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: 001-33190

MCEWEN MINING INC.

(Exact name of registrant as specified in its charter)

150 King Street West, Suite 2800, Toronto, Ontario Canada M5H 1J9

(Address of principal executive offices)  (Zip code)

(866) 441-0690

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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, smaller reporting company, or an emerging growth company.  See the definitions 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 the 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: 337,086,060 shares outstanding as of April 30, 2018.

MCEWEN MINING INC.

FORM 10-Q

Index

PART I

Item 1.  FINANCIAL STATEMENTS

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)

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

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

MCEWEN MINING INC.

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

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

Commitments and contingencies, note 14.

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands of U.S. dollars and shares)

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

MCEWEN MINING INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands of U.S. dollars)

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

NOTE 1  NATURE OF OPERATIONS AND RECENT ACCOUNTING PRONOUNCEMENTS

Nature of Operations and Basis of Presentation

McEwen Mining Inc. (the “Company”) was organized under the laws of the State of Colorado on July 24, 1979. The Company is engaged in the exploration for, development of, production and sale of gold, silver, and copper.

The Company operates in Argentina, Mexico, Canada and the United States. It owns a 49% interest in Minera Santa Cruz S.A. (“MSC”), owner of the producing San José silver-gold mine in Santa Cruz, Argentina, which is operated by the joint venture majority owner, Hochschild Mining plc. It also owns and operates the El Gallo 1 mine in Sinaloa, Mexico and the Black Fox Complex in Timmins, Ontario, Canada. Finally, the Company owns the Los Azules copper deposit in San Juan, Argentina, the El Gallo 2 project in Sinaloa, Mexico, the Gold Bar project in Nevada in the United States, and a portfolio of exploration properties in Argentina, Mexico, Nevada, and Timmins, Ontario in Canada.

The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.

In management’s opinion, the unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income (“Statement of Operations”) for the three months ended March 31, 2018 and 2017, the unaudited Consolidated Balance Sheets as at March 31, 2018  and December 31, 2017, the unaudited Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2018 and 2017, and the unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017, contained herein, reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results of operations and cash flows on a basis consistent with that of the Company’s prior audited consolidated financial statements. However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year. Therefore, these financial statements should be read in conjunction with the audited financial statements and notes thereto and summary of significant accounting policies included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. Except as noted below, there have been no material changes in the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2017. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Inter-company accounts and transactions have been eliminated.

Recently Adopted Accounting Pronouncements

Statement of Cash Flows – Restricted Cash: In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flow - Restricted Cash (ASU 2016-18). ASU 2016-18 requires that an entity's statement of cash flows explain the change during the period in that entity's total cash and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, changes in restricted cash and restricted cash equivalents will no longer be shown as specific line items within the statement of cash flows. Additionally, an entity is required to reconcile the cash and cash equivalents on its balance sheet to the cash and cash equivalent balances presented in its statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 with early adoption permitted. The Company early adopted the guidance within ASU 2016-18 as of December 31, 2017. The impact of ASU 2016-18 on its financial statements was as follows: (1) changes in restricted cash balances are no longer shown in the statements of cash flows, as these balances are included in the beginning and ending cash balances in the statements of cash flows; and (2) included within Note 16 is a reconciliation between cash balances presented on the balance sheets with the amounts presented in the statements of cash flows. The Company continued to hold material restricted cash during the three months ended March 31, 2018.

Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments: In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies how entities should classify certain cash receipts and cash payments in the statement of cash flows and amends certain disclosure requirements of ASC 230. The guidance will generally be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those years. The Company has elected to utilize the Cumulative Earnings Approach to classify distributions from equity method investees, this approach is defined in ASU 2016-15 as an acceptable approach. Based on the Cumulative Earnings Approach, if the inception-to-date distributions are greater than the inception to date earnings then, the cash flows from the equity method investee would be recognized as a return of investment within cash inflows from investing activities. Based on the Company’s analysis the inception-to-date distributions are not greater than the inception-to-date earnings for any of the prior year periods nor the three months ended March 31, 2018. Therefore, the adoption of ASU 2016-15 did not result in any change to the classification or presentation of the distributions received from equity method investees in any current or prior period.

