Fortitude Gold Corp: Form 10-Q for the period ended Mar 31, 2022

We are a Colorado corporation and our subsidiaries are GRC Nevada Inc. (“GRCN”), Walker Lane Minerals Corp. (“WLMC”), County Line Holdings Inc. (“CLH”), County Line Minerals Corp. (“CLMC”), and Golden Mile Minerals Corp. (“GMMC”). WLMC, CLH, CLMH and GMMC are wholly-owned subsidiaries of GRCN. We are a mining company which pursues gold and silver projects that are expected to have both low operating costs and high returns on capital.

Spin-Off from Gold Resource Corporation

Prior to December 31, 2020, we were a subsidiary of Gold Resource Corporation (“GRC”). On December 31, 2020, GRC completed the spin-off of our shares of common stock, which separated our business, activities, and operations into a separate public company. The spin-off was effected by the distribution of all of our outstanding shares of common stock to GRC’s shareholders. GRC’s shareholders received one share of our common stock for every 3.5 shares of GRC’s common stock held as of December 28, 2020.

In February 2021, we began trading on the OTC Market “pink sheets” operated by the OTC Markets Group under the ticker symbol "FRTT". Subsequently the symbol was changed to “FTCO”. Our common stock was subsequently up listed to the OTCQB on March 5, 2021.

During the second quarter of 2021, and in response to GRC terminating the Management Services Agreement (“MSA”) post spin-off, we completed the staffing of our executive and management team.

The following discussion summarizes our results of operations for the three months ended March 31, 2022 and 2021. It also analyzes our financial condition at March 31, 2022. This discussion should be read in conjunction with the management’s discussion and analysis and the audited consolidated financial statements and footnotes for the year ended December 31, 2021, contained in our annual report on Form 10-K for the year ended December 31, 2021.

The discussion also presents certain financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles (“Non-GAAP”) but which are important to management in its evaluation of our operating results and are used by management to compare our performance with what we perceive to be peer group mining companies and are relied on as part of management’s decision-making process. Management believes these measures may also be important to investors in evaluating our performance. For a detailed description of each of the non-GAAP financial measures, please see the discussion below under Non-GAAP Measures.

See Forward-Looking Statements at the end of this Item 2 for important information regarding statements contained herein.

First Quarter 2022 Financial Results and Highlights

• $15.4 million net sales
• $2.6 million net income or $0.11 per share
• $36.3 million cash balance on March 31, 2022
• 9,875 gold ounces produced
• 2.16 grams per tonne average gold grade mined
• $75.7 million working capital at March 31, 2022
• $6.8 million mine gross profit
• $708 total cash cost after by-product credits per gold ounce sold
• $848 per ounce total all-in sustaining cost

Operating Data: The following tables summarize certain information about our operations at our Isabella Pearl Mine for the periods indicated:

(1) The difference between what we report as “metal production” and “metal sold” is attributable to the difference between the quantities of metals contained in the doré we produce versus the portion of those metals actually paid for according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades and recoveries which impact the amounts of metals contained in doré produced and sold.

(1) Average metal prices realized vary from the market metal prices due to final settlement adjustments from our provisional invoices when they are settled. Our average metal prices realized will therefore differ from the market average metal prices in most cases.

Consolidated Results of Operations – Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Sales, net. For the three months ended March 31, 2022, consolidated sales, net were $15.4 as compared to $20.7 million for the same period in 2021. The decrease is attributable to lower sales volumes. First quarter 2022 gold sales volumes decreased 28% from the same period in 2021 as a result of lower production due to lower-grade ore processed. Mine operations in the first quarter focused primarily on waste removal of the phase one open-pit layback. With phase-one now complete, the Company is now focused on phase-two mining with access to the mine’s high-grade Pearl zone.

Mine gross profit. For the three months ended March 31, 2022, we recorded $6.8 million mine gross profit compared to $10.9 million mine gross profit for the same period in 2021. The change is attributable to lower sales, as mentioned above.

General and administrative. For the three months ended March 31, 2022, general and administrative expenses totaled $1.2 million as compared to $6.2 million for the same period in 2021. The decrease in 2022 was primarily the result of costs incurred in 2021 to fully staff the Company post spin-off as a standalone entity.

Exploration expenses. For the three months ended March 31, 2022, property exploration expenses totaled $2.5 million as compared to $1.3 million for the same period of 2021. The increased exploration expense was the result of drilling at the Golden Mile property to further define the resource and move toward a development decision.

Other expense, net. For the three months ended March 31, 2022, other expense, net did not materially change from the same period in 2021.

Income and mining tax expense. For the three months ended March 31, 2022, income and mining tax expense was $0.4 million as compared to $1.0 million for the same period in 2021. The decrease is the result of our decreased income before income and mining taxes and decreased Nevada net proceeds of minerals tax as a result of decreased metal sales. See Note 5 to the Condensed Consolidated Financial Statements.

