UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 2019

Commission File Number: 333-182072

-----------------------------
Patagonia Gold Corp.
(Exact name of registrant as specified in its charter)

British Columbia, Canada
 
1041
(State or other jurisdiction of incorporation or organization)
 
(Primary Standard Industrial Classification Code Number)

Av. Libertador 498 P.26, Argentina, C.A.B.A
(+5411) 52786950
(Address of principal executive offices)

Securities Registered pursuant to Section 12(b) of the Act;
Title of each class
Name on each exchange on which registered
None
None

Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Name on each exchange on which registered
None
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  No 

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 proceeding 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 
 
Check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  No 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

$13,275,516

As of November 17, 2020, the registrant’s outstanding common stock consisted of 361,829,267 common shares.







ADDITIONAL INFORMATION

Descriptions of agreements or other documents in this report are intended as summaries and are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see the Exhibit Index at the end of this report for a complete list of those exhibits.

Special Note on Forward-Looking Statements
 
Certain statements contained in this report (including information incorporated by reference) are "forward-looking statements." The Company's forward-looking statements include current expectations and projections about future production, results, performance, prospects and opportunities, including reserves and other mineralization. The Company has tried to identify these forward-looking statements by using words such as "may," "might," "will," "expect," "anticipate," "believe," "could," "intend," "plan," "estimate" and similar expressions. These forward-looking statements are based on information currently available and are expressed in good faith and believed to have a reasonable basis. However, the forward-looking statements are subject to risks, uncertainties and other factors that could cause actual production, results, performance, prospects or opportunities, including reserves and mineralization, to differ materially from those expressed in, or implied by, these forward-looking statements.

Given these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements. Projections and other forward-looking statements included in this report have been prepared based on assumptions, which the Company believes to be reasonable, and in accordance with United States generally accepted accounting principles ("GAAP") or any guidelines of the Securities and Exchange Commission ("SEC"). Actual results may vary, perhaps materially. Readers are strongly cautioned not to place undue reliance on such projections and other forward-looking statements. All subsequent written and oral forward-looking statements attributable to Patagonia Gold Corp. or to persons acting on the Company's behalf are expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


PART I
Item 1. Business

On July 24, 2019, Patagonia Gold Corp. (PGDC.TSXV – “the Company” or “Patagonia”), formerly Hunt Mining Corp (“Hunt”, or “Hunt Mining”), and Patagonia Gold PLC (“PGP”) completed a reverse acquisition (or the “reverse takeover” or the “RTO”) resulting in Hunt acquiring all issued shares of common stock of PGP in exchange for common shares of Hunt on the basis of 10.76 Hunt shares for each PGP share. Hunt issued 254,355,192 common shares to the shareholders of PGP representing an ownership interest of approximately 80%. The operating name of Hunt Mining Corp. was changed to Patagonia Gold Corp. See Note 26 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the reverse acquisition.

As a result of the RTO, former shareholders of PGP acquired control of the Company, and the transaction was accounted for as an RTO that constitutes a business combination for accounting purposes and is accounted for using the acquisition method under ASC 805. PGP is deemed to be the acquiring company and its assets and liabilities, equity and historical operating results are included at their historical carrying values, and the net assets of the Company are recorded at the fair value as at the date of the transaction. However, the equity structure (that is, the number and type of equity interests issued) reflects the equity structure of the legal parent (the accounting acquiree), including the equity interests the legal parent issued in connection with the RTO. Transaction costs incurred in connection with the reverse acquisition, other than costs associated with financings, were expensed as incurred.

Comparative information for the Company is that of PGP. These figures were originally prepared under International Financial Reporting Standards (“IFRS”) and have been converted to conform with US Generally Accepted Accounting Principles (“US GAAP”). The legal parent post-RTO is Patagonia, which is required to present its financial statements in accordance with US GAAP. In summary, the comparative information for these statements is from PGP, presented in US GAAP to conform with the current requirements of Patagonia.

Patagonia is a mineral exploration and production company incorporated on January 10, 2006 under the laws of Alberta, Canada and together with its subsidiaries, is engaged in the exploration of mineral properties and exploitation of mineral resources and mineral reserves in the Santa Cruz, Rio Negro and Chubut Provinces of Argentina. Effective November 6, 2013, the Company relocated from the Province of Alberta to the Province of British Columbia. The Company’s registered office is located at Suite 2200, 885 West Georgia Street, Vancouver, B.C. V6C 3E8. The Company’s head office is located at Av. Del Libertador 498, Piso 26, C1001ABR, Buenos Aires, Argentina.

The consolidated financial statements include the accounts of the following subsidiaries after elimination of intercompany transactions and balances:
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Corporation
 
Incorporation
Percentage
ownership
 
Functional Currency
Business Purpose
Patagonia Gold S.A.
Argentina
90
US$
Production and Exploration Stage
Minera Minamalu S.A.
Argentina
100
US$
Exploration Stage
Huemules S.A.
Argentina
100
US$
Exploration Stage
Leleque Exploración S.A.
Argentina
100
US$
Exploration Stage
Patagonia Gold Limited (formerly Patagonia Gold PLC)
UK
100
GBP$
Holding
Minera Aquiline S.A.U.
Argentina
100
US$
Exploration Stage
Patagonia Gold Canada Inc.
Canada
100
CAD$
Holding
Patagonia Gold Chile S.C.M.
Chile
100
CH$
Exploration Stage
Cerro Cazador S.A.
Argentina
100
US$
Exploration Stage
Ganadera Patagonia S.R.L.
Argentina
100
US$
Land Holding
1494716 Alberta Ltd.
Canada
100
CAD$
Nominee Shareholder
Hunt Gold USA LLC
USA
100
US$
Management Company

The Company’s activities include the exploration and production of minerals from properties in Argentina. On the basis of information to date, properties where it has not yet been determined if economically recoverable ore reserves exist are classified as exploration-stage. Properties where economically recoverable ore reserves exist and are being exploited are classified as production-stage. The underlying value of the mineral properties is entirely dependent upon the existence of reserves, the ability of the Company to obtain the necessary financing to complete development and upon future profitable production or a sale of these properties.

The Company holds, directly or indirectly through its subsidiaries or under option agreements, the mineral rights to over 360 property interests in Argentina and Chile. These include the mineral rights to 67 property interests in the province of Santa Cruz covering approximately 281,000 hectares held by the Company’s 90%- owned Argentinian subsidiary, Patagonia Gold S.A. (“PGSA”) and to 51 property interests covering approximately 246,000 hectares held by its wholly owned Argentinian subsidiary Minera Minamalu S.A.

Patagonia is one of the largest landholders in the very prospective province of Santa Cruz. Currently its sole producing mine in the region is the Martha mine. Formerly owned and operated by Coeur Mining Inc. (formerly Coeur d’Alene Mines Corp.) and Yamana, the mine was acquired in May 2016 with production of gold and silver recommencing in January 2017. Martha produced a total of 1,008 ounces of gold and 65,620 ounces of sliver during 2019.

Following cessation of open pit operations at Cap-Oeste, work is continuing to evaluate the development of the high-grade underground resource which contains approximately 300,000 oz AuEq at 20 g/t Au. Production from the existing heap leach pad continued at Cap-Oeste during 2019 and yielded a total of 7,796 ounces of gold and 237,727 ounces of silver.

Other projects in Santa Cruz are at different stages of development. The principal projects are La Josefina, La Valenciana, El Tranquilo, La Paloma and La Manchuria. Other less advanced projects include Los Toldos, Sarita, El Gateado and Bajo Pobre together with exploration properties El Tordillo, El Alazan, and El Overo.

The Company’s principal project is Calcatreu located in Rio Negro province: a gold/silver project which it acquired in January 2018 through the acquisition of Minera Aquiline Argentina S.A., a subsidiary of Pan American Silver. Calcatreu, has a resource of over one million oz AuEq and the Company’s immediate aim is to commence a drilling programme to increase the existing resources and advance the project to feasibility study stage during 2020.

The Company has developed a portfolio of highly prospective, grassroots and more advanced projects, with many that exhibit the potential to host high grade, gold- and silver bearing vein systems. The Company’s long-term goal is to discover world class assets through exploration and is currently focused on growing its mineral resources and advancing them into production.

On some properties, ongoing production and sales of gold and silver is being undertaken without having established mineral resources and/or reserves and the Company has not established the economic viability of the operations. As a result, there is increased uncertainty and economic risks of failure associated with those production activities. Despite the sale of gold and silver, these projects remain in the exploration stage because management has not established proven or probable ore reserves required to be classified in either the development or production stage.

Competitive Business Conditions

The mineral exploration business is an extremely competitive industry. The Company competes with other exploration and mining companies for prospective property and the capital necessary to sustain exploration and development programs on those properties. As a result, the Company may have difficulty acquiring attractive silver and gold projects at reasonable prices. The Company also competes for skilled labor and consultants for man hours and consulting time.
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Generally, the Company is subject to the risks inherent to the mining industry. The primary risk of mineral exploration is the low probability of finding a major deposit of minerals. The Company attempts to mitigate this risk by focusing its efforts in areas known to host significant mineral deposits, and by relying on its experienced management team to drive acquisitions of properties that have higher-than-average probabilities of success.

When considering acquisition of properties, not only are essentials such as cost, terms, timing, and market considerations evaluated but also careful screening based on geological, engineering, environmental, and metallurgical factors. In all its operations, the Company competes for skilled labor within the mining industry.

Another significant risk in the mining industry is the price of metals such as gold and silver. If the prices of these metals were to fall substantially, it could lead to a loss of investor interest in the mineral exploration sector, which would increase the difficulty to raise capital necessary to move exploration and development plans forward.

Effect of Existing or Probable Government Regulation

The Company’s exploration and development activities and other property interests are subject to various national, state, provincial and local laws and regulations in the United States, Canada, Argentina, and other jurisdictions, which govern prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, protection of the environment, mine safety, hazardous substances and other matters. The Company has obtained or has pending applications for those licenses, permits or other authorizations currently required to conduct exploration and other programs. The Company believes that it complies in all material respects with applicable mining, health, safety and environmental statutes and regulations in all the jurisdictions in which it operates. The Company is not aware of any current orders or directions relating to us with respect to the foregoing laws and regulations.

Environmental Regulation

The Company’s projects are subject to various federal, state and local laws and regulations governing protection of the environment. These laws are continually changing and, in general, are becoming more restrictive. The Company’s policy is to conduct business in a way that safeguards public health and the environment. The Company believes that its operations are conducted in material compliance with applicable laws and regulations. Changes to current local, state or federal laws and regulations in the jurisdictions where it operates could require additional capital expenditures and increased operating and/or reclamation costs. The Company is unable to predict what additional legislation, if any, might be proposed or enacted, or what additional regulatory requirements could impact the economics of its projects. During 2019, none of the project sites had any material non-compliance occurrences with any applicable environmental regulations.

The Company generally will be required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping and revegetating various portions of a site after mining and mineral processing operations are completed. These reclamation efforts would be conducted in accordance with detailed plans, which must be reviewed and approved by the appropriate regulatory agencies.

Employees

As at December 31, 2019, the Company had 119 full and part time employees and 6 individuals working on a consulting basis. Its operations are managed by officers with input from directors.
Available Information

Additional information with regards to the Company is available on its website at www.patagoniagold.com. Information contained on the website is not a part of this report.

Item 1A. Risk Factors

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

The Company’s activities include the exploration and production of minerals from properties in Argentina. On the basis of information to date, properties where it has not yet been determined if economically recoverable ore reserves exist are classified as exploration-stage. Properties where economically recoverable ore reserves exist and are being exploited are classified as production-stage. The underlying value of the mineral properties is entirely dependent upon the existence of reserves, the ability of the Company to obtain the necessary financing to complete development and upon future profitable production or a sale of these properties.

In February 2019, the Company reviewed the production profile for 2019 for Cap-Oeste and Lomada. Given the expected lower production volumes from Cap-Oeste and the lower than anticipated recoveries from Lomada, the Board took the decision to close Lomada and put Cap-Oeste on care and maintenance until a suitable solution to extract and process the high-grade underground resource from Cap-Oeste has been identified. In this regard, the Company is working on final design on the Cap-Oeste underground mine.

The following is a summary of the Company’s operations, together with an update on exploration activities for the year to date. Except as otherwise noted, Donald J. Birak, independent geologist and registered member of the Society for Mining, Metallurgy and Exploration (“SME”) and fellow of the Australasian Institute for Mining and Metallurgy (“AusIMM”), is the Qualified Person whom has reviewed and approved the scientific and technical information contained herein.

