10-Q 1 aumn-20160930x10q.htm 10-Q aumn_Current Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(MARK ONE)

 

 

 

[X]

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

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016.

 

OR

 

 

[  ]

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

 

FOR THE TRANSITION PERIOD FROM                 TO                 

 

COMMISSION FILE NUMBER 1-13627

 

GOLDEN MINERALS COMPANY


(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

DELAWARE

 

26-4413382

 

 

 

(STATE OR OTHER JURISDICTION OF

 

(I.R.S. EMPLOYER

INCORPORATION OR ORGANIZATION)

 

IDENTIFICATION NO.)

 

 

350 INDIANA STREET, SUITE 800

 

 

GOLDEN, COLORADO

 

80401

 

 

 

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

(ZIP CODE)

 

(303) 839-5060


(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 SUBMIT AND 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:

 

 

 

 

LARGE ACCELERATED FILER ☐

 

ACCELERATED FILER ☐

NON-ACCELERATED FILER ☐

 

SMALLER REPORTING COMPANY ☒

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT):  YES ☐       NO ☒

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT:  YES ☒  NO ☐

 

AT NOVEMBER 3, 2016, 88,920,041 SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING

 

 


 

GOLDEN MINERALS COMPANY

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2016

 

INDEX

 

 

 

 

 

 

PAGE

 

 

 

PART I – FINANCIAL INFORMATION 

 

 

 

ITEM 1. 

FINANCIAL STATEMENTS (Unaudited)

 

 

 

 

ITEM 2. 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

24 

 

 

 

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

33 

 

 

 

ITEM 4. 

CONTROLS AND PROCEDURES

33 

 

 

 

PART II – OTHER INFORMATION 

 

 

 

 

ITEM 1. 

LEGAL PROCEEDINGS

34 

 

 

 

ITEM 1A. 

RISK FACTORS

34 

 

 

 

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

34 

 

 

 

ITEM 3. 

DEFAULTS UPON SENIOR SECURITIES

34 

 

 

 

ITEM 4. 

MINE SAFETY DISCLOSURES

34 

 

 

 

ITEM 5. 

OTHER INFORMATION.

34 

 

 

 

ITEM 6. 

EXHIBITS

35 

 

 

 

 

 

 

SIGNATURES 

36 

 

 

 

 

 

 

 

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

GOLDEN MINERALS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in United States dollars)

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited

    

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(in thousands, except share data)

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents (Note 4)

 

$

3,415

 

$

4,077

 

Short-term investments (Note 4)

 

 

456

 

 

72

 

Trade receivables

 

 

506

 

 

546

 

Inventories (Note 6)

 

 

264

 

 

330

 

Value added tax receivable, net (Note 7)

 

 

4

 

 

400

 

Related party receivable (Note 22

 

 

642

 

 

 —

 

Prepaid expenses and other assets (Note 5)

 

 

277

 

 

451

 

Total current assets

 

 

5,564

 

 

5,876

 

Property, plant and equipment, net (Note 8)

 

 

9,453

 

 

11,125

 

Total assets

 

$

15,017

 

$

17,001

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable and other accrued liabilities (Note 9)

 

$

1,406

 

$

1,144

 

Convertible note payable - related party, net (Note 11)

 

 

 —

 

 

3,702

 

Derivative liability - related party (Note 11)

 

 

 —

 

 

488

 

Deferred revenue (Note 16)

 

 

 —

 

 

500

 

Other current liabilities (Note 12)

 

 

9

 

 

556

 

Total current liabilities

 

 

1,415

 

 

6,390

 

Asset retirement and reclamation liabilities (Note 10)

 

 

2,388

 

 

2,546

 

Warrant liability (Note 13)

 

 

3,031

 

 

210

 

Other long term liabilities (Note 12)

 

 

71

 

 

84

 

Total liabilities

 

 

6,905

 

 

9,230

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity (Note 15)

 

 

 

 

 

 

 

Common stock, $.01 par value, 200,000,000 and 100,000,000 shares authorized; 88,920,041 and  53,335,333 shares issued and outstanding, respectively

 

 

889

 

 

534

 

Additional paid in capital

 

 

495,424

 

 

484,742

 

Accumulated deficit

 

 

(488,352)

 

 

(477,378)

 

Accumulated other comprehensive income (loss)

 

 

151

 

 

(127)

 

Shareholders' equity

 

 

8,112

 

 

7,771

 

Total liabilities and equity

 

$

15,017

 

$

17,001

 

 

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

 

3


 

GOLDEN MINERALS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Expressed in United States dollars)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2016

    

2015

    

2016

    

2015

    

 

 

(in thousands except per share data)

 

(in thousands, except per share data)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide plant lease (Note 16)

 

$

1,729

 

$

 —

 

$

4,768

 

$

 —

 

Sale of metals (Note 16)

 

 

 —

 

 

1,788

 

 

 —

 

 

6,086

 

Total revenue

 

 

1,729

 

 

1,788

 

 

4,768

 

 

6,086

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Oxide plant lease costs (Note 16)

 

 

(549)

 

 

 —

 

 

(1,478)

 

 

 —

 

Cost of metals sold (exclusive of depreciation shown below) (Note 16)

 

 

 —

 

 

(2,598)

 

 

 —

 

 

(8,385)

 

Exploration expense

 

 

(927)

 

 

(615)

 

 

(2,865)

 

 

(2,851)

 

El Quevar project (expense) income

 

 

65

 

 

(177)

 

 

(308)

 

 

(988)

 

Velardeña project expense

 

 

 —

 

 

 —

 

 

 —

 

 

(119)

 

Velardeña shutdown and care and maintenance costs

 

 

(456)

 

 

(393)

 

 

(1,589)

 

 

(393)

 

Administrative expense

 

 

(897)

 

 

(1,047)

 

 

(3,141)

 

 

(3,375)

 

Stock based compensation

 

 

(95)

 

 

(99)

 

 

(666)

 

 

(372)

 

Reclamation expense

 

 

(47)

 

 

(48)

