UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

 

(Mark One)

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              

 

Commission File Number: 001-34857

 

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GOLD RESOURCE CORPORATION

(Exact Name of Registrant as Specified in its charter)

 

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2886 Carriage Manor Point, Colorado Springs, Colorado 80906

(Address of Principal Executive Offices) (Zip Code)

 

(303) 320-7708

(Registrant’s telephone number including area code) 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 post such files). Yes  ☒ No ☐ 

 

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

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 54,179,369 shares of common stock outstanding as of November 2, 2015.

 

 

 

GOLD RESOURCE CORPORATION

 

FORM 10-Q

 

Index

 

 

References in this report to agreements to which Gold Resource Corporation is a party and the definition of certain terms from those agreements are not necessarily complete and are qualified by reference to the agreements. Readers should refer to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and the exhibits listed therein.

 

 

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

GOLD RESOURCE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except share and per share amounts)

 

 

 

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

GOLD RESOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

for the three and nine months ended September 30, 2015 and 2014

(U.S. dollars in thousands, except share and per share amounts)

(Unaudited)

 

 

 

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

 

 

 

GOLD RESOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the nine months ended September 30, 2015 and 2014

(U.S. dollars in thousands)

(Unaudited)

 

 

 

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

GOLD RESOURCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

1. Basis of Preparation of Financial Statements

 

Basis of Presentation: The unaudited interim condensed consolidated financial statements included herein are expressed in United States dollars and are prepared in conformance with United States generally accepted accounting principles (“U.S. GAAP”) and applicable rules of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The unaudited interim condensed consolidated financial statements include the accounts of Gold Resource Corporation (the “Company”) and its U.S. subsidiary GRC Nevada Inc. (“GRC Nevada”) and its Mexican subsidiary Don David Gold Mexico S.A. de C.V. (“Don David Gold Mexico”). Significant intercompany accounts and transactions have been eliminated. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to SEC rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in the Company’s Form 10-K for the year ended December 31, 2014. Unless otherwise noted, there have been no material changes to the footnotes from those accompanying the audited financial statements contained in the Company’s annual report on Form 10-K.

 

In management’s opinion, the unaudited condensed consolidated financial statements contained herein reflect all material normal and recurring adjustments that are necessary for the fair presentation of the Company’s financial position, results of operations, and cash flows on a basis consistent with that of its audited consolidated financial statements for the year ended December 31, 2014. However, the results of operations for the interim period ended September 30, 2015 may not be indicative of results of operations to be expected for the full fiscal year.

 

Recently Issued Accounting Pronouncements: Accounting Standards Update No. 2015-11 Inventory (Topic 330). Topic 330 Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments in this Update require an entity to measure inventory within the scope of this Update at the lower of cost and net realizable value. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company does not anticipate any significant changes due to the implementation of this update.

 

2. Fair Value Measurement

 

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

 

Level 1Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; 

 

Level 2Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and 

 

Level 3Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). 

 

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

 

 

 

 

 

 

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

 

Trade accounts receivable include amounts due to the Company for shipments of concentrates and doré sold to customers.  Concentrate sales contracts provide for provisional pricing as specified in such contracts. These sales contain an embedded derivative related to the provisional pricing mechanism which is bifurcated and accounted for as a derivative. At the end of each reporting period, the Company records an adjustment to sales to reflect the mark-to-market of outstanding provisional invoices. Because these provisionally priced sales have not yet settled as of the reporting date, the mark-to-market adjustment related to these invoices is included in accounts receivable as of each reporting date.

 

The Company’s non-current investments consist of marketable equity securities which are valued using quoted market prices for each security when available.

 

Gains and losses related to changes in the fair value of these financial instruments were included in the Company’s condensed consolidated statements of operations as shown in the following table:

 

 

 

 

 

 

3. Gold and Silver Bullion

 

The Company periodically purchases gold and silver bullion on the open market for investment purposes and to use in its dividend exchange program under which shareholders may exchange their cash dividends for gold and silver bullion. The Company’s investment in gold and silver bullion is carried at the lower of cost or market. 