The majority of the Company’s assets are located in Argentina. The Company’s material mining properties consist of

Approximately 81,000-hectare parcel on which the Company’s Cap-Oeste and El Tranquilo project are located
Approximately 59,200-hectare parcel on which the Company’s Lomada project is located
Approximately 41,800-hectare parcel on which the Company’s Calcatreu project is located
Approximately 5,500-hectare parcel on which the Company’s La Manchuria project is located
Approximately 52,800-hectare parcel on which the Company’s La Josefina project is located
Approximately 29,600-hectare parcel on which the Company’s La Valenciana project is located
Approximately 35,700-hectare parcel on which the Company’s Martha project is located

The Company owns the surface rights to over 108,200 hectares of land encompassing the Estancia (ranch) La Bajada, the Estancia El Tranquilo, the Estancia El Rincon, the Estancia 1° de Abril and the Estancia La Josefina. The Company has clear title and outright ownership over Estancia La Bajada, Estancia El Tranquilo, Estancia 1° de Abril and Estancia La Josefina. There is a back in right granted to the sellers under Estancia El Rincon’s title deed whereby the Company irrevocably committed to resell the estancia to its former owner in the event that two consecutive years elapse without mining activities. Current activity on this estancia includes the Lomada Project.

During 2019, the Company held, directly or indirectly through its subsidiaries or under option agreements, the mineral rights to over 360 property interests in Argentina, Chile and Uruguay. On December 10, 2019, the Company terminated its activities and interests in Uruguay.

It also owns a processing plant located at the Martha project, mobile and fixed housing units, trucks and additional mechanical equipment, all purchased within the last ten years and in good physical condition.

Calcatreu Project

The Company’s principal project, Calcatreu, is located in south-central Rio Negro Province approximately 80 km southwest of the town of Jacobacci. Calcatreu is located in the Jurassic-aged Somuncura Massif along the NW- to SE-oriented, regional-scale Gastre Fault System; a highly prospective belt of Mesozoic-aged rocks and structures and base and precious metal mineral deposits occurring in both the provinces of Chubut and Rio Negro. The massif is similar in geologic character to the larger Deseado Massif in the province of Santa Cruz to the south. Patagonia Gold has also recently acquired new concessions, totaling more than 100,000 hectares (“ha”) along this belt in Rio Negro province. Calcatreu is a gold and silver project acquired in January 2018 through the acquisition of Minera Aquiline Argentina SA, a subsidiary of Pan American Silver and the Company’s immediate aim is to commence a drilling program to increase the existing resources and advance the project to feasibility study stage during 2020. Precious metal mineralization in the Somuncura Massif, like that on the Company’s Calcatreu property, is largely epithermal in character within quartz-rich veins, vein clusters, stockworks and as disseminations. Sulfide minerals are ubiquitous in the mineral deposits as well as a suite of temporally- and spatially-related gangue minerals typical of epithermal deposits in the massif and elsewhere. More specifically, the gold and silver deposits on the Company’s properties are classified as low- and intermediate-sulfidation styles of epithermal deposits.
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The Calcatreu Deposit is a low sulfidation, epithermal gold and silver system with mineralization outcropping at surface. Ore reserves have not yet been established to assess the technical and economic viability of the project’s current mineralized material though the Company has plans to do so. As of December 31, 2018, Calcatreu’s mineralized material amounts to 9.8 million tonnes (approximately 10.8 short tons) with average gold and silver grades of 2.11 and 19.83 grams per tonne, respectively (0.062 ounces per ton of gold and 0.58 ounces per ton of silver).

A geophysical survey, consisting of 20 lines totaling 46.5km, was commissioned by the Company and covered the area between Castro Sur (to the north) and Veta (vein) 49 (to the south). Its objective was to detect the presence of hidden NNE-trending dilational fault and vein sections, similar to those at Veta 49, or any other structure with exploration potential for the discovery of new mineralization in the immediate vicinity of the Veta 49 / Nelson deposits, which comprise the current mineralized material at Calcatreu. The survey resulted in new target definition and ranking that will help guide the Company’s new exploration and definition work. As a result, a drill program consisting of several geophysical-based drill targets was designed. The first, and main, part of the drill program consisted of testing covered conceptual geophysical targets, whereas the last few drill holes were focused on expanding the known mineralization at Veta 49, Belen and Castro Sur, by extrapolating its trend and plunge.

The exploration program during 2019 was mostly focused in surface work, a total of 41.28 linear kilometers of pole-dipole ground induced polarization and resistivity (“IP/Res”) geophysical surveying was conducted over the main Nelson targets and Castro Norte, Fiero, Sabrina and Viuda de Castro areas, plus 121.5 linear kilometers of gradient array IP over Nelson, Sabrina and Mariano. Further, 1,687.2 km of ground magnetics, covering 55.44 sq km, were completed on the project covering several, known mineralized zones, including the main Veta 49 and Nelson. The objective was to identify non outcropping areas with potential to host mineralization in dilatational jogs, blind structures and other geologic settings.

Mapping and sampling, of several areas, was conducted, including the Viuda de Castro, Trinidad, La Cruz, Nelson extension, Piche, La Olvidada and Epu-Peni targets. A total of 254 new rock chips samples were taken, plus 81 new channel samples. Approximately 50% of the core of the project has been relogged; including up to 80 holes at Veta 40 and Belen.

A rotary air blast (“RAB”) drilling campaign and channel (sawn) sampling was in progress during 2020 where all the activities were paused due to the COVID-19 pandemic.

Santa Cruz Province

Geology of the land holdings is characterized by abundant middle-to-late Jurassic age volcanic and volcaniclastic rock units. All the projects in the province of Santa Cruz, Argentina are within the Deseado Massif, a prominent geomorphic and topographic feature, which is dominated by Mesozoic-aged rhyolitic to rhyodacitic ignimbrite flows and lava domes together with scattered intrusive rocks, subordinate agglomerates, volcanic breccias and tuffs with minor basalts, andesites and volcanic agglomerates intercalated upward with mafic tuffs, conglomerates and sediments. Faults active during the period of intense Jurassic extension and volcanism generally trend NNW-SSE and form a series of horst and graben blocks.
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Location of Patagonia Gold Corporation’s mineral properties within the Deseado Massif of Santa Cruz, Argentina.

General Geology of the Deseado Massif

Middle to late Jurassic-aged, bimodal volcanism, typical of a volcanic arc setting, developed during widespread extensional tectonism within the massif. This geologic environment led to the formation of numerous low-sulfidation (LS) epithermal deposits that are spatially and temporally related to the volcanic activity. Most part of these LS deposits and their mineralization is genetically linked to the Late Jurassic-aged Chon Aike Formation and hosted by volcanic rocks of the Middle to Late Jurassic-aged Bajo Pobre Formation. The Deseado Massif can be considered as a differentiated Au-Ag Mesozoic-aged geomorphological province with later hydrothermal alteration and mineralization episodes.

Cap-Oeste Project

Cap-Oeste is located within a structural corridor extending six kilometres from the La Pampa prospect in the northwest to the Tango prospect in the southeast. The Cap-Oeste deposit has an identified and delineated strike extent of 1.2 kilometres. Cap-Oeste has been on care and maintenance since February 2019.

Production from the existing heap leach pad continued during 2019 and yielded a total of 7,796 ounces of Au and 237,727 ounces of Ag. The cash costs for the year were US$573/oz1 and US$651/oz1 (the later including depreciation and amortization). A total of 8,236 Au and 234,441 Ag ounces were sold during the year 2019.

The Company has initiated studies to assess the potential technical and economic extraction of a portion of the current mineralized material at Cap-Oeste. The Company is now focused on evaluating the development of this higher-grade part by underground mining. The Company is expecting quotations with respect to potential construction of an underground mine in Cap-Oeste. Material processing options are being considered and may include utilizing the Company’s flotation facilities are Martha, about 100 kms to the southeast of Cap-Oeste. The Company has successfully carried out bulk metallurgical tests in the Martha process plant, obtaining favorable results.



1 See Non-GAAP Financial Performance Measures in Item 7
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The Company has an asset retirement obligation for reclamation costs for Cap-Oeste Project of $0.1 million as of December 31, 2019.

Lomada de Leiva Project (Lomada)

The Lomada mine was closed in May 2016 while production from the ongoing leaching continued through 2019, though at a reduced output. Given that the ore from the Lomada open pit mine was originally placed on the heap leach pad without crushing, the Company decided to return to Lomada to reprocess this ore. However, in mid-February 2019 the Company took the decision to cease operations and proceed with the closure of Lomada. On this year the Company was working on re handling material of leach pad to regenerate the solution percolation and generate new channels of circulation of solution.

During 2019, Lomada produced 3,969 ounces of gold. The cash costs for the year were US$437/oz2 and US$ 580/oz2; the later including depreciation and amortization. A total of 3,461 ounces of Au were sold at an average gross price of $ 1,374 per ounce Au during the year 2019.

The Company has prepared an update to the closure plan presented and approved by the provincial authorities in 2017. The Company received the final approval in November 2019 and started with the works of remediation on the end of 2019. The work on the remediation had been halted due to the COVID-19 pandemic. In October 2020, the Company received a preliminary Environmental Permit (“Permit”) for a restart of mining and new leaching operations at its Lomada mine in the western part of the Santa Cruz Province of Argentina. Patagonia applied for the Permit in August 2020.

The Company has an asset retirement obligation for reclamation costs for the Lomada de Leva Project of $1.7 million as of December 31, 2019.

Mineralized Material Summary

Cap-Oeste (Santa Cruz Province, AR) – Dec 2018; Notes ¹ and 2
Tonnes (K)
Average Grades (g/t)
Gold
Silver
10,557.4
2.07
63.2

Calcatreu (Rio Negro Province, AR) – Dec 2018; Notes 3 and 4
Tonnes (K)
Average Grades (g/t)
Gold
Silver
9,841.0
2.11
19.8

La Manchuria (Santa Cruz Province, AR) – Feb 2019; Notes 5 and 6
Tonnes (K)
Average Grades (g/t)
Gold
Silver
474.0
2.59
129.0

La Josefina (Santa Cruz Province, AR) – 2010; Notes 7 and 8
Tonnes (K)
Average Grades (g/t)
Gold
Silver
6,524.6
0.74
13.1

Notes
“K” = Thousands, “g/t” = grams per tonne
Rounding may affect sums and weighted averages
100% basis; Fomicruz has a 5% interest in all Santa Cruz mineral interests.

1.
Cap-Oeste
0.5 g/t AuEq cutoff
2.
Cap-Oeste
AuEq = Au + (Ag*69.4)
3.
Calcatreu
0.5 g/t AuEq cutoff
4.
Calcatreu
AuEq = Au + (Ag*81.25)
5.
La Manchuria
0.55 AuEq cutoff
6.
La Manchuria
AuEq = (Au + Ag)/(Au price*0.32151)
7.
La Josefina
0.2 g/t AuEq cutoff
8.
La Josefina
AuEq = Au + (Ag*66.67)





2 See Non-GAAP Financial Performance Measures in Item 7
- 8 -


Exploration Update

Exploration during 2019 consisted mainly of regional reconnaissance, geological mapping, sampling, geophysics and drilling carried out at Rio Negro and Santa Cruz. The geophysical surveys were ground magnetics and pole-dipole IP/Res. During 2019, the Company’s exploration drilling in Argentina was concentrated at Calcatreu, and some of its properties in Santa Cruz province. In addition to the exploration work summarized for Calcatreu above, the Company conducted other exploration at it properties

Mina Angela

On August 13, 2019, the Company announced an offer letter agreement with Latin Metals Inc. to acquire its Mina Angela property. The Mina Angela property is situated in the Somuncura Massif of southern Argentina and is comprised of 44 individual claims located approximately 50 km east-southeast of Patagonia’s 100% owned Calcatreu gold project. Pan American Silver’s Navidad silver and base metal deposit is located 45 km further to the south-southeast of Mina Angela. In March 2020, Patagonia extended the period by which it must enter into the definitive agreement with a $100 thousand payment to Latin Metals; $50 thousand of which was applied to extend the period to enter into the definitive agreement and $50 thousand of which was a partial prepayment of the first earn-in payment to be made under the definitive agreement.

On September 15, 2020, the Company entered into a definitive option agreement with Latin Metals Inc., which granted the Company an irrevocable option to acquire a 100% interest in the Mina Angela property. Upon signing of the definitive agreement, the Company paid $200 thousand representing the balance of the first earn-in payment. It is expected that the Company will pay the second earn-in payment of $250 thousand within the next six months if it exercises the option to acquire the Mina Angela property. A further and final payment of $500 thousand is expected to be paid within 30 days of verification that the legal restrictions preventing development of mining activity in the Chubut Province and at the Mina Angela property have been lifted in such a manner that the Company thereafter has the ability to perform exploration and exploitation mining activities on the Mina Angela property. In addition, Latin Metals will be entitled to receive a 1.25% Net Smelter Royalty from future productions, half of which can be repurchased by the Company for $1 million.

La Manchuria Project

In addition to its current mineral resources, the La Manchuria Project is believed to be prospective for the discovery of new gold and silver mineralization. Brownfield exploration continued through mapping and rock chip sampling of approximately 2,000 ha of the total project’s property size. Veinlets and narrow breccia zones indicative of hydrothermal activity were found at the Magali zone. Anomalous gold values were reported from the Cecilia zone. As a result, a new drill program for La Manchuria, of 2,000 m in 14 holes is planned to test geophysical anomalies and to test gold anomalies generated from surface rock chip sampling.

