0001828377--12-312021Q3Fortitude Gold Corpfalse0001828377us-gaap:AdditionalPaidInCapitalMember2021-07-012021-09-300001828377us-gaap:AdditionalPaidInCapitalMember2021-01-012021-09-300001828377fgc:IncentivePlanMember2021-07-012021-09-300001828377fgc:IncentivePlanMember2021-01-012021-09-300001828377us-gaap:CommonStockMember2021-01-012021-09-300001828377srt:ParentCompanyMember2020-12-282020-12-280001828377us-gaap:RetainedEarningsMember2021-09-300001828377us-gaap:AdditionalPaidInCapitalMember2021-09-300001828377us-gaap:RetainedEarningsMember2021-06-300001828377us-gaap:AdditionalPaidInCapitalMember2021-06-3000018283772021-06-300001828377us-gaap:RetainedEarningsMember2020-12-310001828377us-gaap:AdditionalPaidInCapitalMember2020-12-310001828377us-gaap:RetainedEarningsMember2020-09-300001828377us-gaap:AdditionalPaidInCapitalMember2020-09-300001828377us-gaap:RetainedEarningsMember2020-06-300001828377us-gaap:AdditionalPaidInCapitalMember2020-06-3000018283772020-06-300001828377us-gaap:RetainedEarningsMember2019-12-310001828377us-gaap:AdditionalPaidInCapitalMember2019-12-310001828377us-gaap:CommonStockMember2021-09-300001828377us-gaap:CommonStockMember2021-06-300001828377us-gaap:CommonStockMember2020-12-310001828377us-gaap:CommonStockMember2020-09-300001828377fgc:GrcNevedaMemberus-gaap:CommonStockMember2020-08-180001828377fgc:FortitudeMemberus-gaap:CommonStockMember2020-08-180001828377us-gaap:CommonStockMember2020-06-300001828377us-gaap:CommonStockMember2019-12-310001828377srt:MinimumMemberus-gaap:EmployeeStockOptionMemberfgc:IncentivePlanMember2021-09-300001828377srt:MaximumMemberus-gaap:EmployeeStockOptionMemberfgc:IncentivePlanMember2021-09-300001828377us-gaap:EmployeeStockOptionMemberfgc:IncentivePlanMember2021-07-012021-09-300001828377srt:MaximumMemberfgc:IncentivePlanMember2021-09-300001828377us-gaap:EmployeeStockOptionMember2021-01-012021-09-300001828377srt:MinimumMemberus-gaap:EmployeeStockOptionMember2021-01-012021-09-300001828377srt:MaximumMemberus-gaap:EmployeeStockOptionMember2021-01-012021-09-300001828377srt:MinimumMemberfgc:IncentivePlanMember2021-01-012021-09-300001828377srt:MaximumMemberfgc:IncentivePlanMember2021-01-012021-09-300001828377us-gaap:EmployeeStockOptionMemberfgc:IncentivePlanMember2021-01-012021-09-300001828377fgc:GoldDoreMember2021-07-012021-09-300001828377fgc:GoldDoreMember2021-01-012021-09-300001828377fgc:GoldDoreMember2020-07-012020-09-300001828377fgc:GoldDoreMember2020-01-012020-09-300001828377us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2021-09-300001828377us-gaap:MiningPropertiesAndMineralRightsMember2021-09-300001828377us-gaap:MineDevelopmentMember2021-09-300001828377us-gaap:MachineryAndEquipmentMember2021-09-300001828377us-gaap:LandMember2021-09-300001828377us-gaap:ConstructionInProgressMember2021-09-300001828377us-gaap:AssetRetirementObligationCostsMember2021-09-300001828377fgc:MillFacilitiesAndInfrastructureMember2021-09-300001828377fgc:LightVehiclesAndOtherMobileEquipmentMember2021-09-300001828377fgc:LeachPadAndPondsMember2021-09-300001828377fgc:FurnitureAndOfficeEquipmentMember2021-09-300001828377us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2020-12-310001828377us-gaap:MiningPropertiesAndMineralRightsMember2020-12-310001828377us-gaap:MineDevelopmentMember2020-12-310001828377us-gaap:MachineryAndEquipmentMember2020-12-310001828377us-gaap:LandMember2020-12-310001828377us-gaap:ConstructionInProgressMember2020-12-310001828377us-gaap:AssetRetirementObligationCostsMember2020-12-310001828377fgc:MillFacilitiesAndInfrastructureMember2020-12-310001828377fgc:LightVehiclesAndOtherMobileEquipmentMember2020-12-310001828377fgc:LeachPadAndPondsMember2020-12-310001828377fgc:FurnitureAndOfficeEquipmentMember2020-12-310001828377srt:ParentCompanyMember2020-07-012020-09-300001828377srt:ParentCompanyMember2020-01-012020-09-300001828377us-gaap:PrivatePlacementMember2021-01-112021-01-110001828377us-gaap:RetainedEarningsMember2020-07-012020-09-300001828377us-gaap:RetainedEarningsMember2020-01-012020-09-3000018283772020-10-310001828377us-gaap:RetainedEarningsMember2021-07-012021-09-300001828377us-gaap:RetainedEarningsMember2021-01-012021-09-300001828377srt:MinimumMember2021-09-300001828377srt:MaximumMember2021-09-300001828377us-gaap:SubsequentEventMember2021-10-072021-10-070001828377us-gaap:FairValueInputsLevel1Member2021-09-300001828377us-gaap:FairValueInputsLevel1Member2020-12-3100018283772020-09-3000018283772020-01-012020-12-3100018283772019-12-310001828377fgc:GoldResourceCorpMemberus-gaap:GeneralAndAdministrativeExpenseMember2020-07-012020-09-300001828377fgc:GoldResourceCorpMemberus-gaap:GeneralAndAdministrativeExpenseMember2020-01-012020-09-300001828377us-gaap:FairValueInputsLevel2Member2021-09-300001828377us-gaap:FairValueInputsLevel2Member2020-12-310001828377fgc:InventoryMember2021-07-012021-09-300001828377fgc:InventoryMember2021-01-012021-09-300001828377us-gaap:PropertyPlantAndEquipmentMember2020-07-012020-09-300001828377fgc:InventoryMember2020-07-012020-09-300001828377us-gaap:PropertyPlantAndEquipmentMember2020-01-012020-09-300001828377fgc:InventoryMember2020-01-012020-09-300001828377fgc:NevadaProjectMember2021-09-300001828377fgc:NevadaProjectMember2020-12-310001828377us-gaap:PrivatePlacementMember2021-01-110001828377srt:ParentCompanyMember2021-01-012021-09-300001828377us-gaap:SubsequentEventMember2021-10-0700018283772021-09-3000018283772020-12-3100018283772021-07-012021-09-300001828377us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-3000018283772020-07-012020-09-300001828377us-gaap:AdditionalPaidInCapitalMember2020-01-012020-09-3000018283772020-01-012020-09-3000018283772021-11-0100018283772021-01-012021-09-30xbrli:sharesiso4217:USDiso4217:USDxbrli:sharesxbrli:purefgc:individual