 

During the nine months ended September 30, 2015, the Company made no purchases of gold or silver bullion. The Company recorded write-downs on its gold and silver bullion totaling $0.3 million and $0.2 million for the nine months ended September 30, 2015 and 2014, respectively. At September 30, 2015 and December 31, 2014, the Company’s holdings of bullion consisted of the following:

 

 

 

 

 

4. Current Inventories 

 

At September 30, 2015 and December 31, 2014, inventories consisted of the following:  

 

 

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(1)Reclassified from non-current inventory.

(2)Net of reserve for obsolescence of $217 in each period.

 

 

5. Income Taxes 

 

The Company recorded income tax benefit of $0.8 million and expense of $3.5 million for the three and nine months ended September 30, 2015, respectively. During the three and nine months ended September 30, 2014, the Company recorded income tax expense of $1.1 million and $12.3 million, respectively

 

During the nine months ended September 30, 2015, the Company received $3.0 million in intercompany dividends from its Mexican operations. The Company has asserted permanent reinvestment of all Mexico undistributed earnings as of December 31, 2014. The impact of the planned intercompany dividends for 2015, net of foreign tax credits, is reflected in the estimated annual effective tax rate.

 

During the nine months ended September 30, 2015, the Company experienced a decrease in its annualized effective tax rate principally due to the decrease in intercompany dividends anticipated to be paid in 2015 and the related foreign tax credit.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry-back and carry-forward periods), projected future taxable income and tax-planning strategies in making this assessment. As of September 30, 2015, the Company believes it has sufficient positive evidence to conclude that its federal and foreign deferred tax assets are more likely than not to be realized. However, the Company has determined that the realization of its state deferred tax assets is not more likely than not to be realized and has a valuation allowance offsetting the state deferred tax assets.

 

As of September 30, 2015, the Company believes that it has no liability for uncertain tax positions. If the Company were to determine there was an uncertain tax position, the Company would recognize the liability and related interest and penalties within income tax expense.

Currently the Company is undergoing a normal course tax examination by the Mexican tax authorities that relates to the 2011 and 2012 tax years. The tax examinations are open and ongoing, and no further information has been communicated to the Company by the Mexican tax authorities.

 

6. Prepaid Expenses and Other Current Assets

 

At September 30, 2015 and December 31, 2014, prepaid expenses and other current assets consisted of the following:

 

 

 

 

7. Property, Plant and Mine Development – net

 

At September 30, 2015 and December 31, 2014, property, equipment and mine development consisted of the following:

 

 

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The Company recorded depletion, depreciation and amortization expense of $1.6 million and  $5.4 million for the three and nine months ended September 30, 2015, respectively. During the three and nine months ended September 30, 2014, the Company recorded depletion, depreciation and amortization expense of $1.2 million and $3.1 million, respectively.

 

The Company has equipment leases that qualify as capital leases which have been recorded at the present value of the future minimum lease payments, including transaction fees and bargain purchase options, which approximates the net carrying value of the equipment. The equipment leases bear interest at 4.5% to 5.5% per annum, with monthly principal and interest payments of $0.1 million over the three-year lease term. The Company has an option to purchase the equipment at the end of the lease term for less than $0.1 million. Depreciation on the leased assets is recorded over their estimated useful lives. Scheduled minimum capital lease repayments are $0.3 million in 2015 and $0.9 million in 2016. 

 

8. Investments in Equity Securities

 

At September 30, 2015 and December 31, 2014, the value of investments in equity securities consisted of the following:

 

 

 

 

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(1)The Company determined that it is not practicable to estimate the fair value of this investment.