Sarita Project

The Sarita Project, located in the SW of the Deseado Massif approximately 10 km NW of the Company’s Martha mine and mill, hosts a widespread system of banded, low sulfidation Au-Ag veins, encompassing a small rhyolitic dome complex. Geologically, the area displays very similar structural and stratigraphic characteristics to the Company’s Martha project with Ag-rich, polymetallic, vein-hosted, intermediate sulphidation mineralization. The banded, silver- and gold- bearing quartz veins and quartz vein breccias occur within a set of NNW-SSE striking normal faults and constitute an extensive mineralized vein system, with more than 12 km in total outcropping length. Precious and base metal mineralization has been recognized in quartz veins and vein breccias up to 3 m wide at surface, composed of quartz and sulphides. Rock chips from discrete vein structures or aligned float have returned anomalous gold samples with up to 83.40 g/t Au and up to 15,444 g/t Ag, in separate samples. To date 16 diamond drill holes have been drilled for 1,754 m targeting the vein mineralization. Geochemical results from drilling show gold and silver anomalies. Due to poor ground conditions encountered during drilling, core recovery in some of the veins was poor and Au and Ag mineralization may have not been recovered. Other exploration activities at Sarita included geophysical surveys and drilling. Geophysical anomalies were identified by IP-Res lines [7.1 km] and by detailed ground magnetics [220 hectares] over different targets areas.

A proposal for testing those targets by drilling was defined and shallow geochemical testing, by RAB drilling (Rotary Air Blasting), comprised 198 drill holes in eight targets (Phase I: May 2019, 81 holes; Phase II: September 2019, 117 holes).

Martha Project

The Martha Project (“Martha” or “Mina Martha”) is located in the Province of Santa Cruz, Argentina. The closest community is the town of Gobernador Gregores, situated approximately 50 road kilometers (km) to the west-southwest of Martha. The property is the site of past exploration for, and surface and underground mining and recovery of, silver and gold from epithermal veins and vein breccias, previously operated by Coeur Mining Inc. (formerly, Coeur d’Alene Mine Corp.) and Yamana Inc.
- 9 -


The Company acquired Martha as part of its RTO of Hunt Mining Corp. in 2019. The land package at Martha consists of approximately 7,850 hectares of concessions, various buildings and facilities, surface and underground mining and support equipment, a 480 tonne per day (tpd - maximum) crushing, grinding and flotation plant, tailings facility, various stockpiles and waste dumps, employee living and cafeteria quarters, and miscellaneous physical materials. In addition, the Company has access to surface estancia (“ranch”) lands surrounding the mine and mill site that are approximately 35,700 ha in size.

Ongoing production at the Martha Project is being undertaken without established ore reserves and the Company has not established the technical and economic viability of the Martha Project. As a result, there is increased uncertainty and economic risk of failure associated with these production activities.

The property was purchased in 2016 by Cerro Cazador SA (CCSA), an Argentine subsidiary of the Company, from an Argentine subsidiary of Coeur Mining Inc. (Coeur). The intent to purchase was announced February 10, 2016 and closed May 11, 2016 as disclosed by the Company on its website (www.patagoniagold.com). The processing plant at the Martha Project has an estimated useful life of 8 years as it is anticipated that this plant will be used to process mineral from Cap-Oeste underground, Martha Project and from La Josefina Project. Royal Gold Inc. holds a 2% Net Smelter Return (NSR) royalty on all production from the Martha property; the obligation for which transferred from Coeur to the Company (www.royalgold.com). In addition, the provincial government holds a 3% pit-head royalty from future production.

In late 2019, a plan for reviewing near-mine targets (<5 km away from the mill) was defined. Those remaining targets consist of outcropping veins-veinlets. They included Veta del Medio System, Noroeste, Ivana, Martha Oeste, Martha Norte, Futuro and Sugar Hill among the mains. After encouraging results from sawn-channels (up to 1,000 gr/t Ag) at Veta del Medio System, a RAB drill program was carried out to test mineralization at shallow depths. A total of 65 drill holes (1,397.4 m; up to 25 m depth) tested several targets. Highly anomalous drill intercepts, up to 1m wide and grading 7,700 g/t Ag, were returned from the Veta del Medio Norte which is being considered for follow-up core drilling. Exploration continues to focus on remaining targets by combining systematic sawn-channelling, ground magnetics surveying and new drilling.

The Company has an asset retirement obligation for reclamation costs for the Martha Project of $0.8 million as of December 31, 2019.

La Josefina Project

In March 2007, the Company (Patagonia Gold) acquired the exploration and development rights to the La Josefina project from Fomento Minero de Santa Cruz Sociedad del Estado (“Fomicruz”). In July 2007, the Company entered into an agreement (subsequently amended) with Fomicruz, which provides that, in the event that a positive feasibility study is completed on the La Josefina property, a Joint Venture Corporation (“JV Corporation”) would be formed by the Company and Fomicruz. The Company would own 81% of the joint venture company and Fomicruz would own the remaining 19%. Fomicruz has the option to earn up to a 49% participating interest in the JV Corporation by reimbursing the Company an equivalent amount, up to 49%, of the exploration investment made by the Company. The Company has the right to buy back any increase in Fomicruz’s ownership interest in the JV Corporation at a purchase price of USD$200,000 per each percentage interest owned by Fomicruz down to its initial ownership interest of 19%; the Company can also purchase 10% of the Fomicruz’s initial 19% JV Corporation ownership interest by negotiating a purchase price with Fomicruz. Under the agreement, the Company has until the end of 2019 to complete cumulative exploration expenditures of $18 million and determine if it will enter into production on the property. At December 31, 2019, the Company had incurred approximately $20 million and is in current discussions with Fomicruz to develop a plan for production. In October 2019, the agreement was extended until April 30, 2021 which period may be extended for an additional one-year term.

The project is situated about 450 km northwest of the city of Rio Gallegos, in the Santa Cruz province of Argentina within a scarcely populated steppe-like region known as Patagonia. The La Josefina property occupies 52,800 hectares and makes up approximately 90% of all meters drilled by the Company. The La Josefina Project consists of mineral rights composed by an area of 528 square kilometers established in 1994 as a Mineral Reserve held by Fomicruz. The La Josefina Project comprises 16 Manifestations of Discovery (“MDs”) totaling 52,767 ha in size, which are partially covered by 399 tenements.

- 10 -


La Valenciana Project

La Valenciana is located on the central-north area of the Santa Cruz Province, Argentina. The project encompasses an area of approximately 29,600 ha and is contiguous to the Company’s La Josefina property to the east. The La Valenciana project is comprised of 11 MDs covering segments of Estancia Cañadón Grande, Estancia Flecha Negra, Estancia Las Vallas, Estancia La Florentina, Estancia La Valenciana and Estancia La Modesta (inactive ranches). In La Valenciana, exploration has been limited, with more than half of the surface without systematic exploration. Fomicruz carried out preliminary works defining a main vein system of low sulfidation epithermal style with gold and silver values accompanied by variable amounts of base metals. Exploration and subsequent reconnaissance sampling by CCSA added other, secondary targets and structures combining a total of 5.70 line km of mapped veins and stockworks. The limited exploration to date, alteration features and associated structures, and partial coverage by probable post-mineral units suggest that there is potential for discovery of new mineralization on the property. A new exploration program to define new sites of mineralization, including geophysical surveys and shallow drilling in new and known target areas and an intensive prospecting and reconnaissance sampling in the whole block of mining properties, is being considered.

Bajo Pobre Property

The Bajo Pobre property covers 3,190 hectares and is mainly on the Estancia Bajo Pobre. The property is located 90 kilometers south of the town of Las Heras. No exploration activity has taken place on the Bajo Pobre Property and no exploration activity is planned for the immediate future.

El Gateado Property

In March 2006, CCSA acquired the right to conduct exploration on the El Gateado property through a claim staking process for a period of at least 1,000 days, commencing after the Government issues a formal claim notice, and retain 100% ownership of any mineral deposit found within. El Gateado is a 10,000-hectare exploration concession filed with the Santa Cruz Provincial mining authority. The El Gateado property is located in the north-central part of Santa Cruz province, contiguous to La Josefina on the east.

The Company has not yet received a formal claim notice pertaining to the El Gateado property. Should a mineral deposit be discovered, the company has the exclusive option to file for mining rights on the property. The surface rights of the El Gateado claim are held by the following Ranches, Estancia Los Ventisqueros, Estancia La Primavera, Estancia La Virginia and Estancia Piedra Labrada. The El Gateado claims are filed with the government under file #406.776/DPS/06.

No recent exploration activity has taken place on El Gateado Property and no exploration activity is planned for the immediate future.

The scientific and technical information contained herein has been reviewed and approved by Donald J. Birak, an independent, consulting geologist.

Item 3. Legal Proceedings

The Company had no legal proceedings as at December 31, 2019.

Item 4. Mine Safety Disclosures

The Company has no outstanding mine safety violations or other regulatory safety matters to report, pursuant to Item 104 of Regulation S-K.

- 11 -


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The common stock is listed on the TSX Venture Exchange also referred to as the "TSXV", and trades under the symbol "PGDC".

Exchange Rates

The Company maintains its books of account in United States dollars and references to dollar amounts herein are to the lawful currency of the United States except that it is traded on the TSX Venture Exchange (TSXV) and, accordingly, stock price quotes and sales of stock are conducted in Canadian dollars (C$).

The following table sets out the exchange rate (price of one U.S. dollar in Canadian dollars) information as at each of the years ended December 31, 2019 and 2018.

 
Year Ended December 31
(Canadian $ per U.S. $)
 
2019
2018
Rate at end of Period
1.2988
1.3642
Low
1.2988
1.2288
High
1.3600
1.3642

Dividends

The Company has not paid any cash dividends on common shares since inception and do not anticipate paying any cash dividends in the foreseeable future. The Company plans to retain earnings, if any, to provide funds for the expansion of business.

Outstanding Share Data

As of November 4, 2020, there are 2,438 registered holders of record of the Company's common shares.

Securities authorized for issuance under equity compensation plans

Under the Company's share option plan, and in accordance with TSX Venture Exchange requirements, the number of common shares reserved for issuance under the option plan shall not exceed 10% of the issued and outstanding common shares of the Company. In connection with the foregoing, the number of common shares reserved for issuance to: (a) any individual director or officer will not exceed 5% of the issued and outstanding common shares; and (b) all consultants will not exceed 2% of the issued and outstanding common shares.

Plan category
Number of Securities to be issued upon exercise of outstanding options, warrants and rights
Weighted average exercise price of outstanding options warrants and rights (CAD)
Number of Securities remaining available for future issuance under equity compensation plans (excluding securities to be issued upon exercise of outstanding options, warrants and rights)
Equity compensation plans approved by security holders
7,650,000
$
0.065
24,144,399
Equity compensation plans not approved by security holders
-
$
-
-

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Company and Affiliated Purchasers

None.

- 12 -



Section 15(g) of the Securities Exchange Act of 1934

The company’s shares are covered by Section 15(g) of the Securities Exchange Act of 1934, as amended, that imposes additional sales practice requirements on broker/dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouses). For transactions covered by the Rule, the broker/dealer must make a special suitability determination for the purchase and have received the purchaser’s written agreement to the transaction prior to the sale. Consequently, the Rule may affect the ability of broker/dealers to sell securities and may affect the ability to sell shares in the secondary market.

Section 15(g) also imposes additional sales practice requirements on broker/dealers who sell penny securities. These rules require a one-page summary of certain essential items. The items include the risk of investing in penny stocks in both public offerings and secondary marketing; terms important to in understanding of the function of the penny stock market, such as “bid” and “offer” quotes, a dealers “spread” and broker/dealer compensation; the broker/dealer compensation, the broker/dealers duties to its customers, including the disclosures required by any other penny stock disclosure rules; the customers rights and remedies in causes of fraud in penny stock transactions; and, the FINRA’s toll free telephone number and the central number of the North American Administrators Association, for information on the disciplinary history of broker/dealers and their associated persons.

The application of the penny stock rules may affect your ability to resell your shares.

ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis (“MD&A”) should be read in conjunction with the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018, and the notes thereto included in this annual report. This MD&A includes certain non-GAAP financial performance measures. For a detailed description of these measures, please see “Non-GAAP Financial Performance Measures” at the end of this item. The amounts presented in this MD&A are in thousands ($’000) of U.S dollars unless otherwise noted.

Additional information relevant to the Company’s activities can be found on their website at http://patagoniagold.com, on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

The Company

On July 24, 2019, Patagonia Gold Corp. (PGDC.TSXV – “the Company” or “Patagonia) [formerly Hunt Mining Corp. (“Hunt” or “Hunt Mining”) and Patagonia Gold PLC (“PGP”) completed a reverse acquisition (or reverse takeover, the “RTO”) resulting in Hunt acquiring all issued shares of common stock of PGP in exchange for common shares of Hunt on the basis of 10.76 Hunt shares for each PGP share. Hunt issued 254,355,192 common shares to the shareholders of PGP representing an ownership interest of approximately 80%. The operating name of Hunt Mining Corp. was changed to Patagonia Gold Corp. See Note 26 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the reverse acquisition.