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2021

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: 333-249533

Fortitude Gold Corporation

(Exact name of registrant as specified in its charter)

Colorado

85-2602691

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

2886 Carriage Manor Point

Colorado Springs, CO 80906

(Address of Principal Executive Offices)

(719) 717 9825

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 Exchange Act).   Yes      No  

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

Title of Each Class

Trading symbol

Name of Exchange on which registered

N/A

N/A

N/A

As of November 1, 2021, the registrant had 23,961,208 outstanding shares of common stock.

TABLE OF CONTENTS

    

    

Page

Part I

Financial Information

Item 1.

Financial Statements

1

Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020

1

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (Unaudited)

2

Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020 (Unaudited)

3

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (Unaudited)

4

Notes to Condensed Consolidated Financial Statements (Unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

21

Item 4.

Controls and Procedures

21

Part II

Other Information

Item 1.

Legal Proceedings

22

Item 1A.

Risk Factors

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 4.

Mine Safety Disclosures

22

Item 5.

Other Information

22

Item 6.

Exhibits

23

Signatures

24

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

FORTITUDE GOLD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. Dollars in thousands, except per share data)

September 30, 

December 31, 

    

2021

    

2020

(Unaudited)

  

ASSETS

  

  

Current assets:

  

  

Cash and cash equivalents

$

44,337

$

27,774

Accounts receivable

 

1,628

 

145

Inventories

 

33,012

 

23,051

Prepaid expenses and other current assets

 

2,305

 

1,962

Total current assets

 

81,282

 

52,932

Property, plant and mine development, net

 

37,531

 

50,990

Operating lease assets, net

 

220

 

6,198

Deferred tax assets

1,099

959

Other non-current assets

 

2,947

 

1,946

Total assets

$

123,079

$

113,025

LIABILITIES AND SHAREHOLDERS' EQUITY

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,982

$

1,715

Loans payable, current

 

101

 

665

Finance lease liabilities, current

 

78

 

398

Operating lease liabilities, current

 

220

 

6,198

Mining taxes payable

 

1,153

 

1,001

Other current liabilities

 

1,212

 

1,092

Total current liabilities

 

5,746

 

11,069

Asset retirement obligations

 

4,483

 

3,844

Loans payable, long-term

 

52

 

117

Finance lease liabilities, long-term

 

19

 

27

Total liabilities

 

10,300

 

15,057

Shareholders' equity:

 

  

 

  

Preferred stock - $0.01 par value, 20,000,000 shares authorized and nil outstanding at September 30, 2021 and December 31, 2020

 

 

Common stock - $0.01 par value, 200,000,000 shares authorized and 23,961,208 shares outstanding at September 30, 2021 and 21,211,208 shares outstanding at December 31, 2020

 

240

 

212

Additional paid-in capital

 

103,517

 

99,682

Retained earnings (accumulated deficit)

 

9,022

 

(1,926)

Total shareholders' equity

 

112,779

 

97,968

Total liabilities and shareholders' equity

$

123,079

$

113,025

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

1

FORTITUDE GOLD CORPORATION
Condensed Consolidated Statements of Operations
(U.S. Dollars in thousands, except per share data)
(Unaudited)

    

Three months ended

Nine months ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Sales, net

$

20,422

$

15,851

$

66,979

$

30,284

Mine cost of sales:

 

  

 

  

 

  

 

Production costs

 

7,075

 

7,741

 

21,219

 

19,698

Depreciation and amortization

 

3,668

 

2,949

 

11,953

 

6,157

Reclamation and remediation

 

40

 

24

 

116

 

17

Total mine cost of sales

 

10,783

 

10,714

 

33,288

 

25,872

Mine gross profit

 

9,639

 

5,137

 

33,691

 

4,412

Costs and expenses:

 

  

 

  

 

  

 

General and administrative expenses

 

1,378

 

593

 

8,723

 

1,781

Exploration expenses

 

2,023

 

780

 

4,380

 

1,373

Other expense, net

 

48

 

62

 

132

 

172

Total costs and expenses

 

3,449

 

1,435

 

13,235

 

3,326

Income before income and mining taxes

 

6,190

 

3,702

 

20,456

 

1,086

Mining and income tax expense

 

1,544

 

225

 

5,075

 

675

Net income

$

4,646

$

3,477

$

15,381

$

411

Net income per common share:

 

  

 

  

 

  

 

  

Basic

$

0.19

$

348

$

0.64

$

41

Diluted

$

0.19

$

348

$

0.64

$

41

Weighted average shares outstanding:

 

  

 

  

 

  

 

  

Basic

23,961,208

10,000

23,846,686

10,000

Diluted

 

24,211,606

 

10,000

 

24,078,226

 

10,000

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

2

FORTITUDE GOLD CORPORATION
Condensed Consolidated Statements of Shareholders’ Equity
(U.S. Dollars in thousands)
(Unaudited)

     

Three Months Ended September 30, 2021 and 2020

Par

Retained

Number of

Value of

Earnings

Total

Common

Common

Additional Paid-

(Accumulated

Shareholders'

     

Shares

     

Shares

     

in Capital

     

Deficit)

     

Equity

Balance, June 30, 2020 (GRCN)

10,000

$

$

87,863

$

(15,209)

$

72,654

Capital contributions by Parent

888

888

Net income

3,477

3,477

Balance, September 30, 2020 (GRCN)

10,000

$

$

88,751

$

(11,732)

$

77,019

Balance, June 30, 2021 (Fortitude)

23,961,208

$

240

$

103,471

$

6,892

$

110,603

Stock-based compensation

 

 

46

 

 

46

Dividends

 

 

 

(2,516)

 

(2,516)

Net income

 

 

 

4,646

 

4,646

Balance, September 30, 2021 (Fortitude)