 

 

(144)

 

 

(206)

 

Impairment of long lived assets

 

 

 —

 

 

(13,181)

 

 

 —

 

 

(13,181)

 

Other operating income, net (Note 8)

 

 

1,281

 

 

7

 

 

1,558

 

 

477

 

Depreciation, depletion and amortization

 

 

(346)

 

 

(1,209)

 

 

(1,317)

 

 

(3,743)

 

Total costs and expenses

 

 

(1,971)

 

 

(19,360)

 

 

(9,950)

 

 

(33,136)

 

Loss from operations

 

 

(242)

 

 

(17,572)

 

 

(5,182)

 

 

(27,050)

 

Other income and (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense (Note 11)

 

 

 —

 

 

 —

 

 

(515)

 

 

 —

 

Interest and other income (Note 17)

 

 

10

 

 

623

 

 

12

 

 

2,006

 

Warrant derivative (loss) gain (Note 18)

 

 

(545)

 

 

200

 

 

(2,821)

 

 

1,068

 

Derivative loss (Note 18)

 

 

 —

 

 

 —

 

 

(778)

 

 

 —

 

Loss on debt extinguishment (Note 11)

 

 

 —

 

 

 

 

 

(1,653)

 

 

 —

 

Loss on foreign currency

 

 

(21)

 

 

(71)

 

 

(63)

 

 

(125)

 

Total other (expense) income

 

 

(556)

 

 

752

 

 

(5,818)

 

 

2,949

 

Loss from operations before income taxes

 

 

(798)

 

 

(16,820)

 

 

(11,000)

 

 

(24,101)

 

Income tax benefit

 

 

 —

 

 

 —

 

 

26

 

 

 —

 

Net loss

 

$

(798)

 

$

(16,820)

 

$

(10,974)

 

$

(24,101)

 

Comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on securities

 

 

107

 

 

(88)

 

 

278

 

 

(125)

 

Comprehensive loss

 

$

(691)

 

$

(16,908)

 

$

(10,696)

 

$

(24,226)

 

Net loss per common share — basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss

 

$

(0.01)

 

$

(0.32)

 

$

(0.14)

 

$

(0.46)

 

Weighted average Common Stock outstanding - basic (1)

 

 

88,878,371

 

 

52,960,212

 

 

78,080,858

 

 

52,921,542

 


(1)Potentially dilutive shares have not been included because to do so would be anti-dilutive.

 

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

 

4


 

GOLDEN MINERALS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in United States dollars)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(5,123)

 

$

(8,030)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sale of assets

 

 

898

 

 

416

 

Capitalized costs and acquisitions of property, plant and equipment

 

 

(36)

 

 

(44)

 

Net cash from investing activities

 

$

862

 

$

372

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

3,599

 

 

 —

 

Net cash from financing activities

 

$

3,599

 

$

 —

 

Net decrease in cash and cash equivalents

 

 

(662)

 

 

(7,658)

 

Cash and cash equivalents, beginning of period

 

 

4,077

 

 

8,579

 

Cash and cash equivalents, end of period

 

$

3,415

 

$

921

 

 

See Note 19 for supplemental cash flow information.

 

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

 

5


 

GOLDEN MINERALS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Expressed in United States dollars)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Comprehensive

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

loss

 

Equity

 

 

 

(in thousands except share data)

 

Balance, December 31, 2014

 

53,162,833

 

$

532

 

$

484,197

 

$

(451,995)

 

$

 —

 

$

32,734

 

Stock compensation accrued

 

 —

 

 

 —

 

 

453

 

 

 —

 

 

 —

 

 

453

 

KELTIP mark-to-market

 

 —

 

 

 —

 

 

40

 

 

 —

 

 

 —

 

 

40

 

KELTIP shares issued

 

172,500

 

 

2

 

 

52

 

 

 —

 

 

 —

 

 

54

 

Unrealized loss on marketable equity securities, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(127)

 

 

(127)

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(25,383)

 

 

 —

 

 

(25,383)

 

Balance, December 31, 2015

 

53,335,333

 

$

534

 

$

484,742

 

$

(477,378)

 

$

(127)

 

$

7,771

 

Stock compensation accrued and shares issued for vested stock awards

 

217,968

 

 

1

 

 

220

 

 

 —

 

 

 —

 

 

221

 

Shares issued on conversion of Sentient Note

 

27,366,740

 

 

274

 

 

6,943

 

 

 —

 

 

 —

 

 

7,217

 

Registered offering common stock, net and warrants (Note 15)

 

8,000,000

 

 

80

 

 

3,519

 

 

 —

 

 

 —

 

 

3,599

 

Unrealized loss on marketable equity securities, net of tax

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

278

 

 

278

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(10,974)

 

 

 —

 

 

(10,974)

 

Balance, September 30, 2016

 

88,920,041

 

$

889

 

$

495,424

 

$

(488,352)

 

$

151

 

$

8,112

 

 

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

 

6


 

GOLDEN MINERALS COMPANY

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in United States dollars)

(Unaudited)

 

1.     Basis of Preparation of Financial Statements and Nature of Operations

 

Golden Minerals Company (the “Company”), a Delaware corporation, has prepared these unaudited interim condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), so long as such omissions do not render the financial statements misleading.  The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures normally required by GAAP.

 

In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of the financial results for the periods presented. These interim financial statements should be read in conjunction with the annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and filed with the SEC on February 25, 2016.

