PZG Paramount Gold and Silver Corp

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

Certain statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give the Company's current expectations and forecasts of future events. All statements other than statements of current or historical fact contained in this quarterly report, including statements regarding the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements. These statements are based on the Company's current plans, and the Company's actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Any or all of the forward-looking statements in this quarterly report may turn out to be inaccurate. The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q, and in the risk factors on Form 10-K that was filed with the U.S. Securities and Exchange Commission (SEC) on September 25, 2020. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

Cautionary Note to U.S. Investors

Paramount is subject to the reporting requirements of the Exchange Act and this filing and other U.S. reporting requirements are governed by the SEC Industry Guide 7.  Additionally, Paramount is subject to certain reporting requirements under applicable Canadian securities laws with respect to our material mineral properties under National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) We caution investors that certain terms used under Canadian reporting requirements and definitions of NI 43-101 to describe mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made.  Therefore, investors are cautioned not to assume that all or any part of the mineralized material contained at any of our material projects will ever be converted to Industry Guide 7 compliant reserves.

Overview

We are a company engaged in the business of acquiring, exploring and developing precious metal projects in the United States of America. Paramount owns advanced stage exploration projects in the states of Nevada and Oregon.  We enhance the value of our projects by implementing exploration and engineering programs that have the goal to expand and upgrade known mineralized material to reserves.  The following discussion updates our outlook and plan of operations for the foreseeable future.  It also analyzes our financial condition and summarizes the results of our operations for the three and six-month period ended December 31, 2020 and compares these results to the results of the prior year three and six-month period ended December 31, 2019.

Operating Highlights:

During the six-month period ended December 31, 2020, the Company announced that the Oregon Water Resource Department (“OWRD”) had reviewed and approved the plans and specifications for the tailings dam proposed for the Grassy Mountain mine and stated that from a safety perspective the plans are construction ready.  The OWRD reviewed the data within the Consolidated Permit Application which Paramount submitted in November 2019 and which included all tailings design drawings, safety analysis, field data collected and laboratory testing. The OWRD and its engineering team are required to review and evaluate the data and design, classify the hazard level (high, significant, or low hazard rating) and evaluate readiness for construction from a dam safety perspective.  Considering the project’s remote geographic location, low population density, arid nature with no rivers or permanent streams in close proximity, seismic analysis and all other data compiled, OWRD has rated the dam as low hazard, its lowest risk level. The approval for construction is valid for 5 years with extensions possible on request.

In September 2020, we announced the results of a Canadian NI 43-101 Feasibility Study (“FS”) for our Grassy Mountain Project in Oregon. The FS was completed by a group of industry leading consulting firms led by Ausenco Engineering Canada Inc. (“Ausenco”) who managed the overall study and were responsible for processing and infrastructure design and oversaw metallurgical testing; Mine

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Development Associates (“MDA”) who updated the mineral resource estimate and completed the mine planning and reserves estimation; Golder Associates designed the tailings storage facility and EM Strategies oversaw the environmental aspects of the FS.  

This mining scenario in the FS results in an average annual production of 47,000 ounces of gold and 55,000 ounces of silver for eight years. The metal prices used for the economic analysis includes $1,472 per ounce of gold sold and $16.96 per ounce of silver sold.  The life of mine average cash operating costs are estimated to be $583 per gold ounce including silver revenues as by product credit and the total initial capital requirements are estimated to be $97.5 million resulting in a net present value of $105 million using a 5% discount rate.  In October, 2020, we filed the completed FS on SEDAR as required by Canadian security laws.

Outlook and Plan of Operation:

We believe that investors will gain a better understanding of the Company if they understand how we measure and disclose our results.  As an exploration and development company, we do not generate cash flow from our operations. We recognize the importance of managing our liquidity and capital resources.  We pay close attention to all cash expenses and look for ways to minimize them when possible.  We ensure we have sufficient cash on hand to meet our annual land holding costs as the maintenance of mining claims and leases are essential to preserve the value of our mineral property assets.