Net income. For the three months ended March 31, 2022 we recorded net income of $2.6 million as compared to $2.4 million in the corresponding period for 2021. The increase is due to the changes in our consolidated results of operations as discussed above.

COVID-19 Update

In March 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure. In response to the pandemic, many jurisdictions, including the United States, instituted restrictions on travel, public gatherings, and certain business operations.

During 2022 and 2021, and as of the date of this report, the mining industry is listed as an essential business in the state of Nevada. Accordingly, we continue to operate the Isabella Pearl Mine while utilizing safety measures and protocols. In an effort to mitigate the spread of COVID-19 and protect the health and safety of our employees, contractors, and communities, we have taken precautionary measures including specialized training, social distancing, screening workers before they enter facilities, a work from home mandate where possible, and close monitoring of national and regional COVID-19 impacts and governmental guidelines. As our non-mining workforce is able to work remotely using various technology tools, we have been able to maintain our operations and internal controls over financial reporting and disclosures.

The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including widely available and utilized vaccines, the duration and severity of the pandemic and related restrictions, all of which are uncertain and cannot be predicted.

Non-GAAP Measures

Throughout this report, we have provided information prepared or calculated according to U.S. GAAP and have referenced some non-GAAP performance measures which we believe will assist with understanding the performance of our business. These measures are based on precious metal gold equivalent ounces sold and include cash cost before by-product credits per ounce, total cash cost after by-product credits per ounce, and total all-in sustaining cost per ounce (“AISC”). Because the non-GAAP performance measures do not have any standardized meaning prescribed by U.S. GAAP, they may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation, or as a substitute for measures of performance prepared in accordance with U.S. GAAP. These non-GAAP measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.

Revenue generated from the sale of silver is considered a by-product of our gold production for the purpose of our total cash cost after by-product credits for our Isabella Pearl Mine. We periodically review our revenues to ensure that our reporting of primary products and by-products is appropriate. Because we consider silver to be a by-product of our gold production, the value of silver continues to be applied as a reduction to total cash costs in our calculation of total cash cost after by-product credits per precious metal gold equivalent ounce sold. Likewise, we believe the identification of silver as by-product credits is appropriate because of its lower individual economic value compared to gold and since gold is the primary product we produce.

Total cash cost, after by-product credits, is a measure developed by the Gold Institute to provide a uniform standard for comparison purposes. AISC is calculated based on the current guidance from the World Gold Council.

Total cash cost before by-product credits includes all direct and indirect production costs related to our production of metals (including mining, crushing and conveying and other plant facility costs, royalties, and site general and administrative costs) plus treatment and refining costs.

Total cash cost after by-product credits includes total cash cost before by-product credits less by-product credits, or revenues earned from silver.

AISC includes total cash cost after by-product credits plus other costs related to sustaining production, including sustaining allocated general and administrative expenses and sustaining capital expenditures. We determined sustaining capital expenditures as those capital expenditures that are necessary to maintain current production and execute the current mine plan.

Cash cost before by-product credits per ounce, total cash cost after by-product credits per ounce and AISC are calculated by dividing the relevant costs, as determined using the cost elements noted above, by precious metal gold equivalent ounces sold for the periods presented.

Reconciliations to U.S. GAAP

The following table provides a reconciliation of total cash cost after by-product credits to total mine cost of sales (a U.S. GAAP measure) as presented in the Consolidated Statements of Operations (in thousands):

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The following table presents the non-GAAP measures of total cash cost and AISC (in thousands, except ounces sold and cost per precious metal gold equivalent ounce sold):

(1) Production cost plus treatment and refining charges.

(2) Please see the tables below for a summary of our by-product revenue and by-product credit per precious metal equivalent ounces sold.

(3) Sustaining capital expenditures and sustaining exploration expenses divided by gold ounces sold.

The following tables summarize our by-product revenue and by-product credit per precious metal gold ounce sold (in thousands):

Liquidity and Capital Resources

As of March 31, 2022, we had a cash position of $36.3 million compared to $40.0 million at December 31, 2021. The decrease is primarily due to increased capital expenditures for the Golden Mile property.

As of March 31, 2022, we had positive working capital of $75.7 million compared to $76.0 million at December 31, 2021. Our working capital balance fluctuates as we use cash to fund our operations, financing and investing activities, including exploration, mine development and income taxes. With our working capital balance as of March 31, 2022, we believe that our liquidity and capital resources are adequate to fund our operations, exploration, capital, and corporate activities for the next twelve months.

Net cash provided by operating activities for the three months ended March 31, 2022 was $4.1 million, compared to $7.3 million for three months ended March 31, 2021. The decrease is primarily due to changes in non-cash adjustments for stock-based compensation and depreciation as well as changes operating assets and liabilities, primarily inventories.

Net cash used in investing activities for the three months ended March 31, 2022 was $4.9 million compared to $0.1 million during the same period in 2021. The increase is primarily due to capital expenditures related to Golden Mile.