 

9. Other Non-Current Assets

 

At September 30, 2015 and December 31, 2014, other non-current assets consisted of the following:

 

 

 

 

10. Accrued Expenses and Other Current Liabilities

 

At September 30, 2015 and December 31, 2014, accrued expenses and other current liabilities consisted of the following:

 

 

 

 

 

 

 

 

11. Reclamation and Remediation

 

The Company’s reclamation and remediation obligations relate to the Aguila Project in Oaxaca, Mexico.  The following table presents the changes in reclamation and remediation obligations for the nine months ended September 30, 2015 and the twelve months ended December 31, 2014:

 

 

 

12. Shareholders’ Equity 

 

The Company declared and paid $4.9 million of dividends during each of the nine months ended September 30, 2015 and 2014. The Company has declared monthly cash dividends totaling $2.01 per share of common stock to shareholders of record since July 2010. On October 27, 2015, the Board of Directors declared a dividend on common stock totaling $0.5 million payable in November 2015.

 

13. Concentrate Sale Settlements

 

The Company records adjustments to sales of metals concentrate that result from final settlement of provisional invoices in the period that the final invoice settlement occurs. The Company also compares assays taken at the mine site on its concentrate shipments, upon which the Company’s provisional invoices are based, to assays obtained from samples taken at the buyer’s warehouse prior to final settlement, upon which the final invoices are in part based, to assess whether an adjustment to sales is required prior to final invoice settlement. These adjustments resulted in a decrease to sales of $1.2 million and $1.3 million for the three and nine months ended September 30, 2015, respectively, and an increase to sales of $0.1 million and a decrease to sales of $2.4 million for the three and nine months ended September 30, 2014, respectively.

 

In addition to the final settlement adjustments on provisional invoices, the Company records a sales adjustment to mark-to-market outstanding provisional invoices at the end of each reporting period. These adjustments resulted in an increase to sales of $0.1 million and $0.7 million for the three and nine months September 30, 2015 respectively, and a decrease to sales of $1.4 million for the three and nine months ended September 30, 2014, respectively.

 

Sales of metal concentrates are recorded net of smelter refining fees, treatment charges and penalties. Total charges for these items totaled $2.9 million and  $8.8 million for the three and nine months ended September 30, 2015, and $3.5 million and $9.6 million for the three and nine months ended September 30, 2014, respectively.

 

14. Stock Options

 

The Company has a non-qualified stock option and stock grant plan under which equity awards may be granted to key employees, directors and others (the “Plan”). A summary of activity under the Plan for the nine months ended September 30, 2015 is presented below:

 

 

 

A total of 1,260,000 options were granted during the nine months ended September 30, 2015 of which 225,000 options vested immediately and have an exercise term of 10 years. The remaining options vest over a three year period and have an exercise term of 10 years.

 

The following table summarizes information about stock options outstanding at September 30, 2015:

 

 

 

The fair value of stock option grants is amortized over the respective vesting period. Total stock-based compensation expense related to stock options for the three and nine months ended September 30, 2015 was $1.4 million and $3.3 million, respectively, and for the three and nine months ended September 30, 2014 was $1.9 million and $3.9 million, respectively. 

 

Stock-based compensation expense has been allocated between production costs and general and administrative expense as follows:  

 

 

 

The estimated unrecognized stock-based compensation expense from unvested options as of September 30, 2015 was $0.7 million, and is expected to be recognized over the remaining vesting periods of up to three years. 

 

The assumptions used to determine the value of stock-based awards under the Black-Scholes-Merton method are summarized below:

 

 

 

 

 

15. Other (Expense) Income, Net

 

Other (expense) income, net consisted of the following:

 

 

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16. Net (Loss) Income per Share

 

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

 

The effect of potentially dilutive stock options on the weighted average number of shares outstanding is as follows:

 

 

 

Stock options to purchase 5,550,000 and 4,290,000 shares of common stock for the three and nine months ended September 30, 2015, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive. Stock options to purchase 4,955,000 and 3,055,000 shares of common stock for the three and nine months ended September 30, 2014, respectively, were excluded from the calculation of diluted earnings per share because they were antidilutive.