 

The Company is a mining company, holding a 100% interest in the Velardeña and Chicago precious metals mining properties and associated oxide and sulfide processing plants in Mexico (the “Velardeña Properties”).  During November 2015 the Company suspended mining and sulfide processing activities at its Velardeña Properties in order to conserve the asset until the Company is able to develop mining and processing plans that at then current prices for silver and gold indicate a sustainable positive operating margin (defined as revenues less costs of sales) or the Company is able to locate, acquire and develop alternative mineral sources that could be economically mined and transported to the Velardeña Properties for processing.  The Company has placed the mine and sulfide processing plant on care and maintenance to enable a re-start of either the mine or mill when mining and processing plans and metals prices support a cash positive outlook.  The Company incurred approximately $1.2 million in related shutdown costs for employee severance, net working capital obligations, and other shutdown expenditures to place the property on care and maintenance in the fourth quarter 2015 and $1.6 million in shutdown and care and maintenance costs for the nine months ended September 30, 2016 and expects to incur approximately $0.4 million in quarterly holding costs while mining and processing remain suspended.  The Company has retained a core group of employees, most of whom have been assigned to operate the oxide plant, which is leased to a third party and not affected by the shutdown.  The oxide plant began processing material for the third party in mid-December 2015, and the Company expects to receive net cash flow under the lease of approximately $4.5 million in 2016.  The retained employees also include an exploration group and an operations and administrative group to continue to advance the Company’s plans in Mexico, oversee corporate compliance activities, and to maintain and safeguard the longer term value of the Velardeña assets.

 

The Company remains focused on evaluating and searching for mining opportunities in North America (including Mexico) with near term prospects of mining, and particularly for properties within reasonable haulage distances of our Velardeña Properties. The Company is also reviewing strategic opportunities, focusing primarily on development or operating properties in North America, including Mexico. The Company is continuing its exploration efforts on selected properties in its portfolio of approximately 10 exploration properties located primarily in Mexico. It continues to hold its El Quevar advanced exploration property in Argentina on care and maintenance until it can find a partner to further advance the project.

 

The Company is considered an exploration stage company under the criteria set forth by the SEC as the Company has not yet demonstrated the existence of proven or probable mineral reserves, as defined by SEC Industry Guide 7, at the Velardeña Properties, or any of the Company’s other properties.  As a result, and in accordance with GAAP for exploration stage companies, all expenditures for exploration and evaluation of the Company’s properties are expensed as incurred. As such the Company’s financial statements may not be comparable to the financial statements of mining companies that do have proven and probable mineral reserves.  Such companies would typically capitalize certain development costs including infrastructure development and mining activities to access the ore. The capitalized costs would be amortized on a units-of-production basis as reserves are mined. The amortized costs are typically allocated to inventory and eventually to cost of sales as the inventories are sold.  As the Company does not have proven and probable reserves, substantially all expenditures at the Company’s Velardeña Properties for mine construction activity, as well as costs associated with the

7


 

mill facilities, and for items that do not have a readily identifiable market value apart from the mineralized material, have been expensed as incurred. Such costs are charged to cost of metals sold or project expense during the period depending on the nature of the costs. Certain of the costs may be reflected in inventories prior to the sale of the product. The term “mineralized material” as used herein, although permissible under SEC Industry Guide 7, does not indicate “reserves” by SEC standards. The Company cannot be certain that any deposits at the Velardeña Properties or any other exploration property will ever be confirmed or converted into SEC Industry Guide 7 compliant “reserves”.

 

 

2.     Liquidity, Capital Resources and Going Concern

 

At September 30, 2016 the Company’s aggregate cash and cash equivalents totaled $3.4 million, $0.7 million lower than the $4.1 million in similar assets held at December 31, 2015. The reduction is due primarily to $1.6 million in shutdown and care and maintenance costs at the Velardeña Properties, $2.9 million in exploration expenditures, including costs related to drilling at the San Luis del Cordero, Santa Maria, and Rodeo properties, $0.3 million in care and maintenance and property holding costs at the El Quevar project, $3.1 million in general and administrative expenses and, $0.6 million from an increase in working capital primarily related to a decrease in deferred revenue from the lease of the oxide plant, offset in part by $0.9 million of net proceeds from the sale of nonstrategic exploration properties, $3.3 million of net operating margin received pursuant to the oxide plant lease (defined as oxide plant lease revenue less oxide plant lease costs) and $3.6 million of net proceeds received in a registered direct offering of the Company’s common stock as discussed below.

 

On February 11, 2016, The Sentient Group (“Sentient”) converted approximately $3.9 million of principal and $0.1 million of accrued interest (representing the total amount of accrued interest at the conversion date) pursuant to the Sentient Note (defined below) into 23,355,000 shares of the Company’s common stock. See Note 11 for a full discussion of the Sentient Note. On June 10, 2016 Sentient converted the remaining approximately $1.1 million and approximately $34,000 of accrued interest under the Sentient Note into 4,011,740 shares of the Company’s common stock.  At September 30, 2016 the Company had no outstanding debt.

 

On May 6, 2016, the Company issued 8.0 million registered shares of common stock at a purchase price of $0.50 per share in a registered direct offering (the “Offering”) resulting in gross proceeds of $4.0 million. The Company incurred costs and fees of approximately $0.4 million related to the Offering resulting in net proceeds of approximately $3.6 million.  In connection with the Offering, for each share of common stock purchased by an investor, such investor received an unregistered warrant to purchase threequarters of a share of common stock. The warrants have an exercise price of $0.75 per share and are exercisable six months after the date of issuance and will expire five years from the initial exercise date (see Note 15).

 

In addition to its $3.4 million cash balance at September 30, 2016, in the remaining quarter of 2016 the Company expects to receive approximately $1.2 million in net operating margin from the lease of the oxide plant and $0.2 million from the second quarter farm out of a non-strategic exploration property. The Company also expects to receive $0.6 million in February 2017 relating to the final payment for the August 2016 sale of excess mining equipment. The Company currently plans to spend approximately $1.8 million in the remaining quarter of 2016, as detailed below, resulting in a projected cash balance at the end of 2016 of approximately $3.0 million.

 

·

Approximately $0.4 million at the Velardeña Properties for care and maintenance;

 

·

Approximately $0.5 million on exploration activities and property holding costs related to the Company’s portfolio of exploration properties located primarily in Mexico, including project assessment and development costs relating to Santa Maria, Rodeo, and other properties;

 

·

Approximately $0.2 million at the El Quevar project to fund ongoing maintenance activities, property holding costs, and continuing project evaluation costs; and

 

·

Approximately $0.7 million on general and administrative costs.

