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 SEPTEMBER 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 November 4, 2020, 151,512,652 shares of common stock, $0.01 par value per share, were issued and outstanding.


GOLDEN MINERALS COMPANY

FORM 10-Q

QUARTER ENDED SEPTEMBER 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)

September 30,

December 31,

    

2020

    

2019

 

(in thousands, except share data)

 

Assets

Current assets

Cash and cash equivalents (Note 5)

$

8,658

$

4,593

Lease receivables

 

502

 

448

Inventories, net (Note 8)

 

199

 

231

Derivative at fair value (Note 7)

251

254

Value added tax receivable, net (Note 9)

 

69

 

Prepaid expenses and other assets (Note 6)

570

669

Total current assets

 

10,249

 

6,195

Property, plant and equipment, net (Note 10)

 

5,343

 

6,031

Other long term assets (Note 11)

 

988

 

1,131

Total assets

$

16,580

$

13,357

Liabilities and Equity

Current liabilities

Accounts payable and other accrued liabilities (Note 12)

$

1,304

$

2,127

Deferred revenue, current (Note 19)

100

472

Debt - related party (Note 13)

Other current liabilities (Note 14)

 

230

 

1,824

Total current liabilities

 

1,634

 

4,423

Asset retirement and reclamation liabilities (Note 15)

 

3,102

 

2,839

Other long term liabilities (Note 14)

 

385

 

494

Total liabilities

 

5,121

 

7,756

Commitments and contingencies (Note 22)

Equity (Note 18)

Common stock, $.01 par value, 200,000,000 shares authorized; 149,012,652 and 106,734,279 shares issued and outstanding respectively

 

1,490

 

1,067

Additional paid in capital

 

533,694

 

521,314

Accumulated deficit

 

(523,725)

 

(516,780)

Shareholders' equity

 

11,459

 

5,601

Total liabilities and equity

$

16,580

$

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

Nine Months Ended

September 30,

September 30,

  

2020

    

2019

  

2020

  

2019

(in thousands except per share data)

(in thousands, except per share data)

Revenue:

Oxide plant lease (Note 19)

$

2,146

$

1,944

$

4,566

$

5,852

Total revenue

2,146

1,944

4,566

5,852

Costs and expenses:

Oxide plant lease costs (Note 19)

(582)

(594)

(1,566)

(1,804)

Exploration expense

 

(1,226)

 

(935)

 

(3,681)

 

(3,119)

El Quevar project expense

 

(130)

 

(582)

 

(623)

 

(1,584)

Velardeña care and maintenance costs

 

(206)

 

(422)

 

(861)

 

(1,391)

Administrative expense

 

(852)

 

(742)

 

(2,782)

 

(2,784)

Stock based compensation

 

(105)

 

(72)

 

(771)

 

(725)

Reclamation expense

 

(63)

 

(57)

 

(184)

 

(171)

Other operating (expense) income, net

 

24

 

45

 

(78)

 

225

Depreciation and amortization

 

(226)

 

(270)

 

(770)

 

(814)

Total costs and expenses

 

(3,366)

 

(3,629)

 

(11,316)

 

(12,167)

Loss from operations

 

(1,220)

 

(1,685)

 

(6,750)

 

(6,315)

Other expense:

Interest and other expense, net (Note 20)

 

(12)

 

(42)

 

(85)

 

(182)

Loss on foreign currency

 

(36)

 

(24)

 

(92)

 

(63)

Total other loss

(48)

(66)

(177)

(245)

Loss from operations before income taxes

 

(1,268)

 

(1,751)

 

(6,927)

 

(6,560)

Income taxes (Note 17)

(18)

(9)

(18)

(9)

Net loss

$

(1,286)

$

(1,760)

$

(6,945)

$

(6,569)

Net loss per common share — basic

Loss

$

(0.01)

$

(0.02)

$

(0.06)

$

(0.07)

Weighted average Common Stock outstanding - basic (1)

 

143,285,564

 

104,764,260

 

124,956,140

 

99,263,135


(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)

Nine Months Ended

 

September 30,

    

2020

    

2019

 

(in thousands)

 

Cash flows from operating activities:

Net cash used in operating activities (Note 21)

$

(7,891)

$

(3,122)

Cash flows from investing activities:

Proceeds from sale of assets

 

25

 

144

Proceeds from sale of trading securities

113

Acquisitions of property, plant and equipment

 

(101)

 

(28)

Net cash provided by (used in) investing activities

$

(76)

$

229

Cash flows provided by (used in) financing activities:

Proceeds from issuance of common stock, net of issuance costs

 

12,032

 

2,492

Proceeds from related party loan (Note 13)

1,000

Payment of related party loan (note 13)

(1,000)

