FTCO Fortitude Gold Corporation (QB)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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For the quarterly period ended March 31, 2022

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For the transition period from                      to                    

Commission File Number: 333-249533

Fortitude Gold Corporation

(Exact name of registrant as specified in its charter)

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2886 Carriage Manor Point

Colorado Springs, CO 80906

(Address of Principal Executive Offices)

(719) 717 9825

(Registrant’s telephone number)

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

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

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As of May 3, 2022, the registrant had 24,024,542 outstanding shares of common stock.

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

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

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

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FORTITUDE GOLD CORPORATION
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, unless otherwise stated)
(Unaudited)

1. Basis of Presentation of Financial Statements

These interim Condensed Consolidated Financial Statements (“interim financial statements”) of Fortitude Gold Corporation and its subsidiaries (collectively, the “Company”) are unaudited and have been prepared in accordance with the rules of the Securities and Exchange Commission for interim statements. Certain information and footnote disclosures required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) have been condensed or omitted as permitted by such rules, although the Company believes that the disclosures included are adequate to make the information presented not misleading. The interim financial statements included herein are expressed in United States dollars. In the opinion of management, all adjustments (all of which are of a normal recurring nature) and disclosures necessary for a fair presentation of these interim financial statements have been included. The results reported in these interim financial statements are not necessarily indicative of the results that may be reported for the entire year. These interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021 included in the Company’s annual report on Form 10-K. The year-end balance sheet data were derived from the audited financial statements. Unless otherwise noted, there have been no material changes to the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s annual report on Form 10-K. All intercompany accounts and transactions have been eliminated in consolidation.

Certain items in the prior period’s Condensed Consolidated Financial Statements have been reclassified to conform to the current presentation.

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2. Related Party Transactions

On December 31, 2020, the Company was spun-off from Gold Resource Corporation (“GRC”). In connection with the spin-off, the Company entered into a Management Services Agreement (“MSA” or “Agreement”) with GRC that governed the relationship of the parties following the spin-off. The MSA provided that the Company received services from GRC and its subsidiaries to assist in the transition of the Company as a separate company including, managerial and technical supervision, advisory and consultation with respect to mining operations, exploration, environmental, safety and sustainability matters. The Company also received certain administrative services related to information technology, accounting and financial advisory services, legal and compliance support and investor relations and shareholder communication services. The agreed upon charges for services rendered were based on market rates that align with the rates that an unaffiliated service provider would charge for similar services. The MSA’s initial term was to expire on December 31, 2021, would automatically renew annually and could be cancelled upon 30 days written notice by one party to the other during the term.  On April 21, 2021, GRC provided the Company 30 days written notice to cancel the MSA effective May 21, 2021. During the three months ended March 31, 2022 and 2021, the Company recognized expense of nil and $0.4 million, respectively, related to the MSA.

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3. Revenue

The following table presents the Company’s net sales:

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4. Inventories

At March 31, 2022 and December 31, 2021, current inventories consisted of the following:

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In addition to the inventory above, as of March 31, 2022 and December 31, 2021, the Company has $2.6 million of low-grade ore stockpile inventory included in other non-current assets.

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5. 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.  The Company files a consolidated U.S. income tax return and at the federal level its income and losses are taxed at 21%.  In addition, a 5% Net Proceeds of Minerals tax applies to the Company’s operations in Nevada, and such tax is recorded as an income tax.  The Company recorded income and mining tax expense of $0.4 million and $1.0 million for the three months ended March 31, 2022 and 2021, respectively. In accordance with ASC 740, the interim provision for taxes was calculated by using the annual effective tax rate.  This rate is applied to the year-to-date income before income and mining taxes to determine the income tax expense for the period.

The Company evaluates the evidence available to determine whether a valuation allowance is required on the deferred tax assets. The Company determined that its deferred tax assets were “more likely than not” to be realized as of March 31, 2022 and December 31, 2021, thus no valuation allowance was determined to be necessary.

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As of March 31, 2022, the Company believes that is has no liability for uncertain tax positions.