As reported in our Annual Report on Form 10-K for the year ended June 30, 2020 the Company expects to undertake the following activities:

Grassy Mountain Project:

Paramount received the final Feasibility Study report from Ausenco during the three-month period ended December 31, 2020 and expects to focus its efforts on continued state and federal mining permitting for the fiscal year ended June 30, 2021.  As a follow up to submitting the Consolidated Permit Application (“CPA”) in November 2019, Paramount will respond to the State of Oregon’s CPA completeness review (“Review”) received in February 2019.  The Review provided requests for additional information required by the Company and its proposed resolutions will assist the Company in submitting a revised CPA.  The Company expects the revised CPA to address all the comments and requests for additional information with the objective of submitting a complete revised CPA that allows the State of Oregon to determine whether to issue a state mining permit for the Grassy Mountain Project.  In addition to the State of Oregon permitting activities, Paramount expects to respond to BLM comments it received on its Plan of Operation (“PoO”).  Once all the comments have been addressed and the PoO is deemed complete, the BLM will register a Notice in the Federal Register.  The Notice initiates the EIS process under the National Environmental Policy Act.   To complete these activities Paramount will engage specialized mining consulting firms, work with State and Federal contracted thirds parties and work directly with both state and federal permitting agencies.

Sleeper Gold Project:

Paramount is planning to initiate several programs during the upcoming fiscal year that it believes will enhance the value of the Sleeper Gold Project.  The programs planned include:  1) a review of all geological, geochemical and geophysical data for the purposes of generating targets for exploration drilling to locate additional higher-grade mineralization in the close proximity of the original Sleeper pit or in the large mining claim package owned by the Company; (2) evaluate the various successful metallurgical tests, previously conducted on the sulfide bearing mineralized material in order to optimize the best economic alternatives and increase the number of gold ounces that could be produced in a proposed mining scenario.  (this could include bio or alkaline oxidation in a heap leach scenario, flotation and oxidation and gold recoveries from concentrates); and (3) update the resource estimation and preliminary economic assessment with the best alternatives identified for the project.

Frost Project:

The Company will implement an initial reverse circulation drill program to test historical drill results and additional selective targets.

COVID-19 Update

Paramount continues to monitor the evolution of the COVID-19 pandemic and continues to evaluate its business activities and plans.   Our priority is to ensure the health and safety of our employee and consultants.  We continue to perform the majority of our activities remotely with a limited amount of on-site or in-office attendance only when required.   Video conferencing has replaced in-person participation in conferences, permitting and other corporate meeting and activities that typically required corporate travel.

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Comparison of Operating Results for the three and six-months ended December 31, 2020 and 2019

Results of Operations

We did not earn any revenue from mining operations for the three and six-months ended December 31, 2020 and 2019. During the six-month period ended December 31, 2020, we completed and filed a comprehensive feasibility study on the Grassy Mountain Project.

Net Loss

Our net loss for the three-months ended December 31, 2020 was $1,774,899 compared to a net loss of $2,342,517 in the previous year. The drivers of the decrease in net loss of 24% are fully described below.  

Our net loss for the six-months ended December 31, 2020 was $3,106,407 compared to a net loss of $3,349,016 in the previous year.  The decrease in net loss of 7% is fully described below.

The Company expects to incur losses for the foreseeable future as we continue with our planned exploration and development programs.

Expenses

Exploration and Land Holding Costs

For the three-month period ended December 31, 2020, exploration expenses were $874,488 compared to $1,808,632 in the prior year comparable period.  This represents a decrease of 52% or $934,144.  During the three-month period ended December 31, 2020, the Company completed its previously announced feasibility study for the Grassy Mountain Project and it continued with permitting activities with the State of Oregon and the BLM.  In the prior year comparable period the company incurred full period costs related to completing the feasibility study and incurred a higher level of permitting costs to prepare and submit its comprehensive CPA with the State of Oregon.  Included were expenses related to the Company’s reclamation activities at the Sleeper Project.  Total exploration expenses at the Grassy Mountain Project during the current three-month period were $725,867.  