Net cash from financing activities

$

12,032

$

2,492

Net Increase (decrease) in cash and cash equivalents

 

4,065

 

(401)

Cash and cash equivalents, beginning of period

 

4,593

 

3,293

Cash and cash equivalents, end of period

$

8,658

$

2,892

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

$

(511,125)

$

7,636

Stock compensation accrued (Note 18)

337

337

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)

1,213,642

12

313

325

Net loss

(2,351)

(2,351)

Balance, March 31, 2019

96,868,433

$

968

$

519,050

$

(513,476)

$

6,542

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

312,000

3

89

92

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

900,000

9

194

203

Net loss

(2,458)

(2,458)

Balance, June 30, 2019

98,080,433

$

980

$

519,333

$

(515,934)

$

4,379

Stock compensation accrued (Note 18)

73

73

Registered direct offering agreement, net (Note 18)

8,653,846

87

1,860

1,947

Deemed dividend on warrants (Note 5)

2

(2)

Net loss

 

 

 

(1,760)

 

(1,760)

Balance, September 30, 2019

106,734,279

$

1,067

$

521,268

$

(517,696)

$

4,639

Adjustment related to correction of immaterial error (Note 2)

(267)

(267)

Adjusted Balance, September 30, 2019

106,734,279

$

1,067

$

521,268

$

(517,963)

$

4,372

Balance, December 31, 2019

106,734,279

$

1,067

$

521,314

$

(516,780)

$

5,601

Stock compensation accrued (Note 18)

52

52

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

Net loss

(3,336)

(3,336)

Balance, March 31, 2020

108,457,731

$

1,085

$

521,787

$

(520,116)

$

2,756

Stock compensation accrued (Note 18)

614

614

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

(2,323)

(2,323)

Balance, June 30, 2020

128,176,938

$

1,282

$

525,844

$

(522,439)

$

4,687

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

300,000

3

102

105

Public offering (Note 18)

20,535,714

205

7,748

7,953

Net loss

(1,286)

(1,286)

Balance, September 30, 2020

149,012,652

$

1,490

$

533,694

$

(523,725)

$

11,459

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 Rodeo property, 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.  The Rodeo property, 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 September 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 September 30, 2020 and December 31, 2019 consist of the following:

    

September 30,

    

December 31,

2020

    

2019

(in thousands)

 

Prepaid insurance

$

198

$

494

Recoupable deposits and other

 

372

 

175

$

570

$

669

The September 30, 2020 recoupable deposits and other includes a receivable from Barrick for reimbursement of costs of approximately $0.2 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 September 30, 2020 and December 31, 2019, the Company had recorded a “Derivative at fair value” asset of approximately $251,000 and $254,000, respectively.  At September 30, 2020 and December 31, 2019, the

9


Company had also recorded “Deferred Revenue” of approximately $45,000 and $180,000, related to the amended lease agreement. At September 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 $3,000 related to the change in the fair value of the derivative between December 31, 2019 and September 30, 2020. During the first nine months of 2020, the Company also recognized approximately $135,000 “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 September 30, 2020 and December 31, 2019 consist of the following:

September 30,

December 31,

 

    

2020

    

2019

 

(in thousands)

Material and supplies

$

199

$

231

$

199

$

231

The material and supplies inventory at September 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 September 30, 2020, the Company has also recorded approximately $37,000 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:

September 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

 

16,027

 

16,049

Other furniture and equipment

 

887

 

884

Asset retirement cost

 

948

 

866

 

33,588

 

33,625

Less: Accumulated depreciation and amortization

 

(28,245)

 

(27,594)

$

5,343

$

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).

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 is subject to, among other contingencies, (i) a 10 business-day period, which has since expired, during which Fabled conducted 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 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. The time limit for completing the definitive option agreement was subsequently extended to December 15, 2020. 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.

Property Abandonment

During the second quarter 2020, the Company allowed certain concessions related to the Company’s immaterial Abalena 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 September 30, 2020 and December 31, 2019.  

11


11.Other Long-Term Assets

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

    

September 30,

    

December 31,

2020

2019

(in thousands)

 

Deferred offering costs

$

479

$

511

Right of use assets

 

509

 

620

$

988

$

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:

September 30,

December 31,

2020

2019

 

(in thousands)

 

Accounts payable and accruals

$

583

$

710

Accrued employee compensation and benefits

721

724

Value added tax payable

401

Income taxes payable

 

 

292

$

1,304

$

2,127

September 30, 2020

Accounts payable and accruals at September 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 $0.4 million related to exploration and corporate administrative activities.

Accrued employee compensation and benefits at September 30, 2020 consist of $0.3 million of accrued vacation payable and $0.4 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.

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.

