2020, we entered into the Earn-In Agreement with Barrick, pursuant to which Barrick has acquired an option to earn a 70% interest in the Company’s El Quevar project located in the Salta Province of Argentina.

Pursuant to the terms of the Earn-In Agreement, in order to earn an undivided 70% interest in the El Quevar project, Barrick must: (A) incur a total of $10 million in work expenditures over a total of eight years ($0.5 million per year in years one and two, $1.0 million per year in years three, four and five, and $2.0 million per year in years six, seven and eight); (B) deliver to the Company a National Instrument 43-101 compliant pre-feasibility study pursuant to the parameters set forth in the Earn-In Agreement; and (C) deliver a written notice to exercise the Option to us within the term of the Earn-In Agreement. Barrick may withdraw from the Earn-In Agreement at any time after spending a minimum of $1.0 million in work expenditures and upon providing us with 30 days’ notice.

We will form a new entity (“NewCo”) that will hold the El Quevar properties. Upon satisfaction of the earn-in conditions and exercise of the Option, NewCo will be 70% owned by Barrick and 30% owned by us. Funding of NewCo will be based on Barrick’s and our respective ownership, and industry standard dilution mechanisms will apply in the case of funding shortfalls by either shareholder.

During the earn-in period, in addition to the exploration spending, Barrick will fund the holding costs of the property, which will qualify as work expenditures. Barrick will reimburse us for expenses related to maintaining the exploration camp which will initially be run by us under a service agreement, which will also qualify as work expenditures.

Velardeña PEA

The Velardeña Properties contain two underground mines that were last operated in late 2015, at which point mining activities were suspended when a combination of low metals prices, mining dilution and metallurgical challenges rendered operations unprofitable. We elected to preserve the asset for future use, and since that time we have evaluated and tested various mining methods and processing alternatives that could enable sustainable profitable operations.  

The recent rise in precious metals prices, the advancement of alternative processing technologies in the industry, and the results of our testing activities prompted us to pursue the preparation of an updated preliminary economic assessment (PEA). On April 2, 2020 we announced positive results from the updated PEA. The updated PEA was prepared to incorporate new and updated elements of the project database, mine plan and processing plan, most notably the inclusion of bio-oxidation treatment of gold concentrates. In late 2019, we obtained successful results from testing Velardeña gold concentrate material using Finnish firm Outotec’s “BIOX” process, a unique and sustainable technology that was developed to pre-treat refractory ores and concentrates ahead of conventional cyanide leaching. The gold in these types of mineralized materials, such as those found at Velardeña, is encapsulated in pyrite and arsenopyrite which prevents the gold from being successfully cyanide leached. BIOX utilizes bacteria to oxidize these sulfide minerals, thereby exposing the gold for subsequent cyanide leaching and increasing overall gold recoveries. The 2019 BIOX testing of Velardeña material achieved gold recoveries of 92% from the pyrite-arsenopyrite concentrate, compared to sub-30% gold recoveries realized when the Velardeña Properties last operated in 2015. In the coming months, we plan to continue to optimize the mine plan and processing details in preparation for future test-mining and processing in advance of establishing a definite schedule for restarting commercial production at the Velardeña mines and the installation of the bio-oxidation circuit. No development decision has been made regarding a potential restart of the Velardeña mines.

Santa Maria

On July 14, 2020, we entered into a binding letter of intent (“Letter of Intent”) with Fabled Copper Corp. (“Fabled”) for a potential transaction pursuant to which Fabled would acquire our option to earn a 100% interest in the Santa Maria mining claims located in Chihuahua, Mexico (the “Option”). The Letter of Intent provides that entry into a definitive agreement regarding the Option (the “Definitive Agreement”) is subject to, among other contingencies, (i) a 10 business-day period during which Fabled will conduct its due diligence, (ii) the ability of Fabled to secure financing of not less than CAD$4,000,000, and (iii) acceptance by the TSX Venture Exchange of the proposed transaction.