Net cash used in financing activities was $2.8 million for three months ended March 31, 2022 compared to $0.2 million net cash provided by financing activities for three months ended March 31, 2021. The net change is due to dividend payments in 2022, whereas in 2021, financing activities were substantially comprised of cash received from the private placement.

Development and Exploration Activities

Isabella Pearl Mine: During the first quarter of 2022, our open pit, heap leach operations at the Isabella Pearl Mine continued and we completed construction of the heap leach pad expansion project. Exploration activities during the quarter targeted expansion along the Isabella Pearl trend, including 7 in-fill and step-out reverse circulation (“RC”) drill holes totaling 713 meters. This drilling was mainly conducted outside the current permitted mine plan. Review of all exploration results also continued for future investigation and possible drill targeting along the Isabella Pearl mine mineralized trend.

Golden Mile property: During the first quarter, we completed condemnation RC drilling to confirm locations for heap leach pad, process facilities and waste storage facilities. During the quarter, we also commenced a Phase 2 RC drill campaign for primarily infill, step-down as well as step-out drill holes to test the depth and strike extent of the mineralization. During the quarter, we completed 47 RC holes totaling 6,693 meters. The results from this drilling will be incorporated into our geological model. We are targeting to update our resource estimate and potentially convert mineral resources to mineral reserves in 2022. Engineering, base line and background studies are also on-going for our process facility layout, open-pit design, and infrastructure evaluations at Golden Mile. We have also advanced our hydrogeological understanding of the property to help delineate a potential production water resource at Golden Mile. During 2022, we will continue to evaluate the known mineralized zones among a much larger conceptual project plan of multiple open pits along a trend at Golden Mile to the northwest and onto the Mina Gold property. We are evaluating the potential of at least three pits feeding ore to a strategically located heap leach and process facility. The project’s process plant is being designed and engineered to take the gold to carbon stage and then haul the carbon for processing at our ADR facility at Isabella Pearl for final doré production.

County Line property: During the first quarter, we advanced our 3D geological modeling of the County Line mineralization and commenced site investigations to aid in planning our initial RC drilling program at County Line this year. This program is designed to evaluate the resource potential of the gold-bearing volcanic rocks remaining in the vicinity of the historic County Line open-pit. Fieldwork during the quarter included drone flights and ground surveys along with installation of a chain link fence for security purposes.

East Camp Douglas property: During the first quarter, we continued to review our data in preparation of a follow-up drill program targeted for this year. The objective of this program is to continue to evaluate the resource potential of the gold-bearing silicified volcanic rocks of the lithocap target area.

Accounting Developments

Recently issued accounting pronouncements have been evaluated and do not presently impact our financial statements and supplemental data.

Forward-Looking Statements

This report contains or incorporates by reference “forward-looking statements,” as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others:

• The extent of the impact of the COVID-19 pandemic, including the duration, spread, severity, and any repeated resurgence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions,
• statements about our future exploration, permitting, production, development, and plans for development of our properties
• statements concerning the benefits that we expect will result from our business activities and certain transactions that we contemplate or have completed, such as receipt of proceeds, decreased expenses and avoided expenses and expenditures
• statements of our expectations, beliefs, future plans and strategies, our targets, exploration activities, anticipated developments and other matters that are not historical facts

These statements may be made expressly in this document or may be incorporated by reference from other documents that we will file with the SEC. You can find many of these statements by looking for words such as “believes,” “expects,” “targets,” “anticipates,” “estimates,” or similar expressions used in this report or incorporated by reference in this report.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied in those statements. Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied. We caution you not to put undue reliance on these statements, which speak only as of the date of this report. Further, the information contained in this document or incorporated herein by reference is a statement of our present intention and is based on present facts and assumptions, which may change at any time and without notice, based on changes in such facts or assumptions.

Risk Factors Impacting Forward-Looking Statements

The important factors that could prevent us from achieving our stated goals and objectives include, but are not limited to, those set forth in other reports we have filed with the SEC, including our Form 10-K for the year ended December 31, 2021, and the following:

• Global pandemics such as COVID-19 and governmental responses designed to control the pandemic
• The Biden administration’s current and future stance on resource permitting and development
• Changes in the worldwide price for gold and/or silver
• Volatility in the equities markets
• Adverse results from our exploration or production efforts
• Producing at rates lower than those targeted
• Political and regulatory risks
• Weather conditions, including unusually heavy rains
• Earthquakes or other unforeseen ground movements impacting mining or processing
• Failure to meet our revenue or profit goals or operating budget
• Decline in demand for our common stock
• Downward revisions in securities analysts’ estimates or changes in general market conditions
• Technological innovations by competitors or in competing technologies
• Cybersecurity threats
• Investor perception of our industry or our prospects
• Lawsuits
• General economic trends

Disclosure Controls and Procedures

As required by Rule 13a-15 under the 1934 Act, as of March 31, 2022, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer). Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the 1934 Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the 1934 Act) during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.