 

The actual amount that the Company spends during the remainder of 2016 and the projected yearend cash balance may vary significantly from the amounts specified above and will depend on a number of factors, including variations

8


 

from anticipated care and maintenance costs at the Velardeña Properties and costs for continued exploration, project assessment, and development at the Company’s other exploration properties, including Santa Maria and Rodeo.

 

The consolidated financial statements have been prepared on a going concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the normal course of business.  However, the continuing operations of the Company are dependent upon its ability to secure sufficient funding and to generate future profitable operations.  The underlying value and recoverability of the amounts shown as property, plant and equipment in Note 8 are dependent on the ability of the Company to generate positive cash flows from operations and to continue to fund exploration and development activities that would lead to profitable mining activities or to generate proceeds from the disposition of property, plant and equipment.  There can be no assurance that the Company will be successful in generating future profitable operations or securing additional funding in the future on terms acceptable to the Company or at all.

 

 

3.     New Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for share-based payment award transactions including accounting for income taxes and classification of excess tax benefits on the statement of cash flows, forfeitures and minimum statutory tax withholding requirements.  For the Company, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

In March 2016, the FASB issued ASU 2016-08,  “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”), which clarifies principal versus agent when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606, Revenue from Contracts with Customers, requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (i.e., the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (i.e., the entity is an agent). For the Company, ASU 2016-08 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which amended its standards related to the accounting of certain financial instruments. This amendment addresses certain aspects of recognition, measurement, presentation and disclosure and will eliminate the “available for sale” classification of certain financial instruments. The new rules will become effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. The adoption of this update is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

 

On August 27, 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”).  ASU 2014-15 will require management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management will be required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. ASU 2014-15 is effective for annual and interim periods after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this update to have a material impact on its consolidated financial position or results of operations.

 

 

4.     Cash and Cash Equivalents and Short-term Investments

 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Short-term investments include investments with maturities greater than three months, but not exceeding

9


 

12 months, or highly liquid investments with maturities greater than 12 months that the Company intends to liquidate during the next 12 months for working capital needs.

 

The Company determines the appropriate classification of its investments in equity securities at the time of acquisition and re-evaluates those classifications at each balance sheet date.  Available for sale investments are marked to market at each reporting period with changes in fair value recorded as a component of other comprehensive income (loss). If declines in fair value are deemed other than temporary, a charge is made to net income (loss) for the period.

 

The following tables summarize the Company’s short-term investments at September 30, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Estimated

    

Carrying

 

September 30, 2016

 

Cost

 

Fair Value

 

Value

 

 

 

 

(in thousands)

 

Investments:

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

Available for sale common stock

 

$

275

 

$

456

 

$

456

 

Total available for sale

 

 

275

 

 

456

 

 

456

 

Total short term

 

$

275

 

$

456

 

$

456

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

 

 

Short-term:

 

 

 

 

 

 

 

 

 

 

Available for sale common stock

 

$

199

 

$

72

 

$

72

 

Total available for sale

 

 

199

 

 

72

 

 

72

 

Total short term

 

$

199

 

$

72

 

$

72

 

 

The available for sale common stock consists of 7,500,000 common shares, approximately 10% of the outstanding common shares, of Golden Tag Resources, Ltd. (“Golden Tag”) a junior mining company that was a joint venture partner in the Company’s previously owned San Diego exploration property in Mexico.  The Company Acquired (i) 5,000,000 shares during the first quarter 2015 in exchange for extending by two years from March 24, 2015 the period of time in which Golden Tag could earn an additional 10% interest in the property by completing an additional $0.8 million of exploration work, and (ii) 2,500,00 shares in the third quarter 2016, plus approximately $379,000 in cash, in a transaction in which the Company sold its remaining 50% interest in the San Diego property to Golden Tag (see Note 8 for a description of the sales transaction and Note 13 for a discussion on the fair value measurement techniques used by the Company to value the above investments). 

 

 

5.     Prepaid Expenses and Other Assets

 

Prepaid expenses and other current assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Prepaid insurance

 

$

154

 

$

302

 

Recoupable deposits and other

 

 

123

 

 

149

 

 

 

$

277

 

$

451

 

 

 

 

10


 

6.     Inventories

 

Inventories at the Velardeña Properties at September 30, 2016 and December 31, 2015 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

Material and supplies

 

$

264

 

$

330

 

 

 

$

264

 

$

330

 

 

The Company had no metals or in process inventories at September 30, 2016 or December 31, 2015 as the result of the suspension of mining and processing at the Velardeña Properties (see Note 1). The material and supplies inventory at September 30, 2016 and December 31, 2015 is reduced by a $0.2 million and $0.3 million obsolescence charge respectively.

 

 

7.     Value Added Tax Receivable, Net

 

Mexico law allows for certain VAT payments to be recovered through ongoing applications for refunds. The Company expects that the current amounts will be recovered within a one year period.  At September 30, 2016 the Company has also recorded approximately $5,000 of VAT receivable as a reduction to VAT payable in Mexico, which appears in “Accounts payable and other accrued liabilities” on the Condensed Consolidated Balance Sheets.

 

The Company has also paid VAT in Mexico as well as other countries, primarily related to exploration projects, which has been charged to expense as incurred because of the uncertainty of recoverability.

 

8.     Property, Plant and Equipment, Net

 

The components of property, plant and equipment are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

Mineral properties

 

$

9,575

 

$

9,630

 

Exploration properties

 

 

2,518

 

 

2,518

 

Royalty properties

 

 

200

 

 

200

 

Buildings

 

 

4,386

 

 

4,377

 

Mining equipment and machinery

 

 

16,337

 

 

16,998

 

Other furniture and equipment

 

 

952

 

 

841

 

Asset retirement cost

 

 

992

 

 

1,285

 

 

 

 

34,960

 

 

35,849

 

Less: Accumulated depreciation and amortization

 

 

(25,507)

 

 

(24,724)

 

 

 

$

9,453

 

$

11,125

 

 

The asset retirement cost (“ARC”) is all related to the Company’s Velardeña Properties. The decrease in the ARC during the period is related to an adjustment to the asset retirement obligation (“ARO”), as discussed below in Note 10.

