UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2017

 

☐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

Gold Resource Corporation

_{(Exact Name of Registrant as Specified in its charter)}

 

 

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) 

 

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, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act   ☐    

 

Indicate by check mark whether 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: 56,891,484 shares of common stock outstanding as of October 30, 2017.

 

 

 

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, 2016 and other reports filed with the Securities and Exchange Commission and the exhibits filed or incorporated by reference 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

(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 CHANGES IN SHAREHOLDERS’ EQUITY

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

 

 

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

 

 

 

 

GOLD RESOURCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(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, 2017

(Unaudited)

 

1. Basis of Preparation of Financial Statements

 

The interim Condensed Consolidated Financial Statements (“interim statements”) of Gold Resource Corporation and its subsidiaries (collectively, the “Company”) are unaudited and have been prepared in accordance with the rules of the Securities and Exchange Commission for interim statements. Certain information and footnote disclosures required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) have been condensed or omitted although the Company believes that the disclosures included are adequate to make the information presented not misleading. In the opinion of management, all adjustments (including normal recurring adjustments) and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. These interim statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2016 included in the Company’s annual report on Form 10-K. The year-end balance sheet data was derived from the audited financial statements.  Unless otherwise noted, there have been no material changes to the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s annual report on Form 10-K.

 

 

 

2. Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

Accounting Standards Update 2016-09—Compensation—Stock compensation (Topic 718): Improvements to employee share-based payment accounting. On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued guidance intended to improve the accounting for employee share-based payments. The standard affects all organizations that issue share-based payment awards to their employees and was part of the FASB’s Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification in this standard involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this standard are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Because of the Company’s current valuation allowance position, the adoption of this guidance, effective January 1, 2017, did not result in an adjustment to retained earnings as of December 31, 2016.  Nor did it result in current tax expense or benefit related to vested stock-based awards for the nine months ended September 30, 2017.  As a result, the Company did not exclude any excess tax benefits from the calculation of diluted earnings per share during the nine months ended September 30, 2017, and there was no method change to the cash flow presentation as required by the guidance. Please see Note 5 for more information.

 

Accounting Standards Update 2016-16 – Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740).  In October 2016, the FASB issued guidance intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when an asset is sold to an outside party. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is required to adopt this new standard on January 1, 2018, for its fiscal year 2018 and for interim periods within that fiscal year. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. The Company elected to early adopt this guidance as of January 1, 2017 which resulted in the Company adjusting its deferred tax charge, previously reported in other long-term assets, to nil with the related offset to beginning retained earnings. 

The net effect was a decrease of $0.5 million to other long-term assets and a corresponding decrease to beginning retained earnings.

 

Recently Issued Accounting Pronouncements

 

Accounting Standards Update (“ASU”) No. 2014-09—Revenue from Contracts with Customers (Topic 606). On May 28, 2014, the FASB issued guidance that requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU was further amended in August 2015, March 2016, April 2016, May 2016 and December 2016 by ASU No. 2015-14, No. 2016-08, No. 2016-10, No. 2016-12 and No. 2016-20, respectively.  The guidance provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures about revenue recognition. 

 

The Company has performed an assessment of the revised guidance and the impacts on the Company’s Consolidated Financial Statements and disclosures. The Company has completed the review of all contracts and determined that the adoption of this guidance will not impact the timing of revenue recognition based on the Company’s determination of when control is transferred. Currently, revenue is recognized for contracts upon delivery of material to the customer and will not change under the new guidance.

 

The Company furthered its evaluation of variable consideration for concentrate sales related to the variable nature of the price and metal quantity. Based on its current analysis, the estimate of revenue recognized for concentrates will remain unchanged as sales will initially be recorded on a provisional basis based on the forward prices for the estimated month of settlement and the Company’s estimated metal quantities delivered based on weighing and assay data. The Company believes changes in the underlying weight and metal content are not significant to the sale as a whole and therefore do not preclude the recognition of revenue upon transfer of control.

 

Additionally, the Company completed its evaluation of the impacts of refining fee classification.  The Company also determined that revenue will be recognized, net of treatment and refining charges when these payments are made to customers. This classification remains unchanged from current practice.

 

The Company will adopt the new guidance effective January 1, 2018. The guidance may be applied retrospectively for all periods presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company currently anticipates adopting the guidance retrospectively with the cumulative effect of initially applying the amended guidance recognized at January 1, 2018. As there are no changes to the Company’s current revenue recognition model, no changes will be made to prior period amounts or related prior period disclosures.