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6. Prepaid Expenses and Other Current Assets

At March 31, 2022 and December 31, 2021, prepaid expenses and other current assets consisted of the following:

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7. Property, Plant and Mine Development, net

At March 31, 2022 and December 31, 2021, property, plant and mine development consisted of the following:

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For the three months ended March 31, 2022 and 2021, the Company recorded depreciation and amortization expense of $2.8 million and $3.7 million, respectively.

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8. Other Current Liabilities

At March 31, 2022 and December 31, 2021, other current liabilities consisted of the following:

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9. Asset Retirement Obligation

The following table presents the changes in the Company’s asset retirement obligation for the three months ended March 31, 2022 and year ended December 31, 2021:

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As of March 31, 2022, the Company had a $7.1 million off-balance sheet arrangement consisting of a $12.2 million surety bond off-set by a $5.1 million asset retirement for future reclamation obligations for the Company’s Isabella Pearl Mine. As of December 31, 2021, the Company had a $7.5 million off-balance sheet arrangement consisting of a $12.2 million surety bond off-set by a $4.7 million asset retirement obligation for future reclamation obligations for the Company’s Isabella Pearl Mine. The Company’s asset retirement obligations were discounted using a credit adjusted risk-free rate of 8%.

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10. Commitments and Contingencies

The Company has a Contract Mining Agreement with a mining contractor relating to mining activities at its Isabella Pearl Mine. Included in this Agreement is an embedded lease for the mining equipment for which the Company has recognized a right-of-use asset and corresponding operating lease liability. Please see Note 11 for more information. In addition to the embedded lease payments, the Company pays the contract miner operational costs in the normal course of business. These costs represent the remaining future contractual payments for the Contract Mining Agreement over its term. The contractual payments are determined by rates within the Contract Mining Agreement, estimated tonnes moved and bank cubic yards for drilling and blasting. As of March 31, 2022, total estimated contractual payments remaining, excluding embedded lease payments, are nil for the year ended December 31, 2022. In April 2022, the Company extended the Contract Mining Agreement for a nine-month term.

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11. Leases

Operating Leases

Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases as incurred over the lease term. The Company accounts for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components (e.g., common-area maintenance costs).

The depreciable life of assets is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The weighted average remaining lease term for the Company’s operating leases as of March 31, 2022 is nil years.

The discount rate implicit within the Company’s leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for the Company’s leases is determined based on the lease term adjusted for impacts of collateral. The weighted average discount rate used to measure the Company’s operating lease liabilities as of March 31, 2022 was 4.48%.

There are no material residual value guarantees and no restrictions or covenants imposed by the Company’s leases.

The Company has an embedded lease in its Contract Mining Agreement which was renewed for a three-month period in October 2021. In February 2022, the Company extended the Contract Mining Agreement for another two-month period

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resulting in the recognition of a $1.1 million right-of-use asset and corresponding $1.1 operating lease liability. The Company’s lease payments for its mining equipment embedded lease are determined by tonnage hauled. This embedded lease is within a Contract Mining Agreement entered into for the mining activities at the Company’s Isabella Pearl Mine. The payments, amortization of the right-of-use asset, and interest vary immaterially from forecasted amounts due to variable conditions at the mine. The Company capitalized variable lease costs of $1.7 million to Inventory during the three months ended March 31, 2022 and 2021. In April 2022, the Company extended the Contract Mining Agreement for a nine-month term for its mining activities at the Isabella Pearl Mine.

Supplemental cash flow information related to the Company’s operating lease is as follows for the three months ended March 31, 2022 and 2021:

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12. Other Expense, Net

For the three months ended March 31, 2022 and 2021, other expense, net consisted of the following:

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13. Net Income per Common Share

Basic earnings per common share is calculated based on the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated based on the assumption that stock options and other dilutive securities outstanding, which have an exercise price less than the average market price of the Company’s common shares during the period, would have been exercised on the later of the beginning of the period or the date granted and that the funds obtained from the exercise were used to purchase common shares at the average market price during the period.