As consideration for the Option, Fabled will (i) pay us $500,000 in cash upon closing and will issue us 1,000,000 shares of Fabled’s common stock; (ii) pay us $1,500,000 in cash on the one year anniversary date following the closing;

27


(iii) pay us $2,000,000 in cash on the two year anniversary date following the closing; and (iv) upon exercise of the Option, grant us a 1% net smelter return royalty on the Santa Maria and Punto Com concessions.

The Letter of Intent contains standard representations, warranties, covenants, and other terms customary in similar transactions. We and Fabled have agreed to use our commercially reasonable best efforts to enter into the Definitive Agreement on or before August 12, 2020 and prepare all necessary documentation and apply for and obtain TSX Venture Exchange approval and all other consents, orders or approvals as required or desirable to complete the potential transaction regarding the Option. None of the consideration described above is payable until the Definitive Agreement is executed.

Sand Canyon

During the second quarter 2019 we entered into an earn-in agreement with Golden Gryphon Explorations for the Sand Canyon project located in northwestern Nevada, where surface work has identified a large system of epithermal veins with potential for gold and silver deposits. We hold an option to earn a 60% interest in the Sand Canyon project by spending $2.5 million in exploration expenses over four years, with guaranteed minimum expenditures of $0.5 million in year one. To continue to earn interest in the project, we must spend at least $0.75 million in each of years two and three and $0.5 million in year four, and drill at least 5,000 feet of core or 10,000 feet of reverse circulation or a combination of the two, by the end of the second year. We paid $25,000 cash and $50,000 in reimbursed exploration expenditures to acquire the option and will make staged payments of a total additional $135,000 ($35,000 in 2020, $50,000 in 2021 and $50,000 in 2022) over the next three anniversaries of the agreement.

We completed surface exploration activities on the project in late 2019, including mapping and geochemical sampling to identify drill targets. Based on this work and after securing drill permits, we initiated a drill program in the first quarter 2020.  In March we completed the initial drill program of approximately 1800 meters in 4 diamond drill holes.  The drill holes were placed to target surface geochemical and geophysical anomalies associated with epithermal veining observed in outcrops.  Drill holes  tested the two principal epithermal vein target areas on the property, the DeLong Canyon target and the Sand Canyon target.  The one drill hole collared to test the DeLong Canyon target did not encounter any veins or significant anomalous geochemical values.  Interpretation shows that a fault offset likely caused the drill hole to miss the vein system as projected from surface.   Three drill holes collared to test the veins and anomalies in the Sand Canyon target area all intersected narrow vein and breccia structures with low anomalous values of Ag, As, Sb, and Mo.  No potentially economic concentrations of precious metals were encountered in any of the four drill holes.  Plans for further testing of the mineralized system are being considered.  In the first year of exploration at Sand Canyon, Golden spent $1.6 million toward the $2.5 million earn-in requirement, fulfilling the first and second year minimum expenditures and the minimum drill commitment.

Yoquivo

The Yoquivo property was acquired in 2017 and with the recent additional acquisition of a claim internal to the exterior boundary the project consists of 1,975 hectares in 7 claims that cover an epithermal vein district hosted in Tertiary andesitic volcanic rocks that is exposed in an erosional window through Oligocene rhyolite on the eastern margin of the Sierra Madre Occidental of northern Mexico. The property is 200 km SW of Chihuahua city in the state of Chihuahua, Mexico. Recent surface rock sampling has demonstrated gold and silver values of potential economic interest in several of the veins in the district. We have an option to purchase the six concessions that comprise the Yoquivo property for payments totaling $0.75 million over four years subject to a 2% to 3% NSR royalty on production, capped at $2.8 million.