For the three-month period ended December 31, 2020, land holding costs were $130,400 compared to $132,137 in the prior year comparable period.  The marginal decrease of land holding costs from the prior year comparable period was due to the expiry of a lease term on non-material BLM mining claims owned by a third party. 

For the six-month period ended December 31, 2020, exploration expenses were $1,510,515 compared to $2,267,200 in the prior year comparable period.  This represents a decrease of 33% or $756,685.  During the six-month period ended December 31, 2020, the Company completed a feasibility study for its Grassy Mountain project.  The Company also has been working with the State of Oregon to address information requests required to advance the permitting process and submit and revised consolidated permit application. In the prior year comparable period the company incurred full period costs related to completing the feasibility study and incurred a higher level of permitting costs to prepare and submit its comprehensive CPA with the State of Oregon.  Included in the Company’s exploration expenses were costs related to reclamation activities performed at the Sleeper Project.  Total exploration expenses at the Grassy Mountain Project during the current six-month period were $1,078,631.

For the six-month period ended December 31, 2020, land holding costs were $261,584 compared to $269,714 in the prior year comparable period.  The marginal decrease of land holding costs from the prior year comparable period was due to the expiry of a lease term on non-material BLM mining claims owned by a third party.

Salaries and Benefits

For the three-month period ended December 31, 2020, salary and benefits increased by 91% or by $276,013 to $579,935 from the prior year’s three-month period ended December 31, 2019.  Salary and benefits is comprised of cash and stock based compensation of the Company’s executive and corporate administration teams.  The increase primarily reflects incentive cash compensation and stock-based compensation to management and staff that was recorded during the three-month period ended December 31, 2020 compared to the three-month period ended December 31, 2019.  Included in the salary and benefits expense amount for the three-month period ended December 31, 2020 and 2019 was a non-cash stock-based compensation of $57,922 and $23,361, respectively.

For the six-month period ended December 31, 2020, salary and benefits increased by 63% or by $324,188 to $835,877 from the prior year’s six-month period ended December 31, 2019.  The increase primarily reflects incentive cash compensation and stock-based compensation to management and staff that was recorded during the six-month period ended December 31, 2020 compared to the six-

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month period ended December 31, 2019.  Included in the salary and benefits expense amount for the six-month period ended December 31, 2020 and 2019 was a non-cash stock-based compensation of $116,851 and $34,970, respectively.

Directors’ Compensation

For the three-month period ended December 31, 2020, directors’ compensation increased by 266% or by $32,811 to $45,169  from the prior year’s three-month period ended December 31, 2019.  Directors’ compensation consists of cash and stock-based compensation of the Company’s board of directors.  The increase reflects the additional stock-based compensation recorded in the current quarter compared to the prior year’s comparable period.

For the six-month period December 31, 2020, directors’ compensation increased by 106% or by $39,167 to $76,111from the prior year’s six-month period ended December 31, 2019.  The increase reflects the additional stock-based compensation recorded in the current six-month period compared to the prior-year’s comparable period.

Professional Fees and General and Administration

For the three-month period ended December 31, 2020, professional fees were $28,699 compared to $65,695 in the prior year’s comparable period.  This represents a decrease of 56% or $36,996.  Professional fees included legal, advisory and consultant expenses incurred on corporate and operational activities being performed by the Company on a period by period basis.

For the three-month period ended December 31, 2020, general and administration expenses decreased by 17% to $124,752 from $150,743 in the prior year comparable period.  The decrease in general and administration expenses from the previous year’s comparable period the Company were due to reduced travel related expenses due to the travel restrictions resulting from the COVID-19 global pandemic.  