 

Accounting Standards Update No. 2016-02 Leases (Topic 842). In February 2016, the FASB issued a new standard regarding leases. Lessees will be required to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and a lease liability. Public business entities are required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For calendar year-end public companies, this means an adoption date of January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact on its consolidated financial statements and disclosures.

 

3. Gold and Silver Rounds/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 minted gold and silver rounds. During the nine months ended September 30, 2017 and 2016, the Company purchased 215.85 ounces and nil ounces, respectively, of gold bullion. At September 30, 2017 and December 31, 2016, the Company’s holdings of rounds/bullion, using quoted market prices, consisted of the following:

 

 

 

4. Inventories, net 

 

At September 30, 2017 and December 31, 2016, inventories, net consisted of the following:  

 

 

5. Income Taxes 

 

The Company recorded income tax expense of $3.1 million and $7.0 million for the three and nine months ended September 30, 2017, respectively.  For the three and nine months ended September 30, 2016, the Company recorded income tax expense of $0.8 million and $6.5 million, respectively.

 

In 2015, the Mexican government approved a 2016 Federal Revenue Act that provides tax incentives, including tax credits on Mexican Excise Duty (a.k.a., IEPS), for the acquisition of combustible fossil fuels to be used in productive processes. The Company’s Mexican operations utilize a significant amount of diesel fuel for power generation that qualifies for such tax credits. These tax credits can be applied against income taxes payable, as well as other income tax withholdings during the year. In the three and nine months ended September 30, 2017, the Company recorded $1.0 million and $2.6 million, respectively, of fuel tax credits to offset production costs and such credits were applied against the income tax payable.  During the three and nine months ended September 30, 2016, the Company recorded $0.6 million and $2.3 million, respectively, of fuel tax credits to offset production costs and such credits were applied against the income tax payable and other taxes payable.

 

The Company has asserted permanent reinvestment of all Mexico undistributed earnings as of September 30, 2017. The impact of the planned annual dividends for 2017, net of foreign tax credits, is reflected in the estimated annual effective tax rate. The Company’s annualized effective rate differs from the statutory rate primarily due to planned annual dividends from our Mexican subsidiary as well as differences in statutory rates for income and mining taxes in Mexico.

 

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 are available for deduction. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment. Except as noted in the following paragraph, as of September 30, 2017, 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. The Company has determined that the realization of its state deferred tax assets is not more likely that not to be realized and has a valuation allowance offsetting its state deferred tax assets.

 

As a result of the adoption of ASU 2016-09 in the first quarter of 2017, excess tax benefits and tax deficiencies will be prospectively classified to the statement of operations instead of additional paid-in capital.  Upon adoption, the Company recorded a $4.2 million deferred tax asset related to previously unrecognized foreign tax credits but placed a valuation allowance against the full amount of the deferred tax asset due to the Company’s assessment of the realizability of these foreign tax credits.  Thus, no net impact to the financial statements was generated as a result of adoption of ASU 2016-09.  The Company's effective tax rate for the three and nine months ended September 30, 2017 was not materially impacted by the adoption of ASU 2016-09.

 

As of September 30, 2017, the Company believes that it has no liability for uncertain tax positions.

 

6. Prepaid Expenses and Other Current Assets

 

At September 30, 2017 and December 31, 2016, prepaid expenses and other current assets consisted of the following:

 

 

 

7. Property, Plant and Mine Development, net

 

At September 30, 2017 and December 31, 2016, property, plant and mine development, net consisted of the following:

 

 

 

The Company recorded depreciation and amortization expense of $3.9 million and $10.6 million for the three and nine months ended September 30, 2017, respectively. The Company recorded depreciation and amortization expense of $3.3 million and $9.3 million for the three and nine months ended September 30, 2016, respectively.

 

8. Accrued Expenses and Other Current Liabilities

 

At September 30, 2017 and December 31, 2016, accrued expenses and other current liabilities consisted of the following:

 

 

 

9. Reclamation and Remediation

 

The Company’s reclamation and remediation obligations primarily relate to the Aguila Project. The following table presents the changes in reclamation and remediation obligations for the nine months ended September 30, 2017 and year ended December 31, 2016:

 

 

 

 

 

10. Loan Payable

 

On August 8, 2017, the Company entered into a 48-month loan agreement in the amount of $2.4 million for the purchase of certain equipment.  The loan bears annual interest of 4.48%, is secured by the equipment,  and requires monthly principal and interest payments of $0.05 million.  As of September 30, 2017, there is an outstanding balance of $2.4 million.  Scheduled minimum repayments are $0.2 million in 2017, $0.6 million in 2018, $0.6 million in 2019, $0.6 million in 2020, and $0.4 million in 2021. The Company is subject to a repayment penalty, ranging from 1% to 3% of the outstanding loan balance at time of full repayment, depending of time of repayment. 