The effect of the Company’s dilutive securities is calculated using the treasury stock method and only those instruments that result in a reduction in net income per common share are included in the calculation. As of March 31, 2022 and 2021, potentially dilutive securities representing 100,000 shares and nil shares, respectively, of common stock were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

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Basic and diluted net income per common share is calculated as follows:

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14. Fair Value Measurement

Fair value accounting establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

As required by accounting guidance, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables set forth certain of the Company’s assets measured at fair value by level within the fair value hierarchy as of March 31, 2022 and December 31, 2021:

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The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents consist primarily of cash deposits and are valued at cost, which approximates fair value.

Accounts receivable include amounts due to the Company for deliveries of doré sold to customers, which approximates fair value.

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15. Stock-Based Compensation

The Fortitude Gold Corporation 2020 Equity Incentive Plan (the “Incentive Plan”) allows for the issuance of up to 5 million shares of common stock in the form of incentive and non-qualified stock options, stock appreciation rights, restricted stock units (“RSUs”), stock grants, and stock units. The Company utilizes this Incentive Plan to attract, retain and incentivize staff.

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During the three months ended March 31, 2021, in conjunction with its staffing process after the spin-off from GRC, the Company issued 2,220,000 shares of its common stock to officers, directors, management and other key personnel.  These shares immediately vested and had a weighted average fair value $1.40 per share. No shares were issued during the three months ended March 31, 2022.

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During the three months ended March 31, 2022, the Company issued options to purchase 30,000 shares of its common stock to employees. The options vest over a period of three years.  The Company used the Black-Scholes option valuation model to value the options with the following weighted average assumptions: stock price of $7.06, expected term of 3.5 years, risk free rate of 2.06%, expected volatility of 75.87%, and an assumed dividend rate of 7.25%.  During the three months ended March 31, 2021, the Company issued options to purchase 332,000 shares of its common stock to employees and key personnel other than its officers or directors. The options vest over a period of three years.  The Company used the Black-Scholes option valuation model to value the options with the following weighted average assumptions: stock price of $1.00, expected term of 3.5 years, risk free rate of 0.29%, expected volatility of 73.58%, and an assumed dividend rate of 0%.  

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 During the three months ended March 31, 2022, stock options to purchase an aggregate of 63,334 shares of the Company’s common stock were exercised at a weighted average exercise price of $1.00 per share. No stock options were exercised during the three months ended March 31, 2021.

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Stock-based compensation is included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. For the three months ended March 31, 2022 and 2021, the Company recorded $0.05 and $3.1 million, respectively, of stock-based compensation.  

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16. Shareholders’ Equity

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On January 11, 2021, the Company completed a private placement sale of 500,000 shares of its common stock at $1.00 per share to 20 individual investors. The shares have a restrictive legend with no registration rights. No commission or finder’s fee was paid in connection with the private placement.

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During the three months ended March 31, 2022, the Company declared and paid dividends of $2.9 million or $0.12 per share. No dividends were paid during the three months ended March 31, 2021.

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See Note 15 for information concerning shares and options granted pursuant to the Company's Equity Incentive Plan.

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Operating Data: The following tables summarize certain information about our operations at our Isabella Pearl Mine for the periods indicated:

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Consolidated Results of Operations – Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Sales, net.  For the three months ended March 31, 2022, consolidated sales, net were $15.4 as compared to $20.7 million for the same period in 2021. The decrease is attributable to lower sales volumes. First quarter 2022 gold sales volumes decreased 28% from the same period in 2021 as a result of lower production due to lower-grade ore processed. Mine operations in the first quarter focused primarily on waste removal of the phase one open-pit layback. With phase-one now complete, the Company is now focused on phase-two mining with access to the mine’s high-grade Pearl zone.

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Mine gross profit. For the three months ended March 31, 2022, we recorded $6.8 million mine gross profit compared to $10.9 million mine gross profit for the same period in 2021. The change is attributable to lower sales, as mentioned above.

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General and administrative. For the three months ended March 31, 2022, general and administrative expenses totaled $1.2 million as compared to $6.2 million for the same period in 2021. The decrease in 2022 was primarily the result of costs incurred in 2021 to fully staff the Company post spin-off as a standalone entity.