For the six-month period ended December 31, 2020, professional fees were $73,151 compared to $89,332 in the prior year’s comparable period.  This represents a decrease of 18%.   Professional fees included legal, advisory and consultant expenses incurred on corporate and operational activities being performed by the Company on a period by period basis.

For the six-month period ended December 31, 2020, general and administration expenses decreased by 9% to $238,877 from $262,867 in the prior year comparable period.  The decrease in general and administration expenses from the previous year’s comparable period the Company were due to reduced travel related expenses due to the travel restrictions resulting from the COVID-19 global pandemic.

 Liquidity and Capital Resources

As an exploration and development company, Paramount funds its operations, reclamation activities and discretionary exploration programs with its cash on hand.  At December 31, 2020, we had cash and cash equivalents of $3,498,093 compared to $5,434,081 as at June 30, 2020.  In May 2020, the Company established an $8.0 million “at the market” equity offering program with Cantor Fitzgerald & Co. and Canaccord Genuity LLC to proactively increase its financial flexibility.   During the three and six-months ended December 31, 2020, the Company issued 132,500 and 727,781 shares for net proceeds of $131,660 and $897,356 under the program, respectively.

The main uses of cash for the six-month period ended December 31, 2020 comprised of the following material amounts:

We anticipate our operating expenditures for the remainder of the fiscal year ended June 30, 2021 to be as follows:  

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Our anticipated expenditures will be funded by our cash on hand and by other capital resources.  Historically, we and other similar exploration and development public companies have accessed capital through equity financing arrangements or by the sale of royalties on its mineral properties.  If, however we are unable to obtain additional capital or financing, our exploration and development activities will be significantly adversely affected.

Critical Accounting Policies

Management considers the following policies to be most critical in understanding the judgments that are involved in preparing the Company’s consolidated financial statements and the uncertainties that could impact the results of operations, financial condition and cash flows. Our financial statements are affected by the accounting policies used and the estimates and assumptions made by management during their preparation. Management believes the Company’s critical accounting policies are those related to mineral property acquisition costs, exploration and development cost, stock-based compensation, derivative accounting and foreign currency translation.

Mineral property acquisition costs

The Company capitalizes the cost of acquiring mineral properties and will amortize these costs over the useful life of a property following the commencement of production or expense these costs if it is determined that the mineral property has no future economic value or the properties are sold or abandoned. Costs include cash consideration and the fair market value of shares issued on the acquisition of mineral properties. Properties acquired under option agreements, whereby payments are made at the sole discretion of the Company, are recorded in the accounts of the specific mineral property at the time the payments are made.

The amounts recorded as mineral properties reflect actual costs incurred to acquire the properties and do not indicate any present or future value of economically recoverable reserves.

Exploration expenses

We record exploration expenses as incurred. When we determine that a precious metal resource deposit can be economically and legally extracted or produced based on established proven and probable reserves, further exploration expenses related to such reserves incurred after such a determination will be capitalized. To date, we have not established any proven or probable reserves and will continue to expense exploration expenses as incurred.

Stock Based Compensation

For stock option grants with market conditions that affect vesting, the Company uses a lattice approach incorporating a Monte Carlo simulation to value stock option granted.

For stock option grants that have no market conditions that affect vesting, the Company uses the Black-Scholes option valuation model to value stock options granted. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The model requires management to make estimates which are subjective and may not be representative of actual results. Changes in assumptions can materially affect estimates of fair values.

For stock option grants with performance conditions that affect vesting, the Company recognizes the compensation expense when the Company concludes that it is probable that the performance condition will be achieved. The Company reassesses the probability of achieving the performance condition at each reporting date.

Use of Estimates

The Company prepares its consolidated financial statements and notes in conformity to United States Generally Accepted Accounting Principles (“U.S. GAAP”) and requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates these estimates, including those related to allowances for doubtful accounts receivable, long-lived assets and asset retirement obligations. Management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and

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liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Off-Balance Sheet Arrangements

We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources.

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