 

On August 8, 2016, the Company sold certain mining equipment consisting of two haul trucks, two scoop trams and a compressor to Minera Indé, an indirect subsidiary of Sentient, for $687,000 (see Note 22). The equipment sold was excess equipment held at the Company’s Velardeña Properties that the Company does not expect to use. The equipment had a net book value of $27,000 resulting in a gain of $660,000. The gain is included in “Other operating income, net” in the accompanying Condensed Consolidated Statements of Operations. The Company received $69,000 or 10% of the sales price at the closing of the sale, with the remaining $618,000 plus interest on the unpaid balance at an annual rate of 10% due in February 2017. At September 30, 2016 the Company had recorded a receivable of $627,000 related to the sale, including accrued interest.  The receivable amount is included in “Related party receivable” in the accompanying Condensed Consolidated Balance Sheets.

11


 

 

On August 2, 2016, the Company entered into a definitive agreement to sell its remaining 50% interest in the San Diego exploration property in Mexico to Golden Tag, the company that held the other 50% interest in the property. As a result of the sale, the Company received approximately $379,000 in cash and 2,500,000 common shares of Golden Tag.  Pursuant to the agreement, Golden Tag will be required to pay the Company a 2.0% net smelter return royalty in respect to the San Diego property. The Company had previously written down the value of the San Diego property to approximately zero and accordingly recognized a gain of approximately $0.5 million on the sale. The gain is included in “Other operating income, net” in the accompanying Condensed Consolidated Statements of Operations. Following this transaction the Company now holds 7,500,000 common shares representing approximately 10% of the outstanding common shares of Golden Tag (see Note 4).

 

In the third quarter 2016, the Company, through its wholly owned Mexican subsidiary, entered into an earn-in agreement with a 100% owned Mexican subsidiary of Electrum Global Holdings, L.P., a privately owned company (together “Electrum”), related to the Company’s Celaya exploration property in Mexico. The Company received an upfront payment of $0.2 million and Electrum has agreed to incur exploration expenditures totaling at least $0.5 million in the first year of the agreement, reduced by certain costs Electrum previously incurred on the property since December 2015 in its ongoing surface exploration program. The Company has previously expensed all of its costs associated with the Celaya property and accordingly recognized a gain of $0.2 million from the farm-out of the property in the third quarter 2016. The gain is included in “Other operating income, net” in the accompanying Condensed Consolidated Statements of Operations.

 

On April 28, 2016, the Company entered into an option agreement under which Santa Cruz Silver Mining Ltd. (“Santa Cruz”) may acquire the Company’s interest in certain nonstrategic mineral claims located in the Zacatecas Mining District, Zacatecas, Mexico (the “Zacatecas Properties”) for a series of payments totaling $1.5 million. Santa Cruz paid the Company $0.2 million on signing the agreement. In order to maintain its option and acquire the Zacatecas Properties, Santa Cruz is required to pay an additional $0.2 million in October 2016, six months after signing  plus additional amounts of $0.3 million, $0.3 million and $0.5 million due 12, 18 and 24 months after signing respectively. Santa Cruz has the right to terminate the option agreement at any time, and the agreement will terminate if Santa Cruz fails to make a payment when due. The Company has previously expensed all of its costs associated with the Zacatecas Properties and accordingly recognized a gain of $0.2 million on the first payment received which is  included in “Other operating income, net” in the accompanying Condensed Consolidated Statements of Operations.

 

9.     Accounts Payable and Other Accrued Liabilities

 

The Company’s accounts payable and other accrued liabilities consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in thousands)

 

Accounts payable and accruals

 

$

448

 

$

599

 

Accrued employee compensation and benefits

 

 

958

 

 

545

 

 

 

$

1,406

 

$

1,144

 

 

September 30, 2016

 

Accounts payable and accruals at September 30, 2016 are primarily related to amounts due to contractors and suppliers in the amounts of $0.3 million and $0.2 million related to the Company’s Velardeña Properties and corporate administrative activities, respectively.  In the case of the Velardeña Properties, amounts due also include a net VAT payable of approximately $0.2 million.

 

Accrued employee compensation and benefits at September 30, 2016 consist of $0.2 million of accrued vacation payable and $0.7 million related to withholding taxes and benefits payable, of which $0.3 million is related to activities at the Velardeña Properties.

 

12


 

December 31, 2015

 

Accounts payable and accruals at December 31, 2015 consist primarily of $0.3 million due to contractors and suppliers and $0.3 million related to the Company’s Velardeña Properties and corporate administrative activities, respectively.  In the case of the Velardeña Properties, amounts due also include a VAT payable that is not an offset to the VAT receivable.

 

Accrued employee compensation and benefits at December 31, 2015 consist of $0.1 million of accrued vacation payable and $0.4 million related to withholding taxes and benefits payable, of which $0.2 million is related to activities at the Velardeña Properties.

 

10.     Asset Retirement Obligation and Reclamation Liabilities

 

The Company retained the services of a mining engineering firm to prepare a detailed closure plan for the Velardeña Properties. The plan was completed during the second quarter 2012 and indicated that the Company had an ARO and offsetting ARC of approximately $1.9 million. The estimated $3.5 million ARO and ARC that was recorded at the time of the acquisition of the Velardeña Properties was adjusted accordingly.

 

The Company will continue to accrue additional estimated ARO amounts based on an asset retirement plan as activities requiring future reclamation and remediation occur.  During the first nine months of 2016 the Company recognized approximately $0.1 million of accretion expense and approximately $20,000 of amortization expense related to the ARC.