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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 at the date of the Loan Agreement. The Sentient Loan had an interest rate of 10% per annum and was due in full, together with accrued interest and any other amount outstanding under the Loan Agreement, on December 31, 2020. On August 12, 2020 the Company repaid the Sentient Loan in full in the amount of approximately $1,037,159 (including all accrued interest), with no prepayment penalty, and terminated, the Loan Agreement.

14.     Other Liabilities

Other Current Liabilities

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

September 30,

December 31,

    

2020

2019

(in thousands)

Autlán refundable deposit

$

$

1,251

Premium financing

108

455

Office lease liability

 

122

 

118

$

230

$

1,824

The Autlán refundable deposit is the remaining principal plus interest liability related to the deposit received for the proposed sale of the Company’s 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 was 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. 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 was increased from 11% per annum to 12% per annum, effective on April 9, 2020, with the remaining balance due in full by December 2020. At September 30, 2020 the Company had repaid Autlán the full $1.5 million deposit, plus approximately $66,000 of interest and no amounts remained due. The Company recorded approximately $55,000 of interest expense for the nine months ended September 30, 2020 related to the Autlán refundable deposit.

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 September 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 September 30, 2020 the remaining balance, plus accrued interest, was approximately $108,000.

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 September 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).

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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 nine months of 2020, the Company recognized approximately $184,000 of accretion expense.

The following table summarizes activity in the Velardeña Properties ARO:

Nine Months Ended

 

September 30,

    

2020

    

2019

 

(in thousands)

 

Beginning balance

$

2,825

$

2,660

Changes in estimates, and other

 

82

 

(60)

Accretion expense

 

184

 

167

Ending balance

$

3,091

$

2,767

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 September 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 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.

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

    

Level 1

    

Level 2

    

Level 3

    

Total

 

(in thousands)

 

At September 30, 2020

Assets:

Cash and cash equivalents

$

8,658

$

$

$

8,658

Derivative at fair value

 

 

 

251

 

251

$

8,658

$

$

251

$

8,909

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, 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 Company performed its own valuation of the derivative asset at September 30, 2020 based on an assumed average 95 percent probability that the silver price would remain above $20.00 per ounce for the remainder of the lease term. The valuations fall 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 September 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 September 30, 2020 or December 31, 2019.

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 nine months ended September 30, 2020 the Company recognized $18,000 of income tax expense. For the nine months ended September 30, 2019 the Company recognized income tax expense of $9,000. 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.

15


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 September 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 September 30, 2020 or December 31, 2019.

18.     Equity

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.  On July 24, 2020, the Underwriters acquired the Offering Shares and the full amount of the Option Shares from the Company.  After the underwriting discount of 6% and total offering expenses of approximately $155,000 the company received net proceeds of approximately $8.0 million from the sale of the Offering Shares and the Option Shares.  

Subscription agreement

In connection with the Earn-In Agreement (see Note 11), the Company and Barrick 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

16


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 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, which is currently set to expire in May 2021.

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

17


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.

During the nine months ended September 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 September 30, 2020.

During the nine months ended September 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 nine 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 September 30, 2020.

During the first nine 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. However, as of October 31, 2020, the Company does not have availability under its shelf registration statement due to limitations imposed under SEC rules for public companies with a public float of less than $75 million.  As such, we do not currently have the ability to issue shares under the ATM Program until such time as the calculation of our shelf registration capacity changes.

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.

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The following table summarizes the status of the Company’s restricted stock grants issued under the Equity Plan at September 30, 2020 and the changes during the nine 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

 

300,000

 

0.42

Restrictions lifted during the period

 

(297,333)

 

0.35

Forfeited during the period

 

 

Outstanding September 30, 2020

320,670

$

0.37

For the nine months ended September 30, 2020 the Company recognized approximately $90,000 of compensation expense related to the restricted stock grants.  The Company expects to recognize additional compensation expense related to these awards of approximately $98,000 over the next 22 months. The grants made during the period were to 7 current employees, with one third of the grants vesting immediately on the grant date and one third vesting on each of the first and second anniversaries of the grant date. The restrictions lifted during the period include the 100,000 shares of current period grants that vested on the grant date. The remaining restrictions lifted during the period are related to grants made to the same 7 employees in prior years.

The following table summarizes the status of the Company’s stock option grants issued under the Equity Plan at September 30, 2020 and the changes during the nine 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 September 30, 2020

$

Exercisable at end of period

 

$

Granted and vested

 

$

As of September 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.

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The following table summarizes the status of the RSU grants issued under the Deferred Compensation Plan at September 30, 2020 and the changes during the nine 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 September 30, 2020

3,610,038

$

0.70

For the nine months ended September 30, 2020 the Company recognized approximately $233,000 of compensation expense related to the RSU grants. The Company expects to recognize additional compensation expense related to the RSU grants of approximately $135,000 over the next 9 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.