23,961,208

$

240

$

103,517

$

9,022

$

112,779

     

Nine Months Ended September 30, 2021 and 2020

Par

Retained

Number of

Value of

Earnings

Total

Common

Common

Additional Paid-

(Accumulated

Shareholders'

     

Shares

     

Shares

     

in Capital

     

Deficit)

     

Equity

Balance, December 31, 2019 (GRCN)

10,000

$

$

78,083

$

(12,143)

$

65,940

Capital contributions by Parent

10,668

10,668

Net income

411

411

Balance, September 30, 2020 (GRCN)

10,000

$

$

88,751

$

(11,732)

$

77,019

Balance, December 31, 2020 (Fortitude)

21,211,208

$

212

$

99,682

$

(1,926)

$

97,968

Stock-based compensation

2,250,000

 

23

 

3,340

 

 

3,363

Issuance of shares under private placement

500,000

 

5

 

495

 

 

500

Dividends

 

 

 

(4,433)

 

(4,433)

Net income

 

 

 

15,381

 

15,381

Balance, September 30, 2021 (Fortitude)

23,961,208

$

240

$

103,517

$

9,022

$

112,779

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

3

FORTITUDE GOLD CORPORATION
Condensed Consolidated Statements of Cash Flows
(U.S. Dollars in thousands)
(Unaudited)

Nine months ended

September 30, 

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net income

$

15,381

$

411

Adjustments to reconcile net income to net cash from operating activities:

 

  

 

  

Depreciation and amortization

 

12,045

 

6,263

Stock-based compensation

3,363

Deferred taxes

(140)

Other operating adjustments

 

28

 

16

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

(1,483)

 

(1,599)

Inventories

 

(6,318)

 

(2,662)

Prepaid expenses and other current assets

 

(343)

 

(17)

Other non-current assets

 

(19)

 

(1,304)

Accounts payable and other accrued liabilities

 

555

 

958

Income and mining taxes payable

 

153

 

675

Net cash provided by operating activities

 

23,222

 

2,741

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(1,753)

 

(6,368)

Net cash used in investing activities

 

(1,753)

 

(6,368)

Cash flows from financing activities:

 

  

 

  

Contributions from GRC

 

 

10,567

Dividends paid

(4,433)

Issuance of common stock

500

Repayment of loans payable

 

(629)

 

(656)

Repayment of capital leases

 

(344)

 

(326)

Net cash (used in) provided by financing activities

 

(4,906)

 

9,585

Net increase in cash and cash equivalents

 

16,563

 

5,958

Cash and cash equivalents at beginning of period

 

27,774

 

866

Cash and cash equivalents at end of period

$

44,337

$

6,824

Supplemental Cash Flow Information

 

  

 

  

Interest expense paid

$

24

$

72

Income and mining taxes paid

$

5,063

$

Non-cash investing and financing activities:

 

  

 

  

Change in capital expenditures in accounts payable

$

1,132

$

(1,532)

Change in estimate for asset retirement costs

$

499

$

1,404

Stock contributed from Parent

$

$

100

Equipment purchased under finance lease

$

16

$

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

4

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

1. Basis of Presentation

Fortitude Gold Corporation (the “Company,” “FGC,” or “Fortitude”) was organized under the laws of the State of Colorado on August 11, 2020. On August 18, 2020, Gold Resource Corporation (“GRC” or “Parent”) transferred all of the 10,000 issued and outstanding common stock shares of its wholly-owned subsidiary GRC Nevada Inc. (“GRCN”) to Fortitude in exchange for 21,211,208 shares of Fortitude’s common stock. With the share transfer, GRCN became a wholly-owned subsidiary of Fortitude and Fortitude became a wholly-owned subsidiary of GRC. The assets and liabilities were recorded at historical cost as the entities were under common control.

On December 31, 2020, GRC completed the spin-off of FGC (“Spin-Off”), which separated FGC’s business, activities, and operations into a separate, public company.  The Spin-Off was effected by the distribution of all of the outstanding shares of FGC common stock to GRC’s shareholders. GRC’s shareholders received one share of FGC common stock for every 3.5 shares of GRC’s common stock held as of December 28, 2020.

FGC is a mining company which pursues gold and silver projects that are expected to have both low operating costs and high returns on capital.

These interim Condensed Consolidated Financial Statements (“interim financial statements”) are unaudited and have been prepared in accordance with the rules of the Securities and Exchange Commission for interim statements. The condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, the condensed consolidated statements of operations and shareholders’ equity for the three and nine months ended September 30, 2021, and the condensed consolidated statement of cash flows for the nine months ended September 30, 2021 include the accounts of the Company, its subsidiaries GRCN, Walker Lane Minerals Corp. (“Walker Lane”), County Line Holdings, Inc., and County Line Minerals Corp. The condensed consolidated statements of operations and shareholder’s equity for the three and nine months ended September 30, 2020, and the condensed consolidated statement of cash flows for the nine months ended September 30, 2020 include the accounts of GRCN, WLMC, County Line Holdings, Inc., and County Line Minerals Corp. and have been derived from the accounting records of GRC and should be read with the accompanying notes thereto. All intercompany accounts and transactions have been eliminated in consolidation.

Certain information and footnote disclosures required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) have been condensed or omitted as permitted by such rules, although the Company believes that the disclosures included are adequate to make the information presented not misleading. The interim financial statements included herein are expressed in United States dollars. In the opinion of management, all adjustments (all of which are of a normal recurring nature) and disclosures necessary for a fair presentation of these interim financial statements have been included. The results reported in these interim financial statements are not necessarily indicative of the results that may be reported for the entire year. These interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2020 included in the Company’s annual report on Form 10-K. The year-end balance sheet data was derived from the audited financial statements. Unless otherwise noted, there have been no material changes to the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s annual report on Form 10-K.

The condensed consolidated statements of operations and shareholder’s equity for the three and nine months ended September 30, 2020 and the condensed consolidated statement of cash flows for the nine months ended September 30, 2020 have been prepared on a “carve-out” basis. The accompanying statements include allocations of certain expenses for human resources, accounting, and other services, plus share-based compensation allocated from GRC. The expense allocations have been determined on basis that the Company and GRC consider to be reasonable reflections of the utilization of services or the benefits provided. In addition, the assets and liabilities include only those assigned to the carve-out entities. The allocations and related estimates and assumptions are described more fully in Note 2, Related Party Transactions. Further, the condensed consolidated financial statements do not necessarily reflect what the results of operations, financial position, or cash flows would have been had the Company been a separate entity nor are they indicative of the future results of the Company.