In October 2018 we announced high-grade silver-gold assays from the Yoquivo project. Multiple silver-gold bearing epithermal veins were mapped and sampled, with the two most important veins being the San Francisco and Pertenencia veins. A new vein, the La Nina vein, was discovered in the northwest of the property where it splits off from the main San Francisco vein. Two other veins, the Esperanza and El Dolar veins have been identified and sampled.   Based on sampling and mapping we have identified the most attractive targets on the property and have permits in hand to initiate the drill program. We intend to begin a drill program later this year to test the most promising portions of the veins.

Public offering

On July 21, 2020, we entered into an Amended and Restated Underwriting Agreement (the “Underwriting Agreement”) with H.C. Wainwright & Co., LLC as representative of the underwriters named in Schedule I thereto (the “Underwriters”), providing for the issuance and sale by us in a firm commitment offering (the “Offering”) of 17,857,143

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shares of common stock at a price to the public of $0.42 per share (the “Offering Shares”). In addition, we granted the Underwriters an option to purchase, at the public offering price per share of common stock, up to an additional 2,678,571 shares of common stock, exercisable for 30 days from the date of the Underwriting Agreement (the “Option Shares”).  The Offering Shares and Option Shares were registered pursuant to our registration statement on Form S-3 (File No. 333-220461), and a prospectus supplement thereto filed with the Securities and Exchange Commission.  The Underwriters acquired the Offering Shares and the full amount of the Option Shares from us with an underwriting discount of six percent (6%) and we also agreed to reimburse them for customary fees and expenses.  After the underwriting discount of 6% and total offering expenses of approximately $225,000 we received net proceeds of approximately $7.9 million from the sale of the Offering Shares and the Option Shares.  We intend to use the proceeds from the Offering for working capital requirements and general corporate purposes.  The sale of the Offering Shares and Option Shares closed on July 24, 2020.

In connection with the Offering, the Company, its directors, executive officers, and certain stockholders, subject to certain exceptions, agreed to not sell or transfer any shares of common stock or securities convertible into, or exchangeable or exercisable for, the Company’s shares of common stock during a period ending 90 days after the closing of the Offering. This includes the Company’s use of the LPC Program and the ATM Program.

Offering and private placement transaction

On April 20, 2020, we entered into a securities purchase agreement with certain institutional investors providing for the issuance and sale of 15,000,000 shares of our common stock at a price of $0.20 per share, and in a concurrent private placement transaction, the issuance of 11,250,000 warrants, ultimately consisting of 7,500,000 series A warrants and 3,750,000 series B warrants, to purchase up to 11,250,000 shares of our common stock at an exercise price of $0.30 per share, for aggregate gross proceeds of $3.0 million. The securities purchase agreement contains customary representations, warranties and covenants, in addition to granting the investors the right to collectively participate in up to 50% of any future offerings of securities by the Company on the same terms as other investors, other than certain “exempt issuances” and “permitted sales” as defined therein, until the first anniversary of the closing date of the offering.

Each Warrant is exercisable six months from April 22, 2020, the date of issuance, and has a term expiring five years after such initial exercise date. The Warrants contain so-called full-ratchet anti-dilution provisions which may be triggered upon any future issuance by the Company of shares of its common stock or common stock equivalents at a per share price below the then-exercise price of the Warrant, subject to certain exceptions; provided, however, that with respect to the Series B warrants, the adjusted exercise price will not be less than $0.26.

Total costs for the offering were approximately $290,000, including the placement agent fee of six percent of the aggregate gross proceeds, except, however, that a reduced fee was accepted with respect to one investor.

Financial Results of Operations

For the results of continuing operations discussed below, we compare the results from operations for the three and six months ended June 30, 2020 to the results from operations for the three and six months ended June 30, 2019.  

Three Months Ended June 30, 2020

Revenue from oxide plant lease. We recorded revenue of $1.2 million and $2.0 million during three-month periods ended June 30, 2020 and 2019, respectively, related to the lease of our Velardeña oxide plant to a third party. The decrease in revenue during 2020 is primarily related to a reduction in the per tonne processing fees during the period relating to the