Patagonia is a mineral exploration and production company incorporated on January 10, 2006 under the laws of Alberta, Canada and, together with its subsidiaries, is engaged in the exploration of mineral properties and exploitation of mineral resources and mineral reserves in the Santa Cruz, Rio Negro and Chubut Provinces of Argentina.

Effective November 6, 2013, the Company relocated from the Province of Alberta to the Province of British Columbia. The Company’s registered office is located at Suite 2200, 885 West Georgia Street, Street, Vancouver, B.C. V6C 3E8. The Company’s head office is located at Av. Del Libertador 498, Piso 26, C1001ABR, Buenos Aires, Argentina.

The consolidated financial statements for the year ended December 31, 2019 includes its subsidiaries after elimination of intercompany transactions and balances stated in Item 1.


- 13 -


The Company’s activities include the exploration and production of minerals from properties in Argentina. See Note 8 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the mineral properties. On the basis of information to date, properties where it has not yet been determined if economically recoverable ore reserves exist are classified as exploration-stage. Properties where economically recoverable ore reserves exist and are being exploited are classified as production-stage. The underlying value of the mineral properties is entirely dependent upon the existence of reserves, the ability of the Company to obtain the necessary financing to complete development and upon future profitable production or a sale of these properties.

On some properties, ongoing production and sales of gold and silver are being undertaken without established mineral resources or reserves and the Company has not established the economic viability of the operations. As a result, there is increased uncertainty and economic risks of failure associated with these production activities. Despite the sale of gold and silver, these projects remain in the exploration stage because management has not established proven or probable ore reserves required to be classified in either the development or production stage.

Results of Operations

During the year ended December 31, 2019, the Company earned total revenue of $21,938 compared to $47,441 during the year ended December 31, 2018. Gold and silver sold by the Company is attributed to Cap-Oeste, Lomada de Leiva and Martha Projects.

Cost of sales for the year ended December 31, 2019 were $16,430 compared to $36,361 for December 31, 2018, largely owing to the close of Lomada and putting Cap-Oeste on care and maintenance.

The Company incurred administrative expenses of $7,262 during the year ended December 31, 2019 compared to $6,017 during the year ended December 31, 2018. The increase in administrative expenses during 2019 was due to termination payments made as a result of closing Lomada and putting Cap-Oeste on care and maintenance and due to increase in professional fees incurred in connection with the reverse acquisition. See Note 26 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the reverse acquisition.

The Company incurred exploration expenses of $3,758 during the year ended December 31, 2019 compared to $1,802 during the year ended December 31, 2018. The increase in exploration expense was due to the increase in remediation costs for the Lomada project.

The Company incurred interest expense of $2,131 during the year ended December 31, 2019 compared to $1,665 during the year ended December 31, 2018. The increase in interest expense during 2019 was a result of the debt assumed as part of the reverse acquisition during 2019.

The net loss for the year ended December 31, 2019 was $9,675 compared with a net loss of $7,846 for the year ended December 31, 2018. The increase in net loss during 2019 was due to lower revenues, increase in administrative and exploration expenses, increase in interest expense and non-cash charges for inventory write-down and impairment of mineral properties due to the closure of Lomada and putting Cap-Oeste on care and maintenance.

Basic and diluted net loss per share was $0.03 during the years ended December 31, 2019 and 2018. The basic and diluted net loss per share remained consisted as the higher net loss during 2019 was offset by higher weighted average shares outstanding in 2019.

Cap-Oeste

Cap-Oeste produced a total of 10,585 oz AuEq (7,796 oz Au and 237,727 oz Ag) during the year ended December 31, compared to 42,900 oz AuEq during the year ended December 31, 2018. The cash costs of production for the year were US$573/oz3 and US$651/oz3 including depreciation and amortization. Cap-Oeste generated revenues of $14,903 during the year ended December 31, 2019 compared to $47,441 during the year ended December 31, 2018. The decrease in production and revenues was due to placing Cap-Oeste on care and maintenance in February 2019.

Lomada

Lomada produced a total of 3,969 ounces of gold during the year ended December 31, 2019 compared to 486 ounces during the year ended December 31, 2018. The cash costs of production for the year were US$437/oz3 and US$580/oz3 including depreciation and amortization. Lomada generated revenues of $4,750 during the year ended December 31, 2019 compared to $Nil during the year ended December 31, 2018. The increase in production and revenues was due the re-handling and crushing of stockpiled ore at Lomada which resumed at the end of November 2018.



3 See Non-GAAP Financial Performance Measures

- 14 -


Martha and La Josefina Projects

Martha produced a total of 1,008 oz AuEq (232 oz Au and 65,620 oz Ag) during the year ended December 31, 2019. The cash costs of production during the year were US$714/oz3 and US$805/oz3 including depreciation and amortization. Martha generated revenues of $2,285 during the year ended December 31, 2019.

The Company incurred exploration expenses of $300 and exploration expenses of $871 during the year ended December 31, 2019. The administrative expenses consisted primarily of salaries, taxes and office expenses.

Exploration expenses consisted primarily of consultant fees.

These assets were acquired in the reverse acquisition in 2019 and hence do not include comparatives for the year ended December 31, 2018.

Calcatreu Project

Exploration expense during the year ended December 31, 2019 was $1,300 compared to $1,720 during the year ended December 31, 2018. The exploration expense decreased compared to last year as following the acquisition of Calcatreu in 2018, the Company had performed additional drilling and studies which lead to more exploration expenses during 2018.

Argentina, Uruguay and Chile

This segment includes the results of La Manchuria project, La Sarita project, San José Project (Uruguay) and the Lomada Project.

Exploration expense during the year ended December 31, 2019 was $1,931 compared to $82 during the year ended December 31, 2018. The increase in exploration expense was due to the increase in remediation costs for the Lomada project.

Administrative expense during the year ended December 31, 2019 was of $4,072 compared to $4,706 during the year ended December 31, 2018. The administrative expense decreased during 2019 as a result of the devaluation of the Peso.

Interest expense during the year ended December 31, 2019 was of $765 compared to $1,275 during the year ended December 31, 2018. The decrease in interest expense during 2019 was due to the repayment of loans.

United Kingdom

This segment includes the results of Patagonia Gold Limited which is a holding company and does not generate any revenues.

Administrative expense during the year ended December 31, 2019 was $1,433 compared to $1,005 during the year ended December 31, 2018. The increase in administrative expense during 2019 was due to costs associated with the reverse acquisition during 2019.

Interest expense during the year ended December 31, 2019 was of $782 compared to $390 during the year ended December 31, 2018. The increase in interest expense during 2019 was due to the additional loan received from Cantomi Uruguay S.A., a company owned and controlled by the Company’s Non-Executive Chairman, Carlos J. Miguens.

North America

This segment includes the results of Patagonia Gold Corp (“PGC”), Patagonia Gold Canada Inc, 1494716 Alberta Ltd. (“AL”) and Hunt Gold USA LLC (“HGU”). These entities are holding companies and do not generate any revenues. PGC, AL and HBU were acquired as part of the reverse acquisition during 2019 and their results of operations prior to the reverse acquisition are not incorporated in the consolidated financial statements for the year ended December 31, 2019 and 2018.

Administrative expense during the year ended December 31, 2019 was $307 compared to $80 during the year ended December 31, 2018. The increase in administrative expenses was a result of the operations of new entities acquired in the reverse acquisition.

Interest expense during the year ended December 31, 2019 was of $584 compared to $Nil during the year ended December 31, 2018. The increase in interest expense during 2019 was a result of debts assumed in the reverse acquisition during the year.

- 15 -



Summary of Results of Operations:

 
 
December 31, 2019
$’000
   
December 31, 2018
$’000
   
Change
Favorable (Unfavorable)
$’000
 
Revenue
 
$
21,938
   
$
47,441
   
$
(25,503
)
Net income (loss) for the year
 
$
(9,675
)
 
$
(7,846
)
 
$
(1,829
)
Net income (loss) per share – basic
 
$
(0.03
)
 
$
(0.03
)
 
$
-
 
Net income (loss) per share – diluted
 
$
(0.03
)
 
$
(0.03
)
 
$
-
 
Working capital
 
$
(22,484
)
 
$
(17,541
)
 
$
(4,943
)
Total assets
 
$
54,789
   
$
47,208
   
$
7,581
 
Total non-current liabilities
 
$
17,581
   
$
1,305
   
$
(16,276
)
Total shareholders' equity
 
$
9,176
   
$
16,493
   
$
(7,317
)

The change in working capital is due to increase in increase in bank indebtedness, additional accounts payable and accrued liabilities acquired as part of the reverse acquisition during the year and due to write down of inventory recognized during 2019.

The decrease in shareholders’ equity was due to the net loss for the year and partially offset by increase in the capital stock due to shares issued in the reverse acquisition during the year.

Total assets increased primarily due to the assets acquired in the reverse acquisition and the normal fluctuations in operations, reduction in inventory levels and depreciation of property, plant and equipment.

Non-current liabilities increased during 2019 as result of a loan facility provided by Cantomi Uruguay S.A., a company owned and controlled by the Company’s Non-Executive Chairman, Carlos J. Miguens and additional long-term debt assumed in the reverse acquisition during the year.

Cash flow discussion for the year ended December 31, 2019 and 2018

The Company generated $2,774 of cash from operating activities for the year ended December 31, 2019 compared to $11,769 for the year ended December 31, 2018. The decrease in cash from operating activities was mainly due to lower net income during 2019 after adjusting for non-cash charges such as depreciation, asset retirement obligation, impairment and inventory write down.

Cash used in investing activities for the year ended December 31, 2019 was $880 compared to $11,858 for the year ended December 31, 2018.The large variance in cash used in investing activities was primarily due to purchase of mining rights, during the year ended December 31, 2018 for $14,612. The Company had acquired the Calcatreu gold asset in Rio Negro, Argentina, by way of acquiring 100% of the shares of Minera Aquiline Argentina S.A. (“MASA”), the difference between the fair value of the net asset and the price paid for the 100% of the shares of MASA, $14,612, is related to the rights to explore and mine the Calcatreu Deposit.

Cash from financing activities for the year ended December 31, 2019 was $593 compared to $4,470 of cash used during the year ended December 31, 2018. During 2019, the company’s bank indebtedness increased by $2,608 and the Company received $8,515 in additional proceeds from loans with related parties and repaid $10,530 of other loans. During 2018, the company’s bank indebtedness increased by $7,877 and the Company received $6,278 from loans and repaid $18,625.

Financial Position

Cash

The company has cash on hand of $685 as of December 31, 2019 compared to $660 as of December 31, 2018.

Receivables

Current receivables are $1,516 as of December 31, 2019 compared to $4,923 as of December 31, 2018. The $3,407 decrease in current receivables was mainly due to collection of Value added tax (“VAT”) during 2019.

Non-current receivables are $3,814 as of December 31, 2019 compared to $3,072 as of December 31, 2018. The $742 increase in non-current receivables was mainly due increase in recoverable VAT and other recoverable costs.

- 16 -



Inventory

The company has inventory of $3,347 as of December 31, 2019 compared to $6,286 as of December 31, 2018. The decrease in inventory is mainly due to $2,368 write down recognized during 2019 as result of closure of Lomada and putting Cap-Oeste on care and maintenance.

Property, plant and equipment (“PPE”)

The company has PPE of $10,508 as of December 31, 2019 compared to $9,478 as of December 31, 2018. PPE increased by $1,030 mainly due to the assets acquired in the reverse acquisition. See Note 26 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the reverse acquisition.

Bank indebtedness

The company has bank indebtedness of $14,989 as of December 31, 2019 compared to $12,381 as of December 31, 2018. The increase in bank indebtedness was a result on drawing down against the existing lines of credit for operational purposes.

Accounts payable and accrued liabilities

The company has accounts payable and accrued liabilities of $5,992 as of December 31, 2019 compared to $6,681 as of December 31, 2018. The decrease in accounts payable and accrued liabilities was a result of normal fluctuations in operations.

Accounts payable with related parties

The company has accounts payable with related parties of $6,717 as of December 31, 2019 compared to $246 as of December 31, 2018. The increase in accounts payable with related parties is a result of administrative expenses and interest payable to a company controlled by a director. This liability was assumed in the reverse acquisition during the year. See Note 26 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the reverse acquisition.

Loan payable and current portion of long-term debt

The company has loan payable and current portion of long-term debt of $334 as of December 31, 2019 compared to $10,102 as of December 31, 2018. The decrease in loan payable and current portion of long-term debt was due to repayment of short-term loans that the Company uses to financing ongoing operational requirements.

Long-term debt with related parties

The company has long-term debt with related parties of $11,708 as of December 31, 2019 compared to $Nil as of December 31, 2018.