5

2. Related Party Transactions

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

Prior to the Spin-Off, GRC provided human resources, information technology, accounting, legal, technical, and other services to the Company. The Company obtained its business insurance under GRC. The accompanying condensed consolidated statements of operations and shareholder’s equity for the three and nine months ended September 30, 2020 and condensed consolidated statement of cash flows for the nine months ended September 30, 2020 include allocations of all of these expenses. The allocation method calculates the appropriate share of overhead cost to the Company by using time spent by GRC employees. The Company believes the allocation methodology used is reasonable, has been consistently applied, and results in an appropriate allocation of costs incurred. However, these allocations may not be indicative of the cost had the Company been a stand-alone entity or of future services. GRC allocated $0.6 million and $1.8 million for the three and nine months ended September 30, 2020, respectively. These costs were treated as capital contributions from GRC in the accompanying 2020 financial statements. In addition, the Company received cash contributions from GRC to help fund its operations and mine development, which are not expected to be repaid and are treated as capital contributions. For the three and nine months ended September 30, 2020, the Company received total capital contributions from GRC of $0.9 million and $10.7 million, respectively, inclusive of allocated costs described above.

3. Revenue

The following table presents the Company’s net sales disaggregated by source:

    

Three months ended

    

Nine months ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

(in thousands)

(in thousands)

Sales, net

  

  

  

  

Gold doré sales

$

20,491

$

15,963

$

67,221

$

30,507

Less: Refining charges

 

(69)

 

(112)

 

(242)

 

(223)

Total sales, net

$

20,422

$

15,851

$

66,979

$

30,284

6

4. Inventories

At September 30, 2021 and December 31, 2020, current inventories consisted of the following:

    

September 30, 

    

December 31, 

    

2021

    

2020

    

(in thousands)

Stockpiles

$

7,024

$

6,269

Leach pad

 

25,733

 

16,636

Doré

 

37

 

19

Subtotal - product inventories

 

32,794

 

22,924

Materials and supplies

 

218

 

127

Total

$

33,012

$

23,051

In addition to the inventory above, as of September 30, 2021 and December 31, 2020, the Company has $2.6 million and $1.6 million, respectively, of low-grade ore stockpile inventory included in other non-current assets.

For the three and nine months ended September 30, 2020 the Company recorded nil and $3.6 million, respectively, in net realizable value (“NRV”) inventory adjustments. No NRV adjustments were recorded in 2021.

5. Income Taxes

The Company accounts for income taxes in accordance with the provisions of ASC 740, “Income Taxes” (“ASC 740”), on a tax jurisdictional basis.  The Company files a consolidated U.S. income tax return and at the federal level its income and losses are taxed at 21%.  In addition, a 5% Net Proceeds of Minerals tax applies to the Company’s operations in Nevada, and such tax is recorded as an income tax.  The Company recorded income and mining tax expense of $1.5 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively. The Company recorded income and mining tax expense of $5.1 million and $0.7 million for the nine months ended September 30, 2021 and 2020, respectively. In accordance with ASC 740, the interim provision for taxes was calculated by using the annual effective tax rate.  This rate is applied to the year-to-date income before income and mining taxes to determine the income tax expense for the period.

The Company evaluates the evidence available to determine whether a valuation allowance is required on the deferred tax assets. The Company determined that its deferred tax assets were “more likely than not” to be realized as of September 30, 2021 and December 31, 2020, thus no valuation allowance was determined to be necessary.

As of September 30, 2021, the Company believes that is has no liability for uncertain tax positions.

6. Prepaid Expenses and Other Current Assets

At September 30, 2021 and December 31, 2020, prepaid expenses and other current assets consisted of the following:

    

September 30, 

    

December 31, 

    

2021

    

2020

    

(in thousands)

Contractor advances

$

1,612

$

1,670

Prepaid insurance

476

195

Other current assets

 

217

 

97

Total

$

2,305

$

1,962

7

7. Property, Plant and Mine Development, net

At September 30, 2021 and December 31, 2020, property, plant and mine development consisted of the following:

    

September 30, 

    

December 31, 

    

2021

    

2020

    

(in thousands)

Asset retirement costs

$

4,088

$

3,588

Construction-in-progress

 

2,289

 

195

Furniture and office equipment

 

376

 

324

Leach pad and ponds

 

5,649

 

5,649

Land

 

19

 

13

Light vehicles and other mobile equipment

 

463

 

435

Machinery and equipment

 

14,624

 

14,311

Mill facilities and infrastructure

 

7,729

 

7,669

Mineral interests and mineral rights

 

18,928

 

18,878

Mine development

 

24,365

 

24,365

Software and licenses

 

65

 

65

Subtotal (1) (2)

 

78,595

 

75,492

Accumulated depreciation and amortization

 

(41,064)

 

(24,502)

Total

$

37,531

$

50,990

(1) Includes $1.8 million of assets recorded under finance leases. Please see Note 12 for additional information.
(2) Includes capital expenditures in accounts payable of $1.7 million and $0.6 million at September 30, 2021 and December 31, 2020, respectively.

For the three months ended September 30, 2021 and 2020, the Company recorded depreciation and amortization expense of $3.7 million and $3.0 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded depreciation and amortization expense of $12.0 million and $6.3 million, respectively.

8. Other Current Liabilities

At September 30, 2021 and December 31, 2020, other current liabilities consisted of the following:

    

September 30, 

    

December 31, 

    

2021

    

2020

    

(in thousands)

Accrued royalty payments

$

574

$

718

Accrued property and excise taxes

 

623

 

353

Other accrued expenses

15

21

Total

$

1,212

$

1,092

8

9. Asset Retirement Obligation

The following table presents the changes in the Company’s asset retirement obligation for the nine months ended September 30, 2021 and year ended December 31, 2020:

    

September 30, 

    

December 31, 

    

2021

    

2020

    

(in thousands)

Asset retirement obligation – balance at beginning of period

$

3,844

$

2,486

Changes in estimate

 

499

 

1,159

Payments

(91)

Accretion

 

231

 

199

Asset retirement obligation – balance at end of period

$

4,483

$

3,844

As of September 30, 2021, the Company had a $7.7 million off-balance sheet arrangement consisting of a $12.2 million surety bond off-set by a $4.5 million asset retirement for future reclamation obligations for Isabella Pearl. As of December 31, 2020, the Company had a $5.4 million off-balance sheet arrangement consisting of a $9.2 million surety bond off-set by a $3.8 million asset retirement obligation for future reclamation obligations for Isabella Pearl. The Company’s asset retirement obligations were discounted using a credit adjusted risk-free rate of 8%.