Exploration expenses. For the three months ended March 31, 2022, property exploration expenses totaled $2.5 million as compared to $1.3 million for the same period of 2021. The increased exploration expense was the result of drilling at the Golden Mile property to further define the resource and move toward a development decision.

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 Other expense, net. For the three months ended March 31, 2022, other expense, net did not materially change from the same period in 2021.

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Income and mining tax expense. For the three months ended March 31, 2022, income and mining tax expense was $0.4 million as compared to $1.0 million for the same period in 2021. The decrease is the result of our decreased income before income and mining taxes and decreased Nevada net proceeds of minerals tax as a result of decreased metal sales.  See Note 5 to the Condensed Consolidated Financial Statements.

Net income. For the three months ended March 31, 2022 we recorded net income of $2.6 million as compared to $2.4 million in the corresponding period for 2021. The increase is due to the changes in our consolidated results of operations as discussed above. 

COVID-19 Update

In March 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure. In response to the pandemic, many jurisdictions, including the United States, instituted restrictions on travel, public gatherings, and certain business operations.

During 2022 and 2021, and as of the date of this report, the mining industry is listed as an essential business in the state of Nevada.  Accordingly, we continue to operate the Isabella Pearl Mine while utilizing safety measures and protocols. In an effort to mitigate the spread of COVID-19 and protect the health and safety of our employees, contractors, and communities, we have taken precautionary measures including specialized training, social distancing, screening workers before they enter facilities, a work from home mandate where possible, and close monitoring of national and regional COVID-19 impacts and governmental guidelines. As our non-mining workforce is able to work remotely using various technology tools, we have been able to maintain our operations and internal controls over financial reporting and disclosures.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including widely available and utilized vaccines, the duration and severity of the pandemic and related restrictions, all of which are uncertain and cannot be predicted.

Non-GAAP Measures

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Throughout this report, we have provided information prepared or calculated according to U.S. GAAP and have referenced some non-GAAP performance measures which we believe will assist with understanding the performance of

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our business. These measures are based on precious metal gold equivalent ounces sold and include cash cost before by-product credits per ounce, total cash cost after by-product credits per ounce, and total all-in sustaining cost per ounce (“AISC”). Because the non-GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation, or as a substitute for measures of performance prepared in accordance with U.S. GAAP. These non-GAAP measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.

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Revenue generated from the sale of silver is considered a by-product of our gold production for the purpose of our total cash cost after by-product credits for our Isabella Pearl Mine. We periodically review our revenues to ensure that our reporting of primary products and by-products is appropriate. Because we consider silver to be a by-product of our gold production, the value of silver continues to be applied as a reduction to total cash costs in our calculation of total cash cost after by-product credits per precious metal gold equivalent ounce sold. Likewise, we believe the identification of silver as by-product credits is appropriate because of its lower individual economic value compared to gold and since gold is the primary product we produce.

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Total cash cost, after by-product credits, is a measure developed by the Gold Institute to provide a uniform standard for comparison purposes. AISC is calculated based on the current guidance from the World Gold Council.

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Total cash cost before by-product credits includes all direct and indirect production costs related to our production of metals (including mining, crushing and conveying and other plant facility costs, royalties, and site general and administrative costs) plus treatment and refining costs.

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Total cash cost after by-product credits includes total cash cost before by-product credits less by-product credits, or revenues earned from silver.

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AISC includes total cash cost after by-product credits plus other costs related to sustaining production, including sustaining allocated general and administrative expenses and sustaining capital expenditures. We determined sustaining capital expenditures as those capital expenditures that are necessary to maintain current production and execute the current mine plan.

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Cash cost before by-product credits per ounce, total cash cost after by-product credits per ounce and AISC are calculated by dividing the relevant costs, as determined using the cost elements noted above, by precious metal gold equivalent ounces sold for the periods presented.