In February 2019, the Company announced that Cantomi Uruguay S.A., a company owned and controlled by the Company’s Non-Executive Chairman, Carlos J. Miguens, had provided a two year $15,000 loan facility that will be utilized to fund the Company’s activities going forward, while the review of the Cap-Oeste underground option is ongoing together with the Feasibility Study of its flagship Calcatreu project. As of December 31, 2019, there is $7,908 owing under the loan facility. Additional long-term debts with related parties were acquired as part of the reverse acquisition during 2019.

Capital Stock

The company has capital stock of $2,588 as of December 31, 2019 compared to $301 as of December 31, 2018. The increase in capital stock is due to the shares issued in the reverse acquisition. See Note 26 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the reverse acquisition.


- 17 -



Segment Information

All of the Company's operations are in the mineral properties exploration industry with its principal business activity in mineral exploration. The Company conducts its activities primarily in Argentina. All of the Company's long-lived assets are located in Argentina.

The Company’s net income/(loss) and its geographic allocation of total assets and total liabilities may be summarized as follow

For the year ended December 31, 2019
                         
   
Lomada
Project
   
Cap- Oeste Project
   
Calcatreu Project
   
Martha and La Josefina Projects
   
Argentina Uruguay and Chile
   
UK
   
North America
   
Total
 
     $’000      $’000      $’000      $’000      $’000      $’000      $’000      $’000  
Revenue
 
$
4,750
   
$
14,903
   
$
-
   
$
2,285
   
$
-
   
$
-
   
$
-
   
$
21,938
 
Cost of sales
   
(3,879
)
   
(11,006
)
   
-
     
(1,545
)
   
-
     
-
     
-
     
(16,430
)
Gross profit
 
$
871
   
$
3,897
   
$
-
   
$
740
   
$
-
   
$
-
   
$
-
   
$
5,508
 
                                                                 
Operating expense
                                                               
Exploration expense
 
$
-
   
$
(227
)
 
$
(1,300
)
 
$
(300
)
 
$
(1,931
)
 
$
-
   
$
-
   
$
(3,758
)
Administrative expense
   
-
     
-
     
(279
)
   
(871
)
   
(4,072
)
   
(1,433
)
   
(307
)
   
(6,962
)
Depreciation expense
   
-
     
-
     
(18
)
   
(115
)
   
(67
)
   
(100
)
   
-
     
(300
)
Impairment of mineral properties
   
-
     
-
     
-
     
-
     
-
     
(1,996
)
   
-
     
(1,996
)
Share-based payments
   
-
     
-
     
-
     
-
     
-
     
(40
)
   
(87
)
   
(127
)
Interest expense
   
-
     
-
     
-
     
-
     
(765
)
   
(782
)
   
(584
)
   
(2,131
)
Total operating expense
 
$
-
   
$
(227
)
 
$
(1,597
)
 
$
(1,286
)
 
$
(6,835
)
 
$
(4,351
)
 
$
(978
)
 
$
(15,274
)
                                                                 
Other income/(expense)
                                                               
Interest income
 
$
-
   
$
-
   
$
34
   
$
-
   
$
157
   
$
-
   
$
-
   
$
191
 
Gain/(loss) on foreign exchange
   
-
     
-
     
(11
)
   
(152
)
   
628
     
(440
)
   
352
     
377
 
Accretion expense
   
(46
)
   
(39
)
   
-
     
(94
)
   
-
     
-
     
-
     
(179
)
Total other income/(expense)
 
$
(46
)
 
$
(39
)
 
$
23
   
$
(246
)
 
$
785
   
$
(440
)
 
$
352
   
$
389
 
                                                                 
Income/(loss) – before income tax
 
$
825
   
$
3,631
   
$
(1,574
)
 
$
(792
)
 
$
(6,050
)
 
$
(4,791
)
 
$
(626
)
 
$
(9,377
)
Income tax/(benefit)
   
-
     
-
     
(193
)
   
(866
)
   
761
     
-
     
-
     
(298
)
Net income/(loss)
 
$
825
   
$
3,631
   
$
(1,767
)
 
$
(1,658
)
 
$
(5,289
)
 
$
(4,791
)
 
$
(626
)
 
$
(9,675
)





- 18 -




For the year ended December 31, 2018
 
   
Lomada Project
   
Cap- Oeste Project
   
Calcatreu Project
   
COSE Project
   
Argentina Uruguay and Chile
   
UK
   
North America
   
Total
 
     $’000      $’000      $’000      $’000      $’000      $’000      $’000      $’000  
Revenue
 
$
-
   
$
47,441
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
47,441
 
Cost of sales
   
-
     
(36,361
)
   
-
     
-
     
-
     
-
     
-
     
(36,361
)
Gross profit
 
$
-
   
$
11,080
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
11,080
 
                                                                 
Operating expense
                                                               
Other operating income
 
$
-
   
$
-
   
$
-
   
$
1,505
   
$
-
   
$
-
   
$
-
   
$
1,505
 
Exploration expense
   
-
     
-
     
(1,720
)
   
-
     
(82
)
   
-
     
-
     
(1,802
)
Administrative expense
   
-
     
-
     
(61
)
   
-
     
(4,706
)
   
(1,005
)
   
(80
)
   
(5,852
)
Depreciation expense
   
-
     
-
     
(105
)
   
-
     
(60
)
   
-
     
-
     
(165
)
Impairment of mineral properties
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Share-based payments
   
-
     
-
     
-
     
-
     
-
     
(190
)
   
-
     
(190
)
Interest expense
   
-
     
-
     
-
     
-
     
(1,275
)
   
(390
)
   
-
     
(1,665
)
Total operating expense
 
$
-
   
$
-
   
$
(1,886
)
 
$
1,505
   
$
(6,123
)
 
$
(1,585
)
 
$
(80
)
 
$
(8,169
)
                                                                 
Other income/(expense)
                                                               
Interest income
 
$
-
   
$
-
   
$
-
   
$
-
   
$
142
   
$
-
   
$
-
   
$
142
 
Gain/(loss) on foreign exchange
   
-
     
-
     
(71
)
   
-
     
(12,252
)
   
1,026
     
(1,464
)
   
(12,761
)
Accretion expense
   
-
     
-
     
-
     
-
     
(578
)
   
-
     
-
     
(578
)
Total other income/(expense)
 
$
-
   
$
-
   
$
(71
)
 
$
-
   
$
(12,688
)
 
$
1,026
   
$
(1,464
)
 
$
(13,197
)
                                                                 
Income/(loss) – before income tax
 
$
-
   
$
11,080
   
$
(1,957
)
 
$
1,505
   
$
(18,811
)
 
$
(559
)
 
$
(1,544
)
 
$
(10,286
)
Income tax/(benefit)
   
-
     
-
     
-
     
-
     
2,440
     
-
     
-
     
2,440
 
Net income/(loss)
 
$
-
   
$
11,080
   
$
(1,957
)
 
$
1,505
   
$
(16,371
)
 
$
(559
)
 
$
(1,544
)
 
$
(7,846
)






- 19 -


Liquidity and Capital Resources

At December 31, 2019, the Company had a working capital deficiency of $22,484 as compared to a working capital deficiency of $17,541 at December 31, 2018. The working capital change is due to the $2,368 inventory write down for Cap-Oeste. In addition, working capital decreased due to a reduction in revenue decreasing receivables from $4,923 for the year ended December 31, 2018 to $1,516 for the year ended December 31, 2019.

The Company’s capital management objectives are:

to ensure the Company’s ability to continue as a going concern;
to fund projects from raising capital from equity placements rather than long-term borrowings;
to increase the value of the assets of the business; and
to provide an adequate return to shareholders in the future when new or existing exploration assets
are taken into production.

These objectives will be achieved by maintaining and adding value to existing extraction projects and identifying new exploration projects, adding value to these projects and ultimately taking them through to production and cash flow, either with partners or by the Company’s means.

The Company sets the amount of capital in proportion to its overall financing structure (i.e. equity and financial liabilities). The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets.

In February 2019, the Company announced that Cantomi Uruguay S.A., a company owned and controlled by the Company’s Non-Executive Chairman, Carlos J. Miguens, had provided a two year $15,000 loan facility that will be utilized to fund the Company’s activities going forward, while the review of the Cap-Oeste underground option is ongoing together with the Feasibility Study of its flagship Calcatreu project. As of December 31, 2019, there is $7,908 owing under the loan facility.

The Company also has access to operating lines of credit. As at December 31, 2019, the Company had drawn $14,989 against the credit facilities. The lines of credit had an original maturity date of June 30, 2020 and were subsequently renewed with a January 31, 2021 maturity date.

On October 30, 2020, the Company entered into an agreement with director Tim Hunt and his related parties to convert an aggregate of $10,000 of outstanding debt into 44,040,277 common shares of the Company at a price per share that is equal to CAD $0.30. The converted debt includes $4,822 of principal and accrued interest and $ 5,178 in accounts payable in respect of interest, rent and administration expenses. The balance of $1,458 owing to Tim Hunt is expected to be settled in full by December 10, 2020 by a cash payment of $720 plus 7% accrued interest.

Off-balance sheet arrangements

As at December 31, 2019, the Company had no material off-balance sheet arrangements such as guarantee contracts, contingent interest in assets transferred to an entity, derivative instruments obligations or any obligations that trigger financing, liquidity, market or credit risk to us.

COVID-19

Subsequent to the year ended December 31, 2019, the outbreak of the novel coronavirus, specifically identified as “COVID-19”, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions.

The Company has determined that these events are non‑adjusting subsequent events. Accordingly, the financial position and results of operations as of and for the year ended December 31, 2019 have not been adjusted to reflect their impact. The duration and impact of COVID‑19 pandemic, as well as the effectiveness of government and central bank responses, remains unclear at this time but it could have a material impact on the Company’s future operations and performance. It is not possible to reliably estimate the duration and severity of these consequences, as well as their impact on the financial position and results of the Company for future periods.
 
With the lockdown measures implemented by the government of Argentina, the Company was forced to pause its activities for approximately 30 days. On April 2, 2020, the government declared mining as an essential service and the Company was able to resume operations at most of the sites.

- 20 -



Proposed Transactions

There are no proposed material transactions. However, as is typical of the mineral exploration and development industry, management continually reviews potential merger, acquisition, investment, and joint venture transactions and opportunities that could enhance shareholder value. There is no guarantee that any contemplated transaction will be concluded.

Contractual Obligation

 
 
Payments due by period
 
Total
$’000
< 1 year
$’000
1-3 years
$’000
3-5 years
$’000
> 5 years
$’000
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
12,220
 
200
 
12,020
 
-
 
-
TOTAL
$
12,220
$
200
$
12,020
$
-
$
-

Critical Accounting Policies and Developments

Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to provisions for uncollectible receivables, mineral reserves, inventories, asset retirement obligations, valuation of intangible assets and contingencies and litigation. We base our 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 for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See Note 6 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the critical accounting judgements and estimated applied by the Company.

The accounting policies followed by the Company are set in Note 4 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.

See Note 5 in the notes to the consolidated financial statements of the Company for the years ended December 31, 2019 and 2018 for more information regarding the impact of recent accounting pronouncements.

Non-GAAP Financial Performance Measures

Non-GAAP financial measures are intended to provide additional information only and do not have any standard meaning prescribed by generally accepted accounting principles. Unless otherwise noted, we present the Non-GAAP financial measures of our continuing operations in the tables below.

Cash Costs

The Company uses cash costs to evaluate the Company’s current operating performance. We believe these measures assist in understanding the costs associated with producing gold and silver, assessing our operating performance and ability to generate free cash flow from operations and sustaining production. These measures may not be indicative of operating profit or cash flow from operations as determined under GAAP. The Company believes that allocating cash costs to gold and silver lead based on gold and silver metal sales relative to total metal sales best allows the Company and other stakeholders to evaluate the operating performance of the Company.

- 21 -



Year ended December 31, 2019
                 
(in 000’s, except per unit amounts)
 
Cap-Oeste
   
Lomada de Leiva
   
Martha
 
Cost of sales
 
$
11,006
   
$
3,879
   
$
1,545
 
Less: Inventory impairment
   
(2,368
)
   
-
     
-
 
Less: Depreciation
   
(979
)
   
(1,049
)
   
(115
)
Less: Other charges and timing differences (1)
   
(1,594
)
   
(1,096
)
   
(711
)
Cash costs
 
$
6,065
   
$
1,734
   
$
719
 
Add: Depreciation (2)
   
826
     
568
     
92
 
Cash costs and depreciation
 
$
6,891
   
$
2,302
   
$
811
 
                         
Ounces produced
 
$
10,585
   
$
3,969
   
$
1,008
 
                         
Cash costs per ounce
 
$
573
   
$
437
   
$
714
 
Cash costs and depreciation per ounce
 
$
651
   
$
580
   
$
805
 
                         
(1)
These costs include expenses such as royalties, export and refinery costs, and other charges that the company does not include in cash costs. In addition, these amounts include timing differences related to accrual basis of accounting that the company excludes from the non-GAAP measure in order to measure the cash costs.
(2)
Depreciation is related to the plant, machinery, equipment and vehicles.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The audited consolidated financial statements required by this item are set forth beginning on page F-1.