10. Loans Payable

The Company has financed certain equipment purchases on a long-term basis. The loans bear annual interest at rates ranging from 3% to 4.48%, are collateralized by the equipment, and require monthly principal and interest payments of $0.02 million. As of September 30, 2021, and December 31, 2020, there was an outstanding balance of $0.2 million and $0.8 million, respectively. Scheduled remaining minimum repayments are $0.1 million in 2021, and $0.1 million in 2022. The fair value of the loans payable, based on Level 2 inputs, approximated the outstanding balance at both September 30, 2021 and December 31, 2020. See Note 15 for the definition of a Level 2 input.

11. Commitments and Contingencies

The Company has a Contract Mining Agreement with a mining contractor relating to mining activities at its Isabella Pearl project. Included in this Agreement is an embedded lease for the mining equipment for which the Company has recognized a right-of-use asset and corresponding operating lease liability. Please see Note 12 for more information. In addition to the embedded lease payments, the Company pays the contract miner operational costs in the normal course of business. These costs represent the remaining future contractual payments for the Contract Mining Agreement over its term. The contractual payments are determined by rates within the Contract Mining Agreement, estimated tonnes moved and bank cubic yards for drilling and blasting. As of September 30, 2021, total estimated contractual payments remaining, excluding embedded lease payments, are $0.1 million for the year ended December 31, 2021.

12. Leases

Operating Leases

Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases as incurred over the lease term. For leases beginning in 2019 and later, the Company accounts for lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) separately from the non-lease components (e.g., common-area maintenance costs).

The depreciable life of assets is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The weighted average remaining lease term for the Company’s operating leases as of September 30, 2021 is 0.08 years.

The discount rate implicit within the Company’s leases is generally not determinable and therefore the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for the Company’s

9

leases is determined based on the lease term adjusted for impacts of collateral. The weighted average discount rate used to measure the Company’s operating lease liabilities as of September 30, 2021 was 4.48%.

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

The Company has an embedded lease in its Contract Mining Agreement. The Company’s lease payments for its mining equipment embedded lease are determined by tonnage hauled. This embedded lease is within a Contract Mining Agreement entered into for the mining activities at the Company’s Isabella Pearl Mine. The payments, amortization of the right-of-use asset, and interest vary immaterially from forecasted amounts due to variable conditions at the mine. During the three and nine months ended September 30, 2021, the Company capitalized variable lease costs of $2.4 million and $6.1 million, respectively, to Inventory. During the three months ended September 30, 2020, the Company capitalized variable lease costs of $1.8 million to Inventory and nil to Property, plant, and mine development. During the nine months ended September 30, 2020, the Company capitalized variable lease costs of $4.6 million to Inventory and $1.5 million to Property, plant, and mine development. In October 2021, the Company extended the Contract Mining Agreement for a three-month term for its mining activities at the Isabella Pearl Mine.

Maturities of operating lease liabilities as of September 30, 2021 are as follows (in thousands)

Year Ending December 31:

    

    

2021

$

220

Thereafter

 

Total lease payments

 

220

Less imputed interest

 

Present value of minimum payments

 

220

Less: current portion

 

(220)

Long-term portion of minimum payments

$

Finance Leases

The Company has finance lease agreements for certain equipment. The leases bear annual imputed interest of 4.48% to 5.95% and require monthly principal, interest, and sales tax payments of $0.04 million. The weighted average discount rate for the Company’s finance leases is 5.24%. Scheduled minimum annual payments as of September 30, 2021 are as follows (in thousands):

Year Ending December 31:

    

    

2021

$

58

2022

 

24

2023

 

13

2024

 

4

Thereafter

 

Total minimum obligations

 

99

Less: interest portion

 

(2)

Present value of minimum payments

 

97

Less: current portion

 

(78)

Long-term portion of minimum payments

$

19

The weighted average remaining lease term for the Company’s finance leases as of September 30, 2021 is 1.04 years.

10

Supplemental cash flow information related to the Company’s operating and finance leases is as follows for the nine months ended September 30, 2021 and 2020:

    

Nine months ended

September 30, 

    

2021

    

2020

    

(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

  

  

Operating cash flows from operating leases

$

6,106

$

2,749

Operating cash flows from finance leases

 

11

 

21

Investing cash flows from operating lease

 

 

1,452

Financing cash flows from finance leases

 

344

 

326

13. Other Expense, Net

For the three and nine months ended September 30, 2021 and 2020, other expense, net consisted of the following:

    

Three months ended

Nine months ended

September 30, 

September 30, 

    

2021

    

2020

2021

    

2020

    

(in thousands)

(in thousands)

Interest expense

$

35

$

37

$

108

$

99

Charitable contributions

21

25

34

81

Other income

(8)

(10)

(8)

Total

$

48

$

62

$

132

$

172

14. Net Income per Common Share

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

The effect of the Company’s dilutive securities is calculated using the treasury stock method and only those instruments that result in a reduction in net income per common share are included in the calculation. Options to purchase 90,000 shares of common stock at weighted average exercise prices of $4.91 were outstanding as of September 30, 2021 but were not included in the computation of diluted weighted average common shares outstanding, as the exercise price of the options exceeded the average price of the Company’s common stock during those periods, and therefore are anti-dilutive.

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

    

Three months ended

Nine months ended

September 30, 

September 30, 

    

2021

    

2020

2021

    

2020

Net income (in thousands)

$

4,646

$

3,477

$

15,381

$

411

Basic weighted average shares of common stock outstanding

23,961,208

10,000

23,846,686

10,000

Diluted effect of share-based awards

250,398

231,540

Diluted weighted average common shares outstanding

24,211,606

10,000

24,078,226

10,000

Net income per share:

Basic

$

0.19

$

348

$

0.64

$

41

Diluted

$

0.19

$

348

$

0.64

$

41

11

15. Fair Value Measurement

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

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2

Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

As required by accounting guidance, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following tables set forth certain of the Company’s assets measured at fair value by level within the fair value hierarchy as of September 30, 2021 and December 31, 2020:

    

2021

    

2020

    

Input Hierarchy Level

    

(in thousands)

    

Cash and cash equivalents

$

44,337

$

27,774

Level 1

Accounts receivable

 

1,628

 

145

Level 2

Loans payable

$

153

$

782

Level 2

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

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

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

Loans payable consist of obligations for equipment purchases financed on a long-term basis. Loans payable are recorded at amortized cost, which approximates fair value. See Note 10 for additional information.

