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 March 31, 2018

 

☐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: 57,230,793 shares of common stock outstanding as of April 30, 2018.

 

 

 

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, 2017 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

March 31, 2018

(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 audited consolidated financial statements for the year ended December 31, 2017 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 No. 2014-09—Revenue from Contracts with Customers (Topic 606). On May 28, 2014, the Financial Accounting Standards Board (“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.  On January 1, 2018, the Company adopted the new accounting guidance to all contracts using the retrospective approach.    The adoption of this new guidance did not result in any changes to previously reported revenue amounts.  Please see Note 3 for more information.

 

Recently Issued Accounting Pronouncements

 

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 anticipates adopting the new guidance effective January 1, 2019.

 

The Company has begun its assessment of the new guidance and the impact it will have on the Consolidated Financial Statements and disclosures, and expects to complete its analysis in 2018. Management is still completing its assessment of the impacts; however, based on preliminary findings, the Company expects that the majority of its identified leases will be required to be reported on the Consolidated Balance Sheets.  Based on the preliminary assessment, the Company expects there will be minimal impacts to the Consolidated Statements of Operations. The Company expects to have an update to the impacts of the standard in the third quarter of 2018.

 

3. Revenue

 

The Company derives its revenue from the sale of doré and concentrate.  The following table presents the Company’s net sales disaggregated by source:

 

 

Doré Revenue

 

Doré sales are recognized upon the satisfaction of performance obligations, which occurs when control of the doré transfers to the customer.  Transfer of control occurs once the customer takes possession of the doré.  Doré sales are recorded using quoted metal prices, net of treatment and refining charges.

 

Concentrates Revenue

 

Concentrate sales are initially recorded based on 100% of the provisional sales prices, net of treatment and refining charges, at the time of delivery to the customer as that is when performance obligations are satisfied and control of the product is transferred to the customer.   Until final settlement occurs, adjustments to the provisional sales prices are made to take into account the mark-to-market changes based on the forward prices of metals for the estimated month of settlement.  The changes in price between the provisional sales price and final sales price are considered an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the quoted metal prices at the time of delivery. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through revenue each period prior to final settlement. Changes in the prices of metals that the Company sells, as quoted on the London Bullion Market, between the delivery and final settlement dates will result in adjustments to revenues related to sales of concentrate previously recorded upon delivery. Sales are recorded net of charges for treatment, refining, smelting losses and other charges negotiated with the buyer. These charges are estimated upon delivery of concentrates based on contractual terms and adjusted to reflect actual charges at final settlement. Historically, actual charges have not varied materially from the Company’s initial estimates. 

 

4. 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 three months ended March 31, 2018 and 2017, the Company purchased nil ounces and 64.3 ounces, respectively, of gold bullion.

 

At March 31, 2018 and December 31, 2017, the Company’s holdings of rounds/bullion, using quoted market prices, consisted of the following:

 

 

 

5. Inventories, net 

 

At March 31, 2018 and December 31, 2017, inventories, net consisted of the following:  

 

 

6. Income Taxes

 

The Company recorded income tax expense of $3.6 million and $2.9 million for the three months ended March 31, 2018 and 2017, respectively.  The Company’s annualized effective rate differs from the U.S. corporate rate of 21% primarily due to differences in statutory rates for income and mining taxes in Mexico.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revised the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs, among other things.  The Company has not revised any of the 2017 provisional estimates under SAB No. 118 and ASU No 2018-05.  The Company continues to gather information and is awaiting further guidance from the IRS, SEC and FASB on the Tax Act.

 

Mexico requires a 10% withholding tax on dividends to both residents and non-resident shareholders on all post-2013 earnings.  Dividends from earnings generated prior to 2014 were exempted from the new dividend withholding tax.  The Company plans to distribute post-2013 earnings from Mexico beginning in 2018.  According to the existing US – Mexico tax treaty, the dividend withholding tax between these countries is limited to 5% if certain requirements are met.  Based on the Company’s review of these requirements, it estimates it will pay a 5% withholding tax on dividends received from Mexico in 2018.  The impact of the planned annual dividends for 2018 is reflected in the estimated annual effective tax rate.

 

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 months ended March 31, 2018 and 2017, the Company recorded $1.1 million and $0.7 million, respectively, of fuel tax credits to offset production costs and such credits were applied against the income tax payable. 