- 22 -


Patagonia Gold Corp.


Consolidated Financial Statements
 
Years ended December 31, 2019 and 2018
Page
   
Independent Auditors’ Report
F-2
   
Consolidated Balance Sheets
F-4
   
Consolidated Statements of Operations and Comprehensive Income (Loss)
F-5
   
Consolidated Statement of Shareholders' Equity
F-6
   
Consolidated Statements of Cash Flows
F-7
   
Notes to the Consolidated Financial Statements
F-8
   

F-1









Report of Independent Registered Public
Accounting Firm

Grant Thornton LLP
Suite 1600
333 Seymour Street
Vancouver, BC
V6B 0A4
 
T +1 604 687 2711
F +1 604 685 6569
 

To the Board of Directors and Shareholders of Patagonia Gold Corp.

Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Patagonia Gold Corp. (the “Company”) as of December 31, 2019 and December 31, 2018 and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and December 31, 2018 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).

Material uncertainty related to going concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company incurred a net loss of $9.7 million during the year ended December 31, 2019, and as of that date, the Company had negative working capital of $22.5 million and an accumulated deficit of $174.3 million. These conditions, along with other matters as set forth in Note 3, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

F-2






We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

                                                                                          

Chartered Professional Accountants
Licensed Public Accountants
                                                            We have been the Company’s auditor since February 2020.
Vancouver, Canada
June 15, 2020, (except Note 29, which is as of November 16, 2020)


F-3



Patagonia Gold Corp.
Consolidated Balance Sheets
December 31, 2019 and 2018
(in thousands of U.S. dollars)
 
   
Note
   
December 31, 2019
   
December 31, 2018
 
           $’000      $’000  
Current Assets
                 
 Cash
   
22
   
$
685
   
$
660
 
 Receivables
   
13, 23
     
1,516
     
4,923
 
 Inventories
   
7
     
3,347
     
6,286
 
 Total Current Assets
           
5,548
     
11,869
 
                         
Non-Current Assets
                       
 Mineral Properties
   
8, 26
     
8,610
     
2,525
 
 Mining Rights
   
10
     
16,997
     
16,475
 
 Property, plant and equipment
   
12
     
10,508
     
9,478
 
 Goodwill
   
26
     
4,379
     
-
 
 Other financial assets
   
11, 23
     
334
     
11
 
 Deferred tax assets
   
28
     
4,599
     
3,778
 
 Other receivable
   
14, 23
     
3,814
     
3,072
 
 Total Non-Current Assets
           
49,241
     
35,339
 
Total Assets
         
$
54,789
   
$
47,208
 
                         
Current Liabilities
                       
 Bank indebtedness
   
15
   
$
14,989
   
$
12,381
 
 Accounts payable and accrued liabilities
   
16, 21, 23
     
5,992
     
6,681
 
 Accounts payable with related parties
   
16, 21, 23
     
6,717
     
246
 
 Loan payable and current portion of long-term debt
   
17, 21, 23
     
334
     
10,102
 
 Total Current Liabilities
           
28,032
     
29,410
 
                         
Non-Current Liabilities
                       
 Long-term debt
   
18, 23
     
312
     
674
 
 Long-term debt with related parties
   
18, 21, 23
     
11,708
     
-
 
 Asset retirement obligation
   
9
     
2,812
     
552
 
 Deferred tax liabilities
   
28
     
2,693
     
-
 
 Other long-term payables
           
56
     
79
 
 Total Non-Current Liabilities
           
17,581
     
1,305
 
Total Liabilities
           
45,613
     
30,715
 
                         
Commitments and Contingencies (note 27)
                       
                         
Stockholders’ Equity
                       
Capital stock: Authorized - Unlimited No Par Value Issued and outstanding – 317,943,990 common shares (December 31, 2018 - 63,588,798 common shares)
   
20
     
2,588
     
301
 
Preferred shares - Unlimited No Par Value Issues and outstanding - nil (December 31, 2018 – nil)
   
20
     
-
     
-
 
Additional paid in capital
           
181,676
     
181,549
 
Accumulated Deficit
           
(174,270
)
   
(164,717
)
Accumulated other comprehensive income (loss)
           
(575
)
   
(519
)
Total Stockholders' Equity attributable to the parent:
           
9,419
     
16,614
 
Non-controlling interest
           
(243
)
   
(121
)
Total Stockholders' Equity
           
9,176
     
16,493
 
Total Liabilities and Stockholders’ Equity
         
$
54,789
   
$
47,208
 
Going Concern (note 3)
                       
Subsequent events (note 29)
                       

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

F-4



Patagonia Gold Corp.
Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Year Ended December 31, 2019 and 2018
(in thousands of U.S. dollars)
 
   
Note
   
December 31, 2019
   
December 31, 2018
 
           $’000      $’000  
Revenue
       
$
21,938
   
$
47,441
 
Cost of Sales
   
7
     
(16,430
)
   
(36,361
)
Gross Profit
         
$
5,508
   
$
11,080
 
                         
Operating Income (Expenses):
                       
 Other operating income
           
-
     
1,505
 
 Exploration expenses
           
(3,758
)
   
(1,802
)
 Administrative expense
   
22
     
(7,262
)
   
(6,017
)
 Impairment of mineral properties
   
8
     
(1,996
)
   
-
 
 Share-based payments expense
   
20
     
(127
)
   
(190
)
 Interest expense
           
(2,131
)
   
(1,665
)
Total operating expense:
         
$
(15,274
)
 
$
(8,169
)
                         
Other Income/(Expenses)
                       
 Interest income
   
11
     
191
     
142
 
 Gain/(Loss) on foreign exchange
           
377
     
(12,761
)
 Accretion expense
   
9
     
(179
)
   
(578
)
Total other income/(expenses)
           
389
     
(13,197
)
Income (Loss) – before income taxes
         
$
(9,377
)
 
$
(10,286
)
                         
 Income tax benefit (expense)
   
28
     
(298
)
   
2,440
 
Net Income (Loss)
         
$
(9,675
)
 
$
(7,846
)
                         
Attributable to non-controlling interest
           
(122
)
   
(528
)
Attributable to equity share owners of the parent
           
(9,553
)
   
(7,318
)
           
$
(9,675
)
 
$
(7,846
)
Other Comprehensive Income (Loss) net of tax
                       
 Change in fair value of investment
   
11
     
(28
)
   
(13
)
 Foreign currency translation adjustment
           
(28
)
   
(2,824
)
Total Other comprehensive Income (Loss)
         
$
(56
)
 
$
(2,837
)
Total Comprehensive Income (Loss)
         
$
(9,731
)
 
$
(10,683
)
                         
Weighted average shares outstanding – basic and diluted
   
19
     
282,306,312
     
254,387,482
 
                         
Net Income (Loss) per share – Basic and Diluted
   
19
   
$
(0.03
)
 
$
(0.03
)













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

F-5



Patagonia Gold Corp.
Consolidated Statement of Shareholders’ Equity
December 31, 2019 and 2018
(in thousands of U.S. dollars)


   
Capital Stock
   
Preferred
Shares
   
Accumulated
Deficit
   
Accumulated Other Comprehensive Income (Loss)
   
Additional Paid in Capital
   
Total Attributable to parent
   
Non-Controlling Interest
   
Total
 
     $’000      $’000      $’000      $’000      $’000      $’000      $’000      $’000  
Balance - January 1, 2018
   
31,868
     
-
     
(157,399
)
   
2,318
     
149,982
     
26,769
     
407
     
27,176
 
Share Reorganization (note 21)
   
(31,567
)
   
-
     
-
     
-
     
31,567
     
-
     
-
     
-
 
Net Income (Loss)
   
-
     
-
     
(7,318
)
   
-
     
-
     
(7,318
)
   
(528
)
   
(7,846
)
Other Comprehensive Loss
   
-
     
-
     
-
     
(2,837
)
   
-
     
(2,837
)
   
-
     
(2,837
)
Balance - December 31, 2018
   
301
     
-
     
(164,717
)
   
(519
)
   
181,549
     
16,614
     
(121
)
   
16,493
 
Shares issued in reverse Acquisition (note 26)
   
2,287
     
-
     
-
     
-
     
-
     
2,287
     
-
     
2,287
 
Net Income (Loss)
   
-
     
-
     
(9,553
)
   
-
     
-
     
(9,553
)
   
(122
)
   
(9,675
)
Share based payment
   
-
     
-
     
-
     
-
     
127
     
127
     
-
     
127
 
Other comprehensive income
   
-
     
-
     
-
     
(56
)
   
-
     
(56
)
   
-
     
(56
)
Balance - December 31, 2019
   
2,588
     
-
     
(174,270
)
   
(575
)
   
181,676
     
9,419
     
(243
)
   
9,176
 




















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

F-6



Patagonia Gold Corp.
Consolidated Statements of Cash Flows
December 31, 2019 and 2018
(in thousands of U.S. dollars)
 
 
 
Note
   
2019
   
2018
 
           $’000      $’000  
Cash Flow From Operating Activities
                 
Net Income/(Loss)
       
$
(9,675
)
 
$
(7,846
)
Items not affecting cash
                     
Depreciation of property, plant and equipment
   
22
     
1,844
     
4,512
 
Depreciation of mining rights
   
22
     
100
     
100
 
Share based payment expense
   
20
     
127
     
190
 
Asset retirement obligation
   
9
     
1,342
     
(712
)
Write-down of inventory
   
7
     
2,368
     
8,881
 
Impairment of asset
           
1,996
     
690
 
Accretion expense
   
9
     
179
     
578
 
Deferred tax benefit/(expense)
           
298
     
(2,440
)
             
(1,421
)
   
3,953
 
Net change in non-cash working capital items
                       
(Increase)/decrease in receivables
           
3,863
     
3,841
 
(Increase)/decrease in deferred tax assets
           
1,787
     
1,548
 
(Increase)/decrease in inventory
           
1,477
     
6,932
 
(Increase)/decrease in other financial assets
           
32
     
-
 
Increase/(decrease) in accounts payable and accrued liabilities
           
(3,116
)
   
(4,094
)
Increase/(decrease) in accounts payable and accrued liabilities with related parties
           
301
     
-
 
Increase/(decrease) in other long-term payables
           
(23
)
   
(82
)
Increase/(decrease) in transaction taxes payable
           
(126
)
   
(329
)
             
4,195
     
7,816
 
Net cash provided by/(used in) operating activities
           
2,774
     
11,769
 
                         
Cash Flows from Investing Activities
                       
Purchase of property, plant and equipment
   
12
     
(777
)
   
(4,063
)
Purchase of mineral property
   
8
     
(216
)
   
(698
)
Purchase of mining rights
           
-
     
(14,612
)
Proceeds from disposal of property, plant and equipment
           
113
     
7,515
 
Net cash provided by/(used in) investing activities
           
(880
)
   
(11,858
)
                         
Cash Flow from Financing Activities
                       
Bank indebtedness
           
2,608
     
7,877
 
Proceeds from loans
           
-
     
6,278
 
Proceeds from loans with related parties
           
8,515
     
-
 
Repayment of loans
           
(10,530
)
   
(18,625
)
Net cash provided by/(used in) financing activities
           
593
     
(4,470
)
                         
Net Increase/(Decrease) in Cash
           
2,487
     
(4,559
)
Effect of Foreign Exchange on Cash
           
(2,462
)
   
3,934
 
Cash, Beginning of Year
           
660
     
1,285
 
Cash, End of the Year
         
$
685
   
$
660
 
                         
Taxes paid
           
(126
)
   
(329
)
Interest paid
           
(416
)
   
(634
)
Supplemental Non-Cash Information
                       
Change in value of investments
           
(28
)
   
(13
)



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

F-7



Patagonia Gold Corp.
Notes to Financial Statements
(in thousands of U.S. dollars unless otherwise stated)

1. Nature of Business

On July 24, 2019, Patagonia Gold Corp. (PGDC.TSXV – “the Company” or “Patagonia”) [formerly Hunt Mining Corp (“Hunt”, or “Hunt Mining”)] and Patagonia Gold PLC (“PGP”) completed a reverse acquisition (or reverse takeover, the “RTO”) resulting in Hunt acquiring all issued shares of common stock of PGP in exchange for common shares of Hunt on the basis of 10.76 Hunt shares for each PGP share. Hunt issued 254,355,192 common shares to the shareholders of PGP representing an ownership interest of approximately 80%. The operating name of Hunt Mining Corp. was changed to Patagonia Gold Corp (“the Company”) (Note 26).

Comparative information for the Company is that of PGP (accounting acquirer) prior to the reverse acquisition on July 24, 2019.

Patagonia is a mineral exploration and production company incorporated on January 10, 2006 under the laws of Alberta, Canada and, together with its subsidiaries, is engaged in the exploration of mineral properties and exploitation of reserves in Santa Cruz, Rio Negro and Chubut provinces of Argentina.