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 September 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 September 30, 2020 and December 31,2019, respectively.

20


Common stock warrants

The following table summarizes the status of the Company’s common stock warrants at September 30, 2020 and the changes during the nine 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 September 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 under “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 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 under “Equity – Registered direct offering”, on July 17, 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 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 September 30, 2020 and December 31, 2019.

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

For the nine months ended September 30, 2020 the Company recorded revenue of approximately $4.6 million and related costs of approximately $1.6 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.

21


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

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 nine months ended September 30, 2020 the Company recognized approximately $0.2 million of amortized income related to the upfront cash payment. As of September 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.  

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. During each of the three months ended September 30, 2020, the Comex daily silver spot closing average price exceeded $20.00 per ounce. As a result, the Company received the higher $22.00 per tonne for material processed during those months. 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.

On July 7, 2020, the Company received notification from Hecla terminating the Lease Agreement pursuant to the Third Amendment, effective November 30, 2020. Pursuant to the terms of the Lease Agreement, Hecla had a one-time right of first refusal to continue to lease the plant following a termination notice through December 31, 2020 if the Company decided to use the oxide plant for its own purposes before December 31, 2020. The Company provided written notice to Hecla of its intent to use the oxide plant for its own purposes and Hecla provided written confirmation to the Company that it would not exercise its right of first refusal pursuant to the Lease Agreement.

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 nine-month period ended September 30, 2020 the amortization of the upfront lease payment and the decrease in the derivative asset (Note 7) were recorded as an increase of approximately $132,000 to “Revenue: Oxide plant lease” in the Consolidated Statements of Operations.  

22


For the nine months ended September 30, 2019 the Company recorded revenue of approximately $5.9 million and related costs of approximately $1.8 million associated with the lease of the Velardeña Properties oxide plant. During the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2019 the Company recognized approximately $0.2 million of Interest and Other Expense primarily related to the sale of Golden Tag shares held by the Company at that time.  All the Golden Tag shares were sold during the third quarter 2019.  

21.     Supplemental Cash Flow Information

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

Nine Months Ended September 30,

 

    

2020

    

2019

 

(in thousands)

 

Cash flows from operating activities:

Net loss

$

(6,945)

$

(6,569)

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

Depreciation and amortization

 

770

 

814

Accretion of asset retirement obligation

 

184

 

167

Decrease in derivative at fair value, net

3

Loss on trading securities

 

 

217

Asset write off

 

100

 

19

Gain on sale of assets

 

(25)

 

(144)

Stock compensation

 

771

 

725

Changes in operating assets and liabilities from continuing operations:

(Increase) decrease in lease receivable

(54)

21

Decrease in prepaid expenses and other assets

 

30

 

244

Decrease in inventories

 

33

 

3

Decrease in value added tax recoverable, net

 

 

2

Decrease (increase) in other long term assets

 

143

 

(396)

Decrease in reclamation liability

 

(3)

 

(68)

(Decrease) increase in accounts payable and accrued liabilities

 

(823)

 

135

(Decrease) increase in other current liabilities

(1,594)

1,500

Decrease in deferred revenue

(372)

(219)

(Decrease) increase in other long term liabilities

 

(109)

 

427

Net cash used in operating activities

$

(7,891)

$

(3,122)

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

Nine Months Ended September 30,

 

    

2020

    

2019

 

(in thousands)

 

Supplemental disclosure:

Interest paid

$

95

$

Income taxes paid

$

284

$

Supplemental disclosure of non-cash transactions:

Deferred equity offering costs amortized

$

32

$

58

23


22.     Commitments and Contingencies

At September 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.

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

 

September 30, 2020

    

Revenue

    

to Sales

    

Amortization

    

Expense

    

loss

    

Total Assets

    

Expenditures

 

Velardeña Properties

 

$

2,146

 

$

582

 

$

162

 

$

358

 

$

(959)

 

$

65

Corporate, Exploration and Other

64

2,056

2,227

35

 

$

2,146

 

$

582

 

$

226

 

$

2,414

 

$

1,268

 

$

100

Nine Months Ended

September 30, 2020

Velardeña Properties

 

$

4,566

$

1,566

$

562

$

1,339

$

(820)

$

4,912

 

$

66

Corporate, Exploration and Other

 

 

208

 

6,608

 

7,747

 

11,668

35

 

$

4,566

 

$

1,566

 

$

770

 

$

7,947

 

$

6,927

 

$

16,580

 

$

101

Three Months Ended

September 30, 2019

Velardeña Properties

 

$

1,944

 

$

594

 

$

195

 

$

686

 

$

(276)

 

$

Corporate, Exploration and Other

75

1,995

2,027

1

 

$

1,944

 

$

594

 

$

270

 

$

2,681

 

$

1,751

 

$

1