 

As of March 31, 2018, the Company believes that it has no liability for uncertain tax positions.

 

7. Prepaid Expenses and Other Current Assets

 

At March 31, 2018 and December 31, 2017, prepaid expenses and other current assets consisted of the following:

 

 

 

8.  Property, Plant and Mine Development, net

 

At March 31, 2018 and December 31, 2017, property, plant and mine development, net consisted of the following:

 

 

The Company recorded depreciation and amortization expense of $3.7 million and $2.7 million for the three months ended March 31, 2018 and 2017, respectively.

 

9. Accrued Expenses and Other Current Liabilities

 

At March 31, 2018 and December 31, 2017, accrued expenses and other current liabilities consisted of the following:

 

 

 

10. 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 three months ended March 31, 2018 and year ended December 31, 2017:

 

 

The Company’s reclamation and remediation obligations as of March 31, 2018 and December 31, 2017 were discounted using a discount rate of 8%.

 

11. 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 collateralized by the equipment, and requires monthly principal and interest payments of $0.05 million.  As of March 31, 2018, there is an outstanding balance of $2.1 million which approximates its fair value.  Scheduled minimum repayments are $0.5 million for the remainder of 2018, $0.6 million in 2019, $0.6 million in 2020, and $0.4 million in 2021. The Company is subject to a prepayment penalty, ranging from 1% to 3% of the outstanding loan balance at time of full repayment, depending on the time of repayment.

 

12. Capital Lease

 

The Company has a capital lease agreement for certain equipment.  The lease bears annual imputed interest of 5.95% and requires monthly principal, interest, and sales tax payments of $0.04 million.  Scheduled minimum annual payments as of March 31, 2018 are as follows (in thousands):

 

 

 

13. Commitments and Contingencies

 

Operating leases

 

The Company leases its office in Colorado Springs from a related party under a non-cancelable operating lease which expires in 2018. The Company also leases an office in Denver, Colorado consisting of approximately 2,500 square feet, which was renewed in 2015 and expires in 2018.  The Company’s Mexican subsidiary leases office space in Oaxaca City, Oaxaca. The subsidiary entered into a ten-year lease commencing January 1, 2012.  Future minimum lease payments under operating leases are as follows:

 

 

Other Commitments

 

As of March 31, 2018, the Company has equipment purchase commitments aggregating approximately $3.4 million.

 

14. Embedded Derivatives

 

Concentrate sales contracts contain embedded derivatives due to the provisional pricing terms for unsettled deliveries. 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 18 for additional information.

 

The following table summarizes the Company’s unsettled sales contracts as of March 31, 2018 with the quantities of metals under contract subject to final pricing occurring through June 2018:

 

 

 

15. Stock-Based Compensation

 

During 2016, the Company replaced its Amended and Restated Stock Option and Stock Grant Plan (the “Prior Plan”) with the Gold Resource Corporation 2016 Equity Incentive Plan (the “Incentive Plan”).  The Incentive Plan allows for the issuance of up to five million shares of common stock in the form of incentive and non-qualified stock options, stock appreciation rights, RSUs, stock grants, stock units, performance shares, performance share units and performance cash.  Additionally, pursuant to the terms of the Incentive Plan, any award outstanding under the Prior Plan that is terminated, expired, forfeited, or canceled for any reason, will be available for grant under the Incentive Plan.

 

During the three months ended March 31, 2018, a total of 14,964 restricted stock units (“RSUs”) vested and shares were issued with an intrinsic and a fair value of $0.1 million.

 

During the three months ended March 31, 2018, stock options to purchase an aggregate of 1,000,000 shares of the Company’s common stock were exercised at exercise prices ranging from $4.37 to $5.00 per share.  Of that amount, 945,000 of the options were exercised on a net exercise basis, resulting in 244,345 shares being delivered.  The remaining 55,000 options were exercised for cash.

 

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:

 

 

The Company sponsors a short-term incentive plan for its executive officers that provides the grant of either cash or stock-based bonus awards payable upon achievement of specified performance metrics (the “STIP”). No amounts have been accrued as of March 31, 2018 related to the STIP.

 

16. Other Expense, net

 

Other expense, net, consisted of the following:

 

 

17. 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 2.8 million shares of common stock at weighted average exercise prices of $11.41 and $9.77 were outstanding at March 31, 2018 and 2017, 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:

 

 

 

18. 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).