The consolidated financial statements include the accounts of the following subsidiaries after elimination of intercompany transactions and balances:

 
Corporation
 
Incorporation
Percentage
ownership
Functional currency
Business purpose
 
Patagonia Gold S.A. (PGSA)
 
Argentina
 
90
 
US$
Production and Exploration Stage
Minera Minamalu S.A.
Argentina
100
US$
Exploration Stage
Huemules S.A.
Argentina
100
US$
Exploration Stage
Leleque Exploración S.A.
Argentina
100
US$
Exploration Stage
Patagonia Gold Limited (formerly Patagonia Gold PLC)
UK
100
GBP$
Holding
Minera Aquiline S.A.U.
Argentina
100
US$
Exploration Stage
Patagonia Gold Canada Inc.
Canada
100
CAD$
Holding
Patagonia Gold Chile S.C.M.
Chile
100
CH$
Exploration Stage
Cerro Cazador S.A.
Argentina
100
US$
Exploration Stage
Ganadera Patagonia S.R.L.
Argentina
100
US$
Land Holding
1494716 Alberta Ltd.
Canada
100
CAD$
Nominee Shareholder
Hunt Gold USA LLC
USA
100
US$
Management Company

The Company’s activities include the exploration and production of minerals from properties in Argentina and Chile. On the basis of information to date, properties where it has not yet been determined if economically recoverable ore reserves exist are classified as exploration-stage. Properties where economically recoverable ore reserves exist and are being exploited are classified as production-stage. The underlying value of the mineral properties is entirely dependent upon the existence of reserves, the ability of the Company to obtain the necessary financing to complete development and upon future profitable production or a sale of these properties.

On some properties, ongoing production and sales of gold and silver are being undertaken without established mineral resources or reserves and the Company has not established the economic viability of the operations. As a result, there is increased uncertainty and economic risks of failure associated with these production activities. Despite the sale of gold and silver, these projects remain in the exploration stage because management has not established proven or probable ore reserves required to be classified in either the development or production stage.

2. Basis of presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP).

These consolidated financial statements have been prepared on a historical cost basis except for certain financial instruments measured at fair value. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information.

The Company's presentation currency is the US Dollar.

The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.

F-8


Judgments made by management in the application of US GAAP that have a significant effect on the consolidated financial statements and estimates with significant risk of material adjustment in the current and following periods are discussed in Note 6.
2. Going Concern
3. Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. During the year ended December 31, 2019, the Company had net loss of $9,675. As at December 31, 2019, the Company has negative working capital of $22,484 and had an accumulated deficit of $174,270. The Company’s ability to continue as a going concern is dependent upon the ability to generate cashflows from operations and obtain financing. The Company intends to continue funding operations through operation of Cap-Oeste, Lomada, Martha, La Josefina project and equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements for the year ending December 31, 2020. There can be no assurance that the steps management is taking will be successful.

These factors, among others, indicate the existence of a material uncertainty that cast substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments could be material.
 
4. Significant Accounting Policies

The significant accounting policies used in the preparation of these consolidated financial statements are described below.

(a) Basis of measurement

The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value.

(b) Consolidation

The Company's consolidated financial statements consolidate the accounts of the Company and its subsidiaries. All intercompany transactions, balances and unrealized gains or losses from intercompany transactions are eliminated on consolidation.

(c) Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rates of exchange prevailing at the reporting date. Non-monetary assets and liabilities are translated at the exchange rate prevailing at the transaction date. Revenues and expenses are translated at average exchange rates throughout the reporting period. Gains and losses on translation of foreign currencies are included in the consolidated statement of operations.

The Company’s functional currency is the Canadian dollar. The Company’s subsidiaries have functional currencies in Canadian dollars (“CAD”), US dollars (“US”), Chilean Peso (“CH$”) and Great Britain Pound (“GBP”). These consolidated financial statements are translated to their US dollar equivalents using the current rate method. Under this method, the statements of operations and comprehensive loss and cash flows for each period have been translated using the average exchange rates prevailing during each period. All assets and liabilities have been translated using the exchange rate prevailing at the balance sheet date. Translation adjustments are recorded as income or losses in other comprehensive income or loss. Transaction gains and losses resulting from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized as incurred in the accompanying consolidated statement of operations and comprehensive income/(loss).

(d) Financial instruments

The Company measures the fair value of financial assets and liabilities based on US GAAP guidance, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

The Company classifies financial assets and liabilities as held-for-trading, available-for-sale, held-to-maturity, loans and receivables or other financial liabilities depending on their nature. Financial assets and financial liabilities are recognized at fair value on their initial recognition, except for those arising from certain related party transactions, which are accounted for at the transferor's carrying amount or exchange amount.

Financial assets and liabilities classified as held-for-trading are measured at fair value, with gains and losses recognized in net income or loss. Financial assets classified as held-to-maturity, loans and receivables, and financial liabilities other than those classified as held-for-trading are measured at amortized cost, using the effective interest method of amortization. Financial assets classified as available-for-sale are measured at fair value, with unrealized gains and losses being recognized as other comprehensive income or loss until realized, or if an unrealized loss is considered other than temporary, the unrealized loss is recorded in income or loss.
 
See Note 23 to the Consolidated Financial Statements for fair value disclosures.

F-9


(e) Cash and equivalents

Cash and equivalents include cash on hand, deposits held with banks and other liquid short-term investments with original maturities of three months or less. The Company has no cash equivalents for all periods presented.

(f) Inventories

Inventory comprises, gold held on carbon, mineral concentrate and mineralized material stockpiles. They are physically measured or estimated and valued at the lower of cost or net realizable value. Net realizable value is the estimated future sales price of the product the Company expects to realize when the product is processed and sold, less estimated costs to complete production and bring the product to sale. Where the time value of money is material, these future prices and costs to complete are discounted.

Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile, the number of contained mineral ounces is based on assay data, and the estimated recovery percentage is based on the expected processing method. Stockpile tonnages are verified by periodic surveys. 

Cost of inventory is determined by using the weighted average method and comprises direct costs, depreciation, depletion and amortization as well as a portion of fixed and variable overhead costs incurred in converting materials into concentrate and ore, based on the normal production capacity.

Materials and supplies are valued at the lower of cost or net realizable value. Any provision for obsolescence is determined by reference to specific items of stock. A regular review is undertaken to determine the extent of any provision for obsolescence.

(g) Mineral properties and exploration and evaluation expenditures

Exploration and evaluation costs are expensed until the determination of the technical feasibility and the commercial viability of the associated project. Exploration costs include costs directly related to exploration and evaluation activities in the areas of interest. The technical feasibility and commercial viability of extracting a mineral resource is considered to be determinable when economically recoverable reserves are determined to exist, the rights of tenure are current and it is considered probable that the costs will be recouped through successful development and exploitation of the area, or alternatively by sale of the property. This determination is normally evidenced by the completion of a technical feasibility study.

Expenditures to develop new mines, to define further mineralization in mineral properties which are in the development or operating stage, and to expand the capacity of operating mines, are capitalized and amortized on a units-of-production basis over proven and probable reserves.

Should a property be abandoned, its capitalized costs are charged to the consolidated statement of operations and comprehensive income/(loss). The Company charges to the consolidated statement of operations and comprehensive income/(loss) the allocable portion of capitalized costs attributable to properties sold. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.

(h) Mining rights

Mining rights are rights to explore and mine specified areas of land acquired from the landowner. Mining rights acquired for stated terms in excess of 10 years are capitalized as intangible assets and are measured initially at cost and amortized on a straight-line basis over the term of the rights. Mining rights acquired for undefined terms are capitalized as intangible assets and are measured initially at cost and amortized on a unit of production method over the estimated period of economically recoverable reserves. Amortization is charged to administrative expenses in the consolidated statement of operations and comprehensive income/(loss).

(i) Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of an asset.

Repairs and maintenance costs are charged to these consolidated statement of operations and comprehensive income/(loss) during the period in which they are incurred.

Depreciation is calculated to amortize the cost of the property, plant and equipment over their estimated useful lives using the straight-line and unit of production methods. Office equipment, vehicles, machinery and equipment, Mina Martha processing plant, and buildings are stated at cost and depreciated straight line over an estimated useful life of 3 to 20 years. Depreciation of plant, other than Mina Martha, is based on a unit-of-production method over the estimated period of economically recoverable reserves. Depreciation begins once the asset is in the state intended for use by management.

F-10


The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part. Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate.

Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of other gains or losses in these consolidated statement of operations and comprehensive income/(loss).

(j) Impairment of long-lived assets

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Asset impairment is considered to exist if the total estimated undiscounted pre-tax future cash flows are less than the carrying amount of the asset. In estimating future cash flows, assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of future cash flows from other asset groups. An impairment loss is measured by discounted estimated future cash flows and recorded by reducing the asset's carrying amount to fair value. Future cash flows are estimated based on estimated quantities of recoverable minerals, expected gold and silver (considering current and historical prices, trends and related factors), production levels, operating costs, capital requirements and reclamation costs, all based on life-of-mine plans.

Existing proven and probable reserves and value beyond proven and probable reserves, including mineralization other than proven and probable reserves are included when determining the fair value of mine site asset groups at acquisition and, subsequently, in determining whether the assets are impaired. Estimates of recoverable minerals from exploration stage mineral interests are risk adjusted based on management’s relative confidence in such materials. The ability to achieve the estimated quantities of recoverable minerals from exploration stage mineral interests involves further risks in addition to those risk factors applicable to mineral interests where proven and probable reserves have been identified, due to the lower level of confidence that the identified mineralized material could ultimately be mined economically. Assets classified as exploration potential have the highest level of risk that the carrying value of the asset can be ultimately realized, due to the still lower level of geological confidence and economic modeling.

During the year ended December 31, 2019, the Company performed an analysis of the San José Project in Uruguay and determined that the long-lived asset for the San José Project was impaired. A non-cash impairment charge of $1,996 was recorded and allocated to mineral properties (see Note 8).

(k) Asset retirement obligations

Upon retirement of the Company’s mineral properties, retirement costs will be incurred by the Company. Estimates of these costs are subject to uncertainty associated with the method, timing and extent of future decommissioning activities. The Company records the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal or constructive obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the long-lived assets. The Company also records a corresponding asset, which is depleted over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation is adjusted at the end of each period to reflect the passage of time (accretion expense) and changes in the estimated future cash flows underlying the obligation (asset retirement cost).

The Argentine mining regulations require that mine properties to be restored in accordance with specified standards and an approved reclamation plan. Significant reclamation activities include reclaiming refuse and slurry ponds, reclaiming the pit and support acreage at surface mines, and sealing portals at deep mines. The Company accrues for the cost of final mine closure reclamation over the estimated useful mining life of the property. At each period, the Company reviews the entire reclamation liability and makes necessary adjustments for revisions to cost estimates to reflect current experience.

The Company has adopted Asset Retirement and Environmental Obligations ASC 410, which requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset.

(l) Income taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the asset and liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or all of the deferred tax asset will not be recognized.

F-11


The Company operates in multiple jurisdictions which involves dealing with uncertainties and judgments in the application of complex tax regulations. The final taxes paid or recovered are dependent upon many factors including resolutions arising from federal and state audits. The Company changes is tax assets and liabilities in light of the changing facts and circumstances but due to the complexity of the uncertainties in the tax regulations, the ultimate tax liability or asset could be materially different from the Company’s estimate recorded in the financial statements.

(m) Share-based payments

The Company offers a share option plan for its directors, officers, employees and consultants. ASC 718 “Compensation – Stock Compensation” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of the performance commitment date or performance completion date.

(n) Earnings (loss) per share

The calculation of earnings (loss) per share (“EPS”) is based on the weighted average number of shares outstanding for each period. The basic EPS is calculated by dividing the income or loss attributable to the equity owners of the Company by the weighted average number of common shares outstanding during the period.

The computation of diluted EPS assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on the earnings per share. The treasury stock method is used to determine the dilutive effect of the warrants and share options. When the Company reports a loss, the diluted net loss per common share is equal to the basic net loss per common share due to the anti-dilutive effect of the outstanding warrants and share options.

(o) Revenue recognition

The Company recognizes sales revenue in accordance with ASC 606 when it has satisfied the following criteria: identifiable contract, identifiable performance obligation, determinable transaction price, allocating the transaction price and satisfying performance obligations.

The Company produces doré and concentrate that is shipped to third-party refiners and smelters, respectively, for processing. The Company enters into contracts to sell its metal to third-party customers which may include the refiners and smelters that process the doré and concentrate. The Company’s performance obligation in these transactions is generally the transfer of metal to the customer. In the case of doré shipments, the Company generally sells refined metal at market prices agreed upon by both parties. The Company also has the right, but not the obligation, to sell a portion of the anticipated refined metal in advance of being fully refined. When the Company sells refined metal or advanced metal, the performance obligation is satisfied when the metal is delivered to the customer. Revenue and Cost of Sales are recorded on a gross basis under these contracts at the time the performance obligation is satisfied.