 

The following table summarizes activity in the Velardeña Properties ARO:

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2016

    

2015

 

 

 

(in thousands)

 

Beginning balance

 

$

2,480

 

$

2,582

 

 

 

 

 

 

 

 

 

Changes in estimates, and other

 

 

(293)

 

 

(300)

 

Accretion expense

 

 

144

 

 

148

 

Ending balance

 

$

2,331

 

$

2,430

 

 

The decreases in the ARO recorded during the 2016 and 2015 periods are the result of changes in assumptions related to inflation factors and the timing of future expenditures used in the determination of future cash flows.

 

The ARO set forth on the accompanying Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 includes a nominal amount and approximately $0.1 million, respectively of reclamation liabilities related to activities at the El Quevar project in Argentina.

 

13


 

11.     Convertible Note Payable – Related Party, Net

 

On October 27, 2015, the Company borrowed $5.0 million from Sentient, pursuant to the terms of a Senior Secured Convertible Note (“the Sentient Note”) and a related loan agreement (the "Sentient Loan"), with principal and accrued interest due on October 27, 2016. To comply with security regulations and stock exchange rules in the United States and Canada, the Company received stockholder approval on January 19, 2016 to allow the Sentient Note principal and accrued interest to be converted, solely at Sentient's option, into shares of the Company's common stock at a price equal to the lowest of: 1) $0.29, 90 percent of the 15-day volume weighted average price ("VWAP") for the period immediately preceding the Loan closing date, 2) 90 percent of the 15-day VWAP for the period immediately preceding the loan conversion date, or 3) an anti-dilution adjusted price based on the lowest price for which the Company has sold its stock following the loan closing date. The loan provided for interest at a rate of 9% per annum, compounded monthly.

 

On February 11, 2016, Sentient converted approximately $3.9 million of principal and $0.1 million of accrued interest (representing the total amount of accrued interest at the conversion date) on the Sentient Note into 23,355,000 shares of the Company's common stock at an exercise price of approximately $0.172 per share, equal to 90% of the 15-day VWAP immediately preceding the conversion date. On June 10, 2016, Sentient converted the remaining approximately $1.1 million of principal and approximately $34,000 of accrued interest (representing the total amount of accrued interest at the conversion date) pursuant to the Sentient Note into 4,011,740 shares of the Company's common stock at an exercise price of approximately $0.289 per share, equal to 90% of the 15day VWAP immediately preceding the loan’s original issue date.

 

The beneficial conversion feature of the Sentient Note represented an embedded derivative as defined by ASC 815 "Derivatives and Hedging" ("ASC 815"). ASC 815 provides that a derivative instrument's fair value must be bifurcated from the note and separately recorded on the Company's Consolidated Balance Sheet. The Company used a third party consultant to value the embedded derivative in the Sentient Note employing a Monte Carlo type probability analysis, which falls within Level 3 of the fair value hierarchy (see Note 13). For purposes of valuing the embedded derivative as of the Sentient Loan closing date, at December 31, 2015, at February 11, 2016 (first partial conversion date), and at June 10, 2016 (the remaining conversion date), the valuation model took into account, among other items: 1) the probability of successfully achieving stockholder approval of the Sentient Note’s conversion feature, 2) future variations in the Company’s stock price, and 3) the probability of entering into an equity transaction prior to the Sentient Loan maturity date that would lower the conversion price. It was determined that the embedded derivative had a fair value of approximately $1.1 million at October 27, 2015, the date the Company entered into the Sentient Loan.  Subsequent mark-to-market changes in the value of the derivative were recorded as income or loss in the Consolidated Statements of Operations and Comprehensive Loss.  The Sentient Note was recorded net of the bifurcated embedded derivative at October 27, 2015 with the $1.1 million difference between the face value and the recorded value of the Note representing a loan discount that was amortized to interest expense over the life of the loan using the interest rate method. 

 

The Company also incurred approximately $0.3 million in legal and other costs associated with the Sentient Loan. Per the guidance of ASU 2015-03 "Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" (“ASU 2015-03”), the loan costs are presented as a reduction to the note payable on the accompanying Consolidated Balance Sheets and were amortized to interest expense over the life of the Sentient Note using the interest rate method.

 

Because the Sentient Loan is recorded net of the bifurcated embedded derivative and loan costs, both of which were amortized to interest expense over the life of the loan, the effective rate of interest on the recorded loan obligation was higher than the stated nominal rate of interest. The effective interest rate on the Sentient Note was approximately 36% per annum, compounded monthly, compared to the stated nominal rate of 9% per annum, compounded monthly.

 

The Company adjusted the recorded value of the Sentient Loan as of the conversion dates to reflect the amortization of the loan discount and loan costs, shown as “Interest expense” in the Consolidated Statements of Operations and Comprehensive Loss. For the nine months ended September 30, 2016, the Company has recorded a total noncash loss on debt extinguishment of $1.7 million reflecting the difference between the value of the shares issued to Sentient as a result of the two separate conversions and the recorded value of the Sentient Loan, including related loan costs, loan discount and embedded derivative eliminated at the conversion dates. The Company marked-to-market the embedded derivative at each of the conversion dates and recorded a total derivative loss of $0.8 million for the nine months ended September 30, 2016 in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

14


 

At September 30, 2016 the Sentient Note had been fully converted and the Company had no outstanding debt.

 

12.     Other Liabilities

 

The Company recorded other current liabilities of approximately nil and $0.6 million at September 30, 2016 and December 31, 2015 respectively.  The December 31, 2015 amount includes a net liability of approximately $0.4 million related to the Argentina tax on equity due for years 2009 through 2012 stemming from a tax audit of those years, including approximately $0.2 million of estimated interest and penalties.

 

During the first four months of 2016 the Company paid the remaining approximately $0.2 million of Argentine tax on equity as of December 31, 2015 leaving approximately $0.2 million of estimated interest and penalties awaiting a final assessment from the tax authorities as of June 30, 2016.  During the third quarter 2016 the Argentine government adopted an amnesty program that the Company effectively used to eliminate the remaining interest and penalties that had been accrued as of June 30, 2016.  The reversal of the June 30, 2016 accrual reduced expenses incurred at the El Quevar project during the third quarter 2016. The December 31, 2015 amount also includes $0.1 million of accrued interest on the Sentient Loan and $0.1 million as a loss contingency on a disputed contract with a third party contractor in Mexico.  The dispute was settled during the first quarter 2016 for the amount previously accrued.