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The following table presents the non-GAAP measures of total cash cost and AISC (in thousands, except ounces sold and cost per precious metal gold equivalent ounce sold):

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The following tables summarize our by-product revenue and by-product credit per precious metal gold ounce sold (in thousands):

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Liquidity and Capital Resources

As of March 31, 2022, we had a cash position of $36.3 million compared to $40.0 million at December 31, 2021. The decrease is primarily due to increased capital expenditures for the Golden Mile property.

As of March 31, 2022, we had positive working capital of $75.7 million compared to $76.0 million at December 31, 2021. Our working capital balance fluctuates as we use cash to fund our operations, financing and investing activities, including exploration, mine development and income taxes.  With our working capital balance as of March 31, 2022, we believe that our liquidity and capital resources are adequate to fund our operations, exploration, capital, and corporate activities for the next twelve months.

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Net cash provided by operating activities for the three months ended March 31, 2022 was $4.1 million, compared to $7.3 million for three months ended March 31, 2021. The decrease is primarily due to changes in non-cash adjustments for stock-based compensation and depreciation as well as changes operating assets and liabilities, primarily inventories.

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Net cash used in investing activities for the three months ended March 31, 2022 was $4.9 million compared to $0.1 million during the same period in 2021. The increase is primarily due to capital expenditures related to Golden Mile.

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Net cash used in financing activities was $2.8 million for three months ended March 31, 2022 compared to $0.2 million net cash provided by financing activities for three months ended March 31, 2021.  The net change is due to dividend payments in 2022, whereas in 2021, financing activities were substantially comprised of cash received from the private placement.

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Development and Exploration Activities

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Isabella Pearl Mine: During the first quarter of 2022, our open pit, heap leach operations at the Isabella Pearl Mine continued and we completed construction of the heap leach pad expansion project.  Exploration activities during the quarter targeted expansion along the Isabella Pearl trend, including 7 in-fill and step-out reverse circulation (“RC”) drill holes totaling 713 meters.  This drilling was mainly conducted outside the current permitted mine plan.  Review of all exploration results also continued for future investigation and possible drill targeting along the Isabella Pearl mine mineralized trend.

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Golden Mile property: During the first quarter, we completed condemnation RC drilling to confirm locations for heap leach pad, process facilities and waste storage facilities. During the quarter, we also commenced a Phase 2 RC drill campaign for primarily infill, step-down as well as step-out drill holes to test the depth and strike extent of the mineralization. During the quarter, we completed 47 RC holes totaling 6,693 meters.  The results from this drilling will be incorporated into our geological model. We are targeting to update our resource estimate and potentially convert mineral resources to mineral reserves in 2022.  Engineering, base line and background studies are also on-going for our process facility layout, open-pit design, and infrastructure evaluations at Golden Mile.  We have also advanced our hydrogeological understanding of the property to help delineate a potential production water resource at Golden Mile.  During 2022, we will continue to evaluate the known mineralized zones among a much larger conceptual project plan of multiple open pits along a trend at Golden Mile to the northwest and onto the Mina Gold property.  We are evaluating the potential of at least three pits feeding ore to a strategically located heap leach and process facility. The project’s process plant is being designed and engineered to take the gold to carbon stage and then haul the carbon for processing at our ADR facility at Isabella Pearl for final doré production.

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County Line property: During the first quarter, we advanced our 3D geological modeling of the County Line mineralization and commenced site investigations to aid in planning our initial RC drilling program at County Line this year.  This program is designed to evaluate the resource potential of the gold-bearing volcanic rocks remaining in the vicinity of the historic County Line open-pit.  Fieldwork during the quarter included drone flights and ground surveys along with installation of a chain link fence for security purposes.    

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East Camp Douglas property: During the first quarter, we continued to review our data in preparation of a follow-up drill program targeted for this year. The objective of this program is to continue to evaluate the resource potential of the gold-bearing silicified volcanic rocks of the lithocap target area.

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Accounting Developments

Recently issued accounting pronouncements have been evaluated and do not presently impact our financial statements and supplemental data.

Forward-Looking Statements

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This report contains or incorporates by reference “forward-looking statements,” as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others:

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