(p) Segment reporting

In accordance with ASC 280, the management approach is used to identify operating segments. An operating segment is a component of an entity (i) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), (ii) whose operating results are regularly reviewed by the entity's management, and (iii) for which discrete financial information is available. The Company has identified its reportable segments on the basis of their geographic location. As a result, the Company discloses information geographically based on the location of each of its operations and within Argentina on the basis of operating mines and projects under construction
No operating segments have been aggregated to form the above reportable operating segments.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment.

(q) Highly inflationary economy

The Company has operations in Argentina through its subsidiaries as disclosed in Note 1 and their functional currency has historically been the Argentine Peso. The Company monitors inflation rates in the countries it operates under ASC 830-10-45-12. An economy must be classified as highly inflationary when the cumulative three-year inflation rate exceeds 100%.

F-12


During the year ended December 31, 2018, the economic environment in Argentina experienced the acceleration of multiple local inflation indices, a three-year cumulative inflation rate of the local Argentine wholesale price index exceeding 100% in July 1, 2018, and the significant devaluation of the Argentine Peso.

As such, the Company has considered Argentina to be a highly inflationary economy. In accordance with ASC 830, beginning on July 1 the functional currency of the Company’s Argentinian subsidiaries was changed to the Company’s reporting currency ($USD). The following table presents the application ASC 830-10 for a highly inflationary economy for the conversion of account balances:

Non-monetary Assets and Liabilities
Monetary assets and Liabilities
Equity
Translated at the balance of prior period end
Translated at the balance of prior period end
Remeasured using historical exchange rate
     

(r) Business Combinations

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, Business Combinations, by recognizing identifiable tangible and intangible assets acquired, liabilities assumed, and non-controlling interests in the acquired business at their fair values. The excess of the costs of the acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed is recorded as Goodwill. Acquisition related costs are expensed as incurred.

5. Recent Accounting Pronouncements

Recently issued and adopted accounting pronouncements

Leases
 
In February 2016, Accounting Standard Update (“ASU”) No. 2016-02 Leases was issued related to leases. The new guidance modifies the classification criteria and requires lessees to recognize the assets and liabilities arising from most leases on the balance sheet. This update is effective in fiscal years, including interim periods, beginning after December 15, 2018 and early adoption is permitted. The Company has evaluated all contracts which could be classified as leases under the new standards and determined that any impact as a result of adoption would not be material.

Recently issued but not yet adopted accounting pronouncements

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)”. The new standard is effective for reporting periods beginning after December 15, 2019. The standard replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We plan to adopt the new credit loss standard effective January 1, 2020. We do not expect the new credit loss standard to have a material effect on our financial position, results of operations or cash flows.
Income Taxes

In December 2019, the FASB issued ASU 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740)” which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2020 (January 1, 2021 for the Company). Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2019-12 will have on its consolidated financial statements.

6. Critical accounting judgments and estimates

(a) Significant judgments

Preparation of the consolidated financial statements requires management to make judgments in applying the Company's accounting policies. Judgments that have the most significant effect on the amounts recognized in these consolidated financial statements relate to functional currency, income taxes, provisions, highly inflationary economy, title to mineral proerty interest and reclamation and closure cost obligations. These judgments have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.


F-13



Functional currency

Management determines the functional currency for each entity. This requires that management assess the primary economic environment in which each of these entities operates. Management’s determination of functional currencies affects how the Company translates foreign currency balances and transactions. Determination includes an assessment of various indicators. In determining the functional currency of the Company’s operations in Canada (Canadian dollar), UK (British Pound) and Argentina (U.S. dollar and Argentine Peso), management considered the indicators of ASC 830 Foreign Currency Matters.

Income taxes and taxes receivable

Significant judgment is required in determining the provision for income taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain and subject to judgment. The Company recognizes liabilities and contingencies for anticipated tax audit issues based on the Company’s current understanding of the tax law in the various jurisdictions in which it operates. For matters where it is probable that an adjustment will be made, the Company records its best estimate of the tax liability including the related interest and penalties in the current tax provision. Management believes they have adequately provided for the probable outcome of these matters; however, the final outcome may result in a materially different outcome than the amount included in the tax liabilities.

The Company has receivables due from the Argentinean government for value-added taxes. Significant estimates and judgments are involved in the assessment of recoverability of these receivables. Changes in management’s impairment assumptions may result in an additional impairment provision, or a reduction to any previously recorded impairment provision, with the impact recorded in profit or loss.

The Company has accrued deferred income tax assets but may not be able to utilize part or all of these assets in the future. The Company only recognizes the expected future tax benefit from these assets if it is considered more likely than not that the tax benefit will be realized. Otherwise, a valuation allowance is applied against deferred tax assets that are not more likely than not to be utilized. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income, including application of existing tax laws in each jurisdiction, assumptions about future metals prices, the macroeconomic environment and results of the Company’s operations. To the extent that future cash flows and taxable income differ significantly from estimates, the Company’s ability to realize deferred tax assets could be impacted. Additionally, future changes in tax laws could limit the ability to obtain the future benefits represented by the deferred tax assets

Title to mineral property interests

Although the Company has taken steps to verify title to mineral properties in which it has an interest, these procedures do not guarantee the Company’s title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.

Highly inflationary economy

The Company has designated Argentina as a highly inflationary economy in accordance with ASC 830, Foreign Currency Matters, and has therefore employed the use of the highly inflationary accounting. The determination of whether an economy is highly inflationary requires the Company to monitor, assess and calculate whether the three-year cumulative inflation rate exceeds 100%. The determination of whether an economy is highly inflationary requires the Company to make certain estimates and judgements, such as assessment of historic inflation rates and anticipation of future trends.

(b) Use of estimates

The preparation of theses consolidated financial statements in conformity with US GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company also makes estimates and assumptions concerning the future. The determination of estimates requires the exercise of judgment based on various assumptions and other factors such as historical experience and current and expected economic conditions. Actual results could differ from those estimates.

The more significant areas requiring the use of management estimates and assumptions relate to mineral reserves, asset retirement obligations, inventories and the allocation of fair value to assets and liabilities assumed in connection with business combinations. These estimates have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

The Company is also exposed to legal risk. The outcome of currently pending and future proceedings cannot be predicted with certainty. Thus, an adverse decision in a lawsuit could result in additional costs that are not covered, either wholly or partly, under insurance policies and that could significantly influence the business and results of operations.

F-14


Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Mineral reserves

The Company uses estimates and assumptions related to mineral reserves that are the basis for future cash flow estimates utilized in impairment calculations and units-of production amortization calculations, environmental, reclamation and closure obligations and estimates of recoverable silver and gold in inventories. The Company relies on their technical personnel and independent mining consultants to determine the estimates of mineral reserves. Mineral reserve estimates are based upon engineering evaluations of samplings of drill holes and other openings.

Business Combinations

The acquisition method of accounting for business combinations in accordance with ASC 805 requires management to determine the fair value of assets acquired and liabilities assumed on the date of the acquisition. In determining and allocating the fair values of assets and liabilities in a business combination, the Company relies on appraisals, internal valuations based on discounted cash flow, historical experience and other reliable information available as of the date of the acquisition.

Change in estimates

During the year 2018, the Company conducted a review of its plant and buildings which resulted in changes in its expected use. It was determined that the renovation work performed in 2016 and 2017 on these assets was having greater success than originally anticipated in extending their useful life. Additionally, metallurgical studies performed throughout 2018 confirmed that the plant could be successfully used to process mineralized materials from other mineral properties of the Company. It is now expected that the useful life of these assets will be extended from an original estimate of 36 months in 2017 to 87 months from December 31, 2018. The changes to the useful life of these assets were adopted prospectively for the year ended December 31, 2018.

7. Inventories

 
December 31, 2019
 
December 31, 2018
 
   $’000    $’000  
 
       
Gold held on carbon
 
$
1,422
   
$
1,571
 
Silver and gold concentrate
   
157
     
-
 
Material stockpiles
   
-
     
2,996
 
Materials and supplies
   
1,768
     
1,719
 
 
 
$
3,347
   
$
6,286
 

During the year ended December 31, 2019, the Company closed the Lomada project and put the Cap-Oeste project into care and maintenance. As a result, the carrying value of inventory for these projects has been reviewed for impairment. The net realizable value of the inventory is less than the costs incurred in establishing the ore stockpile and therefore a write down of $2.37 million was required and is recorded in cost of sales in these consolidated statements of operations and comprehensive income (loss).

8. Mineral properties

   
Mining assets
   
Surface rights acquired
   
Total
 
     $’000      $’000      $’000  
Cost
                 
Balance at January 1, 2018
 
$
1,280
   
$
847
   
$
2,127
 
Additions
   
500
     
198
     
698
 
Exchange differences
   
-
     
(300
)
   
(300
)
Balance December 31, 2018
 
$
1,780
   
$
745
   
$
2,525
 
Reverse acquisition (Note 26)
   
6,830
     
1,035
     
7,865
 
Additions
   
216
     
-
     
216
 
Impairment
   
(1,996
)
   
-
     
(1,996
)
Balance December 31, 2019
 
$
6,830
   
$
1,780
   
$
8,610
 


F-15


Trilogy Mining Corporation

In January 2016, Patagonia Gold PLC (PGP) entered into an earn–in agreement with Trilogy Mining Corporation (“Trilogy”) in relation to the San José Project in Uruguay. This has been recognized within mining assets at a cost of $1,996 (2018: $1,780). In December 2019, the Company announced the termination of its option agreement with Trilogy and in exchange has received common shares of Trilogy, that will result in PGP owning 42.5% of the then issued and outstanding shares of Trilogy. Owing to this during the year ended December 31, 2019 the Company has impaired $1,996 of mining asset related to San José Project in Uruguay and is recorded in Operating expenses in the consolidated statements of operations and comprehensive income (loss).

Surface rights

The Company owns the surface rights of land encompassing the Estancia La Bajada, Estancia El Tranquilo, Estancia El Rincon, Estancia La Josefina and the Estancia 1° de Abril.

There is a back in right granted to the sellers under Estancia El Rincon’s title deed whereby the Company irrevocably committed to resell the estancia to its former owner in the event that two consecutive years elapse without mining activities. Current activity on this property includes the Lomada Project.

Mina Martha project

On May 6, 2016, the Company acquired the assets of the Mina Martha project from Coeur Mining Inc. (“Coeur”). The Mina Martha project consists of land, mineral rights, a mine camp, offices, a warehouse, maintenance shop, mining facilities including a flotation mill and a tailings retention facility.

La Josefina project

In March 2007, the Company acquired the exploration and development rights to the La Josefina project from Fomento Minero de Santa Cruz Sociedad del Estado (“Fomicruz”) the Santa Cruz provincial mining and petroleum company.

In July 2007, the Company entered into an agreement (subsequently amended) with Fomicruz which provides that, in the event that a positive feasibility study is completed on the La Josefina property, a Joint Venture Corporation (“JV Corporation”) would be formed by the Company and Fomicruz. The Company would own 81% of the joint venture company and Fomicruz would own the remaining 19%. Fomicruz has the option to earn up to a 49% participating interest in the JV Corporation by reimbursing the Company an equivalent amount, up to 49%, of the exploration investment made by the Company. The Company has the right to buy back any increase in Fomicruz’s ownership interest in the JV Corporation at a purchase price of $0.2 million per each percentage interest owned by Fomicruz down to its initial ownership interest of 19%; the Company can also purchase 10% of the Fomicruz’s initial 19% JV Corporation ownership interest by negotiating a purchase price with Fomicruz. Under the agreement, the Company has until the end of 2019 to complete cumulative exploration expenditures of $18 million and determine if it will enter into production on the property. As at December 31, 2018, the Company had incurred approximately $20 million and is in current discussions with Fomicruz to develop a plan for production. In October 2019, the agreement was extended until April 30, 2021 which period may be extended for an additional one-year term.

As at December 31, 2019, this project has a carrying amount of $Nil (2018 - $Nil) on the consolidated balance sheet.

9. Asset retirement obligation

The Company is legally required to perform reclamation on sites where environmental disturbance is caused by the development or on-going mining of a property to restore it to its original condition at the end of its useful life. In accordance with FASB ASC 410-20, Asset Retirement Obligations, the Company recognized the fair value of that liability as an asset retirement obligation. The total amount of undiscounted cash flows required to settle the estimated obligation is $5,533 which has been discounted using a credit-adjusted rate of 24.94% (2018 – 24.94%) and an inflation rate of 2.29% (2018 – 2.29%).

The following table describes the changes to the Company's asset retirement obligation liability:

 
 
December 31,
2019
   
December 31,
2018
 
     $’000     $’000
 
Asset retirement obligation at beginning of year
 
$
552
   
$
686
 
Reverse acquisition (note 26)
   
739
     
-
 
Change in estimate
   
1,342
     
(712
)
Accretion expense
   
179
     
578
 
Asset retirement obligation at end of year
 
$
2,812
   
$
552
 


F-16


10. Mining Rights



   
Fomicruz Agreement
   
Minera Aquiline Argentina
   
Total
 
     $’000      $’000      $’000