 

13.     Fair Value Measurements

 

Financial assets and liabilities and nonfinancial assets and liabilities are measured at fair value under a framework of a fair value hierarchy which prioritizes the inputs into valuation techniques used to measure fair value into three broad levels.  This hierarchy gives the highest priority to quoted prices (unadjusted) in active markets and the lowest priority to unobservable inputs.  Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy per ASC 820 are as follows:

 

Level 1:  Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

Level 2:  Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.

 

Level 3:  Unobservable inputs due to the fact that there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.

 

15


 

The following table summarizes the Company’s financial assets and liabilities at fair value on a recurring basis at September 30, 2016 and December 31, 2015, by respective level of the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

 

(in thousands)

 

At September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,415

 

$

 —

 

$

 —

 

$

3,415

 

Trade accounts receivable

 

 

506

 

 

 —

 

 

 —

 

 

506

 

Short-term investments

 

 

456

 

 

 —

 

 

 —

 

 

456

 

 

 

$

4,377

 

$

 —

 

$

 —

 

$

4,377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 —

 

$

 —

 

$

3,031

 

$

3,031

 

 

 

$

 —

 

$

 —

 

$

3,031

 

$

3,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,077

 

$

 —

 

$

 —

 

$

4,077

 

Trade accounts receivable

 

 

546

 

 

 —

 

 

 —

 

 

546

 

Short-term investments

 

 

72

 

 

 —

 

 

 —

 

 

72

 

 

 

$

4,695

 

$

 —

 

$

 —

 

$

4,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant liability

 

$

 —

 

$

 —

 

$

210

 

$

210

 

Derivative liability

 

 

 —

 

 

 —

 

 

488

 

 

488

 

 

 

$

 —

 

$

 —

 

$

698

 

$

698

 

 

The Company’s cash equivalents, comprised principally of U.S. treasury securities, are classified within Level 1 of the fair value hierarchy.

 

The Company’s trade accounts receivable is classified within Level 1 of the fair value hierarchy and is related to the sale of metals at our Velardeña Properties and the lease of the oxide plant lease that are valued at published metals prices per the terms of the refining and smelting agreements or lease rates per the plant lease agreement.

 

At September 30, 2016 and December 31, 2015, the Company recorded a liability for warrants to acquire the Company’s stock as a result of anti-dilution clauses in the warrant agreements that could result in a resetting of the warrant exercise price in the event the Company were to issue additional shares of its common stock in a future transaction at a price lower than the current exercise price of the warrants (see Note 15). The Company assesses the fair value of its warrant liability at the end of each reporting period, with changes in the value recorded as “Warrant derivative (loss) gain” on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The valuation policies are approved by the Chief Financial Officer who reviews and approves the inputs used in the fair value calculations and the changes in fair value measurements from period to period for reasonableness. Fair value measurements are discussed with the Company’s Chief Executive Officer, as deemed appropriate. The warrant liability has been recorded at fair value as of September 30, 2016 and December 31, 2015 based primarily on a valuation performed by a third party expert using a Monte Carlo simulation, which falls within Level 3 of the fair value hierarchy.  The valuation model takes into account the probability that the Company could issue additional shares in a future transaction at a lower price than the current exercise price of the warrants.

 

The beneficial conversion feature of the Sentient Note represents an embedded derivative as defined by ASC 815 (see Note 11). ASC 815 provides that a derivative instrument’s fair value must be bifurcated from the host contract and separately recorded on the Company’s Condensed Consolidated Balance Sheets. At December 31, 2015 and at each of the conversion dates (see Note 11), the Company had recorded a derivative liability related to the beneficial conversion feature of the Sentient Note. On June 10, 2016, the remaining Sentient Note and related embedded derivative had been fully retired.  The Company assesses the fair value of the derivative liability at the end of each reporting period, with changes in the value recorded as “Derivative loss” on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Loss. The valuation policies are approved by the Chief Financial Officer who reviews and approves the

16


 

inputs used in the fair value calculations and the changes in fair value measurements from period to period for reasonableness. Fair value measurements are discussed with the Company’s Chief Executive Officer, as deemed appropriate. The derivative liability was recorded at fair value at December 31, 2015 and each of the conversion dates based primarily on a valuation performed by a third party expert using a Monte Carlo simulation, which falls within Level 3 of the fair value hierarchy. The valuation model takes into account, among other items: 1) the probability of successfully achieving stockholder approval of the loan’s conversion feature, 2) future variations in the Company’s stock price, and 3) the probability of entering into an equity transaction prior to the Loan maturity date that would lower the conversion price.

 

In addition to the warrant exercise prices (see Note 15) and Sentient Note conversion price (see Note 11) other significant inputs to the warrant valuation model at September 30, 2016 and December 31, 2015 and derivative valuation model at December 31, 2015 included the following as applicable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

Company's ending stock price

 

$

0.76

 

$

0.20

 

Company's stock volatility

 

 

110%

 

 

85%

 

Applicable risk free interest rate

 

 

0.87%

 

 

1.48%

 

 

An increase or decrease in the Company’s stock price, in isolation, would result in a relatively lower or higher fair value measurement respectively.  A decrease in the probability of the issuance of additional common stock at a lower price than the current warrant exercise price would result in a lower value for the warrants. The table below highlights the change in fair value of the warrant and derivative liabilities.

 

 

 

 

 

 

 

 

 

 

    

    

Fair Value Measurements

 

 

 

Using Significant Unobservable

 

 

 

Inputs (Level 3)

 

 

 

Warrant Liabilities

    

Derivative  Liability

 

 

 

(in thousands)

 

Ending balance at December 31, 2015

 

$

210

 

$

488

 

Conversion of Sentient Loan (see Note 11)

 

 

 —

 

 

(488)

 

Change in estimated fair value

 

 

2,821

 

 

 —

 

Ending balance at September 30, 2016

 

$

3,031

 

$

 —

 

 

Non-recurring Fair Value Measurements

 

There were no non-recurring fair value measurements at September 30, 2016.