16. Stock-Based Compensation

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

During the nine months ended September 30, 2021, in conjunction with its staffing process post Spin-Off, the Company issued 2,250,000 shares of its common stock to officers, directors, management and other key personnel.  These shares immediately vested at a fair value ranging from $1.40 per share to $5.48 per share. No shares were issued during the three months ended September 30, 2021.

12

During the nine months ended September 30, 2021, the Company issued options to purchase 462,000 shares of its common stock to employees and key personnel other than its officers or directors. The options vest over a period of three years.  The Company used the Black-Scholes option valuation model to value the options with the following assumptions: stock price of $1.40 to $5.48, expected term of 3.5 years, risk free rate of 0.26% to 0.53%, expected volatility of 73.56% to 74.67%, and an assumed dividend rate of 0% to 4.6%.  No options to purchase common stock were issued during the three months ended September 30, 2021.

Stock-based compensation is included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2021, the Company recorded $0.1 million and $3.4 million, respectively, of stock-based compensation.  For the three and nine months ended September 30, 2020, the Company recognized stock-based compensation expenses allocated from GRC, as described in Note 2, for options and restricted stock units granted under GRC’s equity incentive plan. Stock-based compensation charged to the Company from GRC was $0.1 million and $0.3 million for the three and nine months ended September 30, 2020, respectively.

17. Shareholders’ Equity

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

During the three months ended September 30, 2021, the Company declared and paid dividends of $2.5 million or $0.11 per share. During the nine months ended September 30, 2021, the Company declared and paid dividends of $4.4 million or $0.19 per share.

See Note 16 for information concerning shares and options granted pursuant to the Company's Equity Incentive Plan.

18. Subsequent Event

On October 7, 2021, the Company increased its monthly dividend to $0.04 per share, or $0.48 annually.

13

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

We are a Colorado corporation and our subsidiaries are GRC Nevada Inc. (“GRCN”), Walker Lane Minerals Corp. (“WLMC”), County Line Holdings Inc. (“CLH”), and County Line Minerals Corp. (“CLM”).  WLMC, CLH, and CLM are wholly-owned subsidiaries of GRCN. We are a mining company which pursues gold and silver projects that are expected to have both low operating costs and high returns on capital.

 

Spin-Off from Gold Resource Corporation

 

Prior to December 31, 2020, we were a subsidiary of Gold Resource Corporation (“GRC”). On December 31, 2020, GRC completed the spin-off of our shares of common stock, which separated our business, activities, and operations into a separate, public company.  The spin-off was effected by the distribution of all of our outstanding shares of common stock to GRC’s shareholders. GRC’s shareholders received one share of our common stock for every 3.5 shares of GRC’s common stock held as of December 28, 2020.

In February 2021, we began trading on the OTC Market “pink sheets” operated by the OTC Markets Group under the ticker symbol "FRTT".  Subsequently the symbol was changed to “FTCO”. Our common stock was subsequently up listed to the OTCQB on March 5, 2021.

During the second quarter of 2021, and in response to GRC terminating the Management Services Agreement (“MSA”) post Spin-Off, we completed the staffing of our executive and management team.

The following discussion summarizes our results of operations for the three and nine months ended September 30, 2021 and 2020, including GRCN prior to it becoming our wholly-owned subsidiary on August 18, 2020. It also analyzes our financial condition at September 30, 2021. This discussion should be read in conjunction with the management’s discussion and analysis and the audited consolidated financial statements and footnotes for the year ended December 31, 2020, contained in our annual report on Form 10-K for the year ended December 31, 2020.

The discussion also presents certain financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles (“Non-GAAP”) but which are important to management in its evaluation of our operating results and are used by management to compare our performance with what we perceive to be peer group mining companies and are relied on as part of management’s decision-making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the non-GAAP financial measures, please see the discussion below under Non-GAAP Measures.

See Forward-Looking Statements at the end of this Item 2 for important information regarding statements contained herein.

Third Quarter 2021 Financial Results and Highlights

$20.4 million net sales
$4.6 million net income or $0.19 per share
$44.3 million cash balance on September 30, 2021, an increase of $16.6 million from December 31, 2020
11,478 gold ounces produced
1.42 grams per tonne average gold grade mined
$75.5 million working capital at September 30, 2021, an increase of $33.7 million from December 31, 2020
$9.6 million mine gross profit
$624 total cash cost after by-product credits per gold ounce sold
$793 per ounce total all-in sustaining cost
16.7% dividend increase to $0.42 annually per share, subsequently increased by 14% to $0.48 per share

14

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

    

    

Three months ended September 30, 

Nine months ended September 30, 

    

2021

    

2020

    

2021

    

2020

Ore mined

 

  

 

  

 

  

 

  

Ore (tonnes)

 

139,950

 

188,048

 

454,679

 

490,620

Gold grade (g/t)

 

1.42

 

2.02

 

4.52

 

1.60

Low-grade stockpile

 

  

 

  

 

  

 

  

Ore (tonnes)

 

8,600

 

51,977

 

8,600

 

70,467

Gold grade (g/t)

 

0.33

 

0.50

 

0.33

 

0.52

Pre-strip waste

 

 

 

 

1,346,316

Waste (tonnes)

 

1,838,027

 

1,437,429

 

4,894,937

 

3,597,770

Metal production (before payable metal deductions)(1)

 

  

 

  

 

  

 

  

Gold (ozs.)

 

11,478

 

7,847

 

37,593

 

16,747

Silver (ozs.)

 

16,467

 

9,169

 

33,643

 

20,154

(1) The difference between what we report as “metal production” and “metal sold” is attributable to the difference between the quantities of metals contained in the doré we produce versus the portion of those metals actually paid for according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades and recoveries which impact the amounts of metals contained in doré produced and sold.

    

    

Three months ended September 30, 

Nine months ended September 30, 

    

2021

    

2020

    

2021

    

2020

Metal sold

  

  

  

  

Gold (ozs.)

11,454

 

8,396

37,436

 

17,205

Silver (ozs.)