 

11. Commitments and Contingencies

 

As of September 30, 2017, the Company had outstanding cancellable equipment purchase contracts totaling $7.2 million.  The contracts require payments during the equipment construction periods and the Company is required to reimburse the vendors for all costs up to the cancellation date, if cancelled. 

 

 

12. Shareholders’ Equity 

 

The Company declared and paid $0.9 million and $0.8 million of dividends during the nine months ended September 30, 2017 and 2016, respectively. On October 26, 2017, the Board of Directors declared a dividend on common stock totaling $0.1 million payable in November 2017.

 

On January 6, 2017, the Company issued 59,642 shares of common stock as partial consideration for additional mineral rights for its Isabella Pearl project. At the time of issuance, the shares were valued at $5.03 per share, for an aggregate value of $0.3 million.

 

On January 17, 2017, the Company issued 186,568 shares of common stock as partial consideration for mineral rights at the East Camp Douglas property.  At the time of issuance, the shares were valued at $5.36 per share, for an aggregate value of $1.0 million.

 

 

13. Equity Incentive Plans

 

The Company maintains an Equity Incentive Plan (“Incentive Plan”) that provides for the issuance of up to 5 million shares of common stock (plus additional shares that are terminated or forfeited under the previous equity plan) in the form of stock-based awards. The Incentive Plan was adopted in April 2016 and became effective in June 2016 and replaced the Amended and Restated Stock Option and Stock Grant Plan.

 

During the nine months ended September 30, 2017, a total of 78,400 restricted stock units (“RSUs”) vested and shares were issued with an intrinsic value $0.3 million and a fair value of $0.4 million. 

 

A total of 341,000 options with a term of 10 years were granted during the nine months ended September 30, 2017, of which 37,000 vested immediately and the remainder vest over a three year period. A total of 105,945 restricted stock units were granted during the nine months ended September 30, 2017, of which 14,964 vest within six months and the remainder vest over a three year period.

 

Stock-based compensation expense for stock options and RSUs is as follows:

 

 

Total stock-based compensation related to stock options and RSUs has been allocated between production costs, general and administrative expenses, and exploration expense as follows:

 

 

 

14. Embedded Derivatives

 

Concentrate sales contracts contain embedded derivatives due to the provisional pricing terms for unsettled shipments. At the end of each reporting period, the Company records an adjustment to accounts receivable and revenue to reflect the mark-to-market adjustments for outstanding provisional invoices based on metal forward prices.  Please see Note 17 for additional information.

 

The following table summarizes the Company’s unsettled sales contracts at September 30, 2017 with the quantities of metals under contract subject to final pricing occurring through November 2017:

 

 

 

15. Other Expense (Income), net

 

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

 

 

 

 

 

16. Net Income per Common Share

 

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

 

The effect of the Company’s dilutive securities is calculated using the treasury stock method and only those instruments that result in a reduction in net income per common share are included in the calculation. Options to purchase 3.1 million and 3.7 million shares of common stock at weighted average exercise prices of $11.44 and $10.32 were outstanding at September 30, 2017 and 2016, respectively, but were not included in the computation of diluted weighted average common shares outstanding, as the exercise price of the options exceeded the average price of the Company’s common stock during those periods, and therefore are anti-dilutive.

 

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

 

 

 

 

17. 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). 

 

As required by accounting guidance, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth certain of the Company’s assets measured at fair value by level within the fair value hierarchy as of September 30, 2017 and December 31, 2016:  

 

 

Cash and cash equivalents consist primarily of cash deposits and are valued at cost, which approximates fair value. Gold and silver rounds/bullion consist of precious metals used for investment purposes and in the dividend program which are valued using quoted market prices. Please see Note 3 for additional information. The Company determined that it was not practicable to estimate the fair value of its non-current investment in equity securities of $0.2 million and as such, it is reported at cost.

Trade accounts receivable include amounts due to the Company for shipments of concentrates and doré sold to customers. Concentrate sales contracts contain embedded derivatives due to the provisional pricing terms for unsettled shipments. At the end of each reporting period, the Company records an adjustment to accounts receivable and revenue to reflect the mark-to-market adjustments for outstanding provisional invoices based on the forward prices. Please see Note 14 for additional information.