 

14.     Income Taxes

 

The Company accounts for income taxes in accordance with the provisions of ASC 740, “Income Taxes” (“ASC 740”), on a tax jurisdictional basis.  For the nine months ended September 30, 2016 the Company recognized an income tax benefit of $26,000 related to the partial removal of a valuation allowance on net operating losses resulting from an unrealized gain on held for sale investments reported in other comprehensive income in the Condensed Consolidated Statements of Operations and Comprehensive Loss and treated as a source of taxable income. The Company operates in jurisdictions that have generated ordinary losses on a year-to-date basis. However, the Company is unable to recognize a benefit for those losses, except as described in this paragraph, thus an estimated effective tax rate has not been used to report the year-to-date results.   

 

In accordance with ASC 740, the Company presents deferred tax assets net of its deferred tax liabilities on a tax jurisdictional basis on its Condensed Consolidated Balance Sheets. As of September 30, 2016 and as of December 31, 2015, the Company had no net deferred tax assets or net deferred tax liabilities reported on its balance sheet.   

 

The Company, a Delaware corporation, and its subsidiaries file tax returns in the United States and in various foreign jurisdictions. The tax rules and regulations in these countries are highly complex and subject to interpretation. The Company’s income tax returns are subject to examination by the relevant taxing authorities and in connection with such examinations, disputes can arise with the taxing authorities over the interpretation or application of certain tax rules within the country involved.  In accordance with ASC 740, the Company identifies and evaluates uncertain tax positions, and

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recognizes the impact of uncertain tax positions for which there is less than a more-likely-than-not probability of the position being upheld upon review by the relevant taxing authority.  Such positions are deemed to be “unrecognized tax benefits” which require additional disclosure and recognition of a liability within the financial statements. The Company had no unrecognized tax benefits at September 30, 2016 or December 31, 2015.

 

15.     Equity

 

Offering and Private Placement

 

On May 6, 2016, the Company issued 8.0 million registered shares of common stock at a purchase price of $0.50 per share in a registered direct offering (the “Offering”) resulting in gross proceeds of $4.0 million. The Company incurred costs and fees of approximately $0.4 million related to the Offering, resulting in net proceeds of approximately $3.6 million.  In connection with the Offering, for each share of common stock purchased by an investor, the investor received in a private placement an unregistered warrant to purchase threequarters of a share of common stock. The 6.0 million warrants have an exercise price of $0.75 per share and are exercisable six months after the date of issuance and will expire five years from the initial exercise date. 

 

The net proceeds of the Offering were recorded in equity and appear as a separate line item in the Condensed Consolidated Statements of Changes in Equity. Using the Black Scholes model, the fair value of the warrants issued was $3.6 million, considering the closing stock price on April 29, 2016 (the first business day preceding May 2, 2016, the date the Company entered into a definitive agreement to issue the shares), the exercise price and exercise period of the warrants, the Company’s volatility rate of 105%, and the applicable risk free rate of 0.74%. 

 

Sentient Note conversion

 

On February 11, 2016, Sentient converted approximately $3.9 million of principal and $0.1 million of accrued interest (representing the total amount of accrued interest at the conversion date) pursuant to the Sentient Note into 23,355,000 shares of the Company's common stock at an exercise price of approximately $0.172 per share, reflecting 90% of the 15-day VWAP immediately preceding the conversion date. On June 10, 2016, Sentient converted the remaining approximately $1.1 million of principal and approximately $34,000 of accrued interest (representing the total amount of accrued interest at the conversion date) pursuant to the Sentient Note into 4,011,740 shares of the Company's common stock at an exercise price of approximately $0.289 per share, equal to 90% of the 15day VWAP immediately preceding the loan’s original issue date (see Note 11).  At September 30, 2016 the Sentient Note had been fully converted and the Company had no further debt outstanding. After conversion, Sentient holds approximately 47% of the Company’s 88.9 million shares of issued and outstanding common stock.

 

Equity Incentive Plans

 

Under the Company’s Amended and Restated 2009 Equity Incentive Plan (the “Equity Plan”) awards of the Company’s common stock may be made to officers, directors, employees, consultants and agents of the Company and its subsidiaries.  The Company recognizes stock-based compensation costs using a graded vesting attribution method whereby costs are recognized over the requisite service period for each separately vesting portion of the award.

 

The following table summarizes the status of the Company’s restricted stock grants issued under the Equity Plan at September 30, 2016 and the changes during the nine months then ended:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted 

 

 

 

 

 

Average Grant 

 

 

 

 

 

 Date Fair 

 

 

 

Number of 

 

 Value Per 

 

Restricted Stock Grants

 

Shares

 

 Share

 

Outstanding at December 31, 2015

 

84,170

 

$

0.46

 

Granted during the period

 

 —

 

 

 —

 

Restrictions lifted during the period

 

(836)

 

 

2.89

 

Forfeited during the period

 

 —

 

 

 —

 

Outstanding at September 30, 2016

 

83,334

 

$

0.44

 

 

18


 

Restrictions were lifted on 836 shares during the nine months ended September 30, 2016 according to the terms of grants made to an employee in prior years. 

 

For the nine months ended September 30, 2016 the Company recognized approximately $4,700 of compensation expense related to the restricted stock grants.  The Company expects to recognize additional compensation expense related to these awards of approximately $1,500 over the next three months.

 

In addition to the restricted stock grants in the table above, on May 19, 2016, the Company granted a consultant 50,000 shares of fully vested stock. The Company recognized stock compensation expense of $21,000 related to the grant.

 

The following table summarizes the status of the Company’s stock option grants issued under the Equity Plan at September 30, 2016 and the changes during the nine months then ended:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Exercise

 

 

 

Number of 

 

Price Per 

 

Equity Plan Options

 

Shares

 

Share

 

Outstanding at December 31, 2015

 

245,810

 

$

3.47

 

Granted during the period

 

 —