16,330

 

9,616

33,171

 

21,046

Average metal prices realized (1)

  

 

  

  

 

  

Gold ($per oz.)

1,789

 

1,901

1,796

 

1,773

Silver ($per oz.)

23.98

 

24.02

25.14

 

19.86

Precious metal gold equivalent ounces sold

Gold Ounces

11,454

8,396

37,436

17,205

Gold Equivalent Ounces from Silver

219

122

464

236

11,673

8,518

37,900

17,441

Total cash cost before by-product credits per gold ounce sold

$

658

$

963

$

596

$

1,182

Total cash cost after by-product credits per gold ounce sold

$

624

$

935

$

574

$

1,158

Total all-in sustaining cost per gold ounce sold

$

793

$

945

$

663

$

1,191

(1) Average metal prices realized vary from the market metal prices due to final settlement adjustments from our provisional invoices when they are settled. Our average metal prices realized will therefore differ from the market average metal prices in most cases.

15

Consolidated Results of Operations – Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Sales, net.  For the three months ended September 30, 2021, consolidated sales, net were $20.4 as compared to $15.9 million for the same period in 2020. The increase is attributable to higher sales volumes which were partially offset with lower average realized prices. Third quarter 2021 gold sales volumes increased 36% from the same period in 2020 as a result of higher-grade ore processed.  Average realized price for gold in third quarter 2021 decreased 6% from the same period in 2020.   

 

Mine gross profit. For the three months ended September 30, 2021, we recorded $9.6 million mine gross profit compared to $5.1 million mine gross profit for the same period in 2020. The change is attributable to higher sales, as mentioned above, and slightly lower cash production costs.

General and administrative. For the three months ended September 30, 2021, general and administrative expenses totaled $1.4 million as compared to $0.6 million for the same period in 2020.  The increase in 2021 was primarily the result of fully staffing the Company post Spin-Off as a standalone entity whereas the 2020 amount is an allocated amount from GRC based on time spent.

 

Exploration expenses.  For the three months ended September 30, 2021, property exploration expenses totaled $2.0 million as compared to $0.8 million for the same period of 2020. The increased exploration expense was the result of drilling at the Golden Mile property to further define the resource and move toward a development decision.

 Other expense, net. For the three months ended September 30, 2021, other expense, net did not materially change from the same period in 2020.

Income and mining tax expense. For the three months ended September 30, 2021, income and mining tax expense was $1.5 million as compared to $0.2 million for the same period in 2020.  The increase is the result of our increased income before income and mining taxes and increased Nevada net proceeds of minerals tax as a result of increased metal sales.  See Note 5 to the Condensed Consolidated Financial Statements.

 

Net income. For the three months ended September 30, 2021 we recorded net income of $4.6 million as compared to $3.5 million in the corresponding period for 2020. The increase is due to the changes in our consolidated results of operations as discussed above.

Consolidated Results of Operations – Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Sales, net.  For the nine months ended September 30, 2021, consolidated sales, net were $67.0 million as compared to $30.3 million for the same period in 2020. The increase is primarily attributable to higher sales volumes. For the nine months ended September 30, 2021, gold sales volumes increased 118% from the same period in 2020 as a result of higher-grade ore mined and processed.

 

Mine gross profit. For the nine months ended September 30, 2021, we recorded $33.7 million mine gross profit compared to $4.4 million for the same period in 2020. The change is attributable to higher sales volumes and higher average realized prices for gold and silver, resulting in a lower cash cost after by-products per gold ounce sold.  The lower cash cost per ounce is due to mining efficiencies and higher-grade ore mined in 2021 as compared to 2020 as well as no NRV expense related to our inventory in 2021, whereas in 2020, we recorded a $3.6 million NRV adjustment.

General and administrative. For the nine months ended September 30, 2021, general and administrative expenses totaled $8.7 million as compared to $1.8 million for the same period in 2020.  The increase was primarily the result of non-recurring stock-based compensation and onboarding incentive compensation totaling $5.5 million relating to building out the Company’s staffing needs post Spin-Off which was recognized in the first quarter.  While the Company anticipated working under the MSA for a longer period, the Company believed it would be prudent to fully staff up during the first quarter.  On April 21, 2021, the Company was delivered official notice of cancellation of the MSA from GRC that the MSA was being canceled. See Note 2 to the Condensed Consolidated Financial Statements.

 

16

Exploration expenses.  For the nine months ended September 30, 2021, property exploration expenses totaled $4.4 million as compared to $1.4 million for the same period of 2020. The increase of $3.0 million is the result of increased drilling and other exploration activities at the Golden Mile and Isabella Pearl (Scarlet target) projects as well as geophysical studies at Isabella Pearl.

 

Other expense, net. For the nine months ended September 30, 2021, other expense, net did not materially change from the same period in 2020.

Income and mining tax expense. For the nine months ended September 30, 2021, income and mining tax expense was $5.1 million as compared to $0.7 million for the same period in 2020.  The increase is the result of our increased income before income and mining taxes and increased Nevada net proceeds of minerals tax as a result of increased metal sales.  See Note 5 to the Condensed Consolidated Financial Statements.

 

Net income. For the nine months ended September 30, 2021 we recorded net income of $15.4 million as compared to $0.4 million in the corresponding period for 2020. The increase is due to the changes in our consolidated results of operations as discussed above.

COVID-19 Update

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

 

During 2020 and 2021, and as of the date of this report, the mining industry is listed as an essential business in the state of Nevada.  Accordingly, we continue to operate the Isabella Pearl Mine while utilizing safety measures and protocols. In an effort to mitigate the spread of COVID-19 and protect the health and safety of our employees, contractors, and communities, we have taken precautionary measures including specialized training, social distancing, screening workers before they enter facilities, a work from home mandate where possible, and close monitoring of national and regional COVID-19 impacts and governmental guidelines. As our non-mining workforce is able to work remotely using various technology tools, we have been able to maintain our operations and internal controls over financial reporting and disclosures.

 

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

Non-GAAP Measures

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

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

17

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

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

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

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

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

Reconciliations to U.S. GAAP

The following table provides a reconciliation of total cash cost after by-product credits to total mine cost of sales (a U.S. GAAP measure) as presented in the Consolidated Statements of Operations:

Three months ended September 30, 

Nine months ended September 30, 

    

2021

    

2020

2021

    

2020

(in thousands)

Total cash cost after by-product credits

$

7,144

$

7,853

$

21,461

$

19,921

Treatment and refining charges

  

(69)

(112)

  

(242)

(223)

Depreciation and amortization

  

3,668

2,949

  

11,953

6,157

Reclamation and remediation

40

24

116

17

Total consolidated mine cost of sales

$

10,783

$

10,714

$

33,288

$

25,872


The following table presents a reconciliation of the non-GAAP measures of total cash cost and AISC:

Three months ended September 30, 

Nine months ended September 30, 

    

2021

    

2020

2021

    

2020

(in thousands, except ounces sold and cost per precious metal gold equivalent ounce sold)

Total cash cost before by-product credits (1)

$

7,536

$

8,084

$

22,295

$

20,338

By-product credits (2)

  

(392)

(231)

  

(834)

(417)

Total cash cost after by-product credits

$

7,144

$

7,853

$

21,461

$

19,921

Sustaining capital expenditures

1,491

47

2,188

236

Sustaining exploration expenses

441

38

1,147

324

Total all-in sustaining cost

$

9,076

$

7,938

$

24,796

$

20,481

Gold ounces sold

  

11,454

8,396

  

37,436

17,205

Total cash cost before by-product credits per gold ounce sold

$

658

$

963

$

596

$

1,182

By-product credits per gold ounce sold (2)

(34)

(28)

(22)

(24)

Total cash cost after by-product credits per gold ounce sold

624

935

574

1,158

Other sustaining expenditures per gold ounce sold (3)

169

10

89

33

Total all-in sustaining cost per gold ounce sold

$

793

$

945

$

663

$

1,191

(1) Production cost plus treatment and refining charges.
(2) Please see the tables below for a summary of our by-product revenue and by-product credit per precious metal equivalent ounces sold.
(3) Sustaining capital expenditures and sustaining exploration expenses divided by gold ounces sold.

18

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

Three months ended September 30, 

Nine months ended September 30, 

    

2021

    

2020

    

2021

    

2020

(in thousands)

By-product credits by dollar value:

  

  

Silver sales

$

392

$

231

$

834

$

417

Total sales from by-products

$

392

$

231

$

834

$

417

Three months ended September 30, 

Nine months ended September 30, 

    

2021

    

2020

    

2021

    

2020

By-product credits:

  

  

Silver sales

$

34

$

28

$

22

$

24

Total by-product credits

$

34

$

28

$

22

$

24

Liquidity and Capital Resources

Through December 31, 2020, our primary source of liquidity during development, construction and ramp up stages of the Isabella Pearl Mine was cash contributions from GRC. Since December 31, 2020, our liquidity has largely been impacted through operating activities. As production and sales from Isabella Pearl have continued to increase, so has our cash position. As of September 30, 2021, we had a cash position of $44.3 million compared to $27.8 million at December 31, 2020. The increase is primarily due to increased cash from operations.

 

As of September 30, 2021, we had positive working capital of $75.5 million, representing an increase of $33.7 million from December 31, 2020. Our working capital balance fluctuates as we use cash to fund our operations, financing and investing activities, including exploration, mine development and income taxes.  With our working capital balance as of September 30, 2021, we believe that our liquidity and capital resources are adequate to fund our operations, exploration, capital, and corporate activities for the next twelve months.

Net cash provided by operating activities for the nine months ended September 30, 2021 was $23.2 million, compared to $2.7 million for nine months ended September 30, 2020. The primary difference is due to increased net income.

Net cash used in investing activities for the nine months ended September 30, 2021 was $1.8 million compared to $6.4 million during the same period in 2020. The decrease is primarily due to the completion of phase one Pearl mine development in 2020.

Net cash used in financing activities was $4.9 million for nine months ended September 30, 2021 compared to $9.6 million net cash provided by financing activities for nine months ended September 30, 2020.  The net change is due to dividend payments in 2021, whereas in 2020, financing activities were substantially comprised of capital contributions from GRC. No such contributions were made in 2021.

Development and Exploration Activities

Isabella Pearl Mine: During the third quarter, our open pit, heap leach operations at the Isabella Pearl Mine continued and we received our permit for the heap leach pad expansion project from the BLM. Construction of the heap leach pad commenced during the quarter and is expected to be complete by the end of the year or early first quarter 2022.  Exploration activities during the quarter targeted expansion of the Scarlet target, including 13 in-fill and step-out holes totaling 1,369 meters.  This drilling was mainly conducted outside the current permitted mine plan.  Review of results of the helicopter-borne geophysical survey continued for future investigation and possible drill targeting along the Isabella Pearl mine mineralized trend.

Golden Mile property: During the third quarter, we completed a reverse circulation drill campaign for primarily infill and a few step-out drill holes, which included 48 holes totaling 5,935 meters.  The results from this drilling will be incorporated into our geological model and we remain on target to complete our maiden resource estimate during 2021.  

19

In the third quarter, evaluation of material collected for metallurgical testing was completed by a third-party process metallurgical services company specializing in column heap leaching.  Metallurgical test results were positive with column leach tests reporting up to 85% gold recovery.  These positive results continue to move the property closer to a development decision.  Engineering, base line and background studies are also on-going with numerous revisions to the Golden Mile project and process facility layout, open-pit design, and infrastructure evaluations.  We have also retained a hydrology consultant to help delineate a potential production water resource at Golden Mile.  During the remainder of 2021, we will continue to evaluate the known mineralized zones among a much larger conceptual project plan of multiple open pits along a trend at Golden Mile to the northwest and onto the Mina Gold property.  We are evaluating the potential of at least three pits feeding ore to a strategically located heap leach and process facility. The conceptualized process plant is being evaluated to take the gold to carbon stage and then haul the carbon for processing at our ADR facility at Isabella Pearl for final doré production.

East Camp Douglas property: During the third quarter, we completed a review of the oriented core study undertaken earlier this year associated with the surface diamond drilling program on the lithocap target area of our East Camp Douglas property.  The oriented core study defined two major structural elements as controlling the gold bearing mineralization in the three targeted areas: Discovery Breccia, Gypsum Shaft and D2 Cliffs. These mineralized zones are hosted in brecciated vuggy silicified volcanic rock with a high degree of oxidation. A follow-up drilling program is targeted for later this year, continuing to evaluate the resource potential of the gold-bearing silicified volcanic rocks of the lithocap target area.

Accounting Developments

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

Forward-Looking Statements

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

The extent of the impact of the COVID-19 pandemic, including the duration, spread, severity, and any repeated resurgence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of the COVID-19 pandemic on our mining operations