Revenue from Contracts with Customers: In 2016, the FASB issued four separate accounting standard updates regarding Topic 606: ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2017-13. These ASUs outline amendments to Topic 606, including reporting revenue gross versus net, identifying performance obligations and licensing and narrow-scope improvements and practical expedients. Adoption of this update by the Company, effective January 1, 2018 was completed using the modified retrospective approach. The modified retrospective method contemplates that comparative periods should not be restated and the cumulative impact of applying the standard should be recognized at the date of initial adoption, January 1, 2018. The Company has elected to apply the method only to new contracts and contracts that were not completed as of January 1, 2018. As expected, the Company did not have any cumulative effect of initially applying the standard for contracts not complete as of January 1, 2018. As a result, the Company has presented comparative periods under legacy GAAP and there has been no change to any line item as a result of adoption of the new standard. There was no material impact to revenue recognition.

Revenue Recognition Accounting Policy: Revenue consists of sales value received for the Company’s principal products, gold and silver. Revenue is recognized when title to gold and silver passes to the buyer and when collectability is reasonably assured. Title passes to the buyer based on terms of the sales contract, usually upon delivery of the product. Product pricing is determined under the sales agreements which are referenced against active and freely traded commodity markets, for example, the London Bullion Market for both gold and silver, in an identical form to the product sold. Gold and silver doré produced from the San José mine is sold at the prevailing spot market price based on the London A.M. fix, while concentrates are sold at the prevailing spot market price based on either the London P.M. fix or average of the London A.M. and London P.M. fix depending on the sales contract. Concentrates are provisionally priced, whereby the selling price is subject to final adjustments at the end of a period ranging from 30 to 90 days after delivery to the customer. The final price is based on the market price of the precious metal content at the relevant quotation point stipulated in the contract. Due to the time elapsed between shipment and the final settlement with the buyer, MSC must estimate the prices at which sales of metals will be settled. At the end of each financial reporting period, previously recorded provisional sales are adjusted to estimated settlement metals prices based on relevant forward market prices until final settlement with the buyer. Any material differences to these differences will be separately disclosed.

The Company entered into a doré sales agreement with a Canadian financial institution in July 2012. Under that agreement, the Company has the option to sell to the institution approximately 90% of the gold and silver contained in doré bars prior to the completion of refining by the third party refiner, which normally takes approximately 10 business days. Revenue is recognized when the Company has provided irrevocable instructions to the refiner to transfer to the purchaser the refined ounces sold upon final processing outturn, and when payment of the purchase price for the purchased doré or bullion has been made in full by the purchaser. There is no judgement involved in revenue recognition as revenue is recognized when payment has been made by the purchaser and the product has been delivered.

The Company also has a contract under which revenue is earned from a toll milling arrangement at the Black Fox Complex. Revenue is recognized when title to the product passes to the customer. This revenue is separately disclosed as Other revenue in the financial statements. There is no judgement involved in revenue recognition from the toll milling agreement as revenue is recognized when the customer takes delivery of the product.

Revenue by operating segments is separately disclosed within Note 12 to the financial statements.

Compensation – Stock Compensation – Scope of Modification Accounting: In May 2017, the FASB issued ASU No. 2017-09 which provides clarity and reduces diversity in practice with respect to the modification of terms or conditions of a share-based payment award. The update to the standard is effective for the Company for fiscal years beginning after December 15, 2017, with early application permitted. The Company has adopted the update as of January 1, 2018 and adoption did not have any impact on the consolidated financial statements or disclosures.

Business Combinations:  Definition of a business: In January 2017, the FASB issued ASU No. 2017-01 which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The update to the standard is effective for the Company beginning after December 15, 2017, with early application permitted. The Company has adopted the update as of January 1, 2018 and the adoption did not have any impact on the consolidated financial statements or disclosures.

Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory: In October 2016, the FASB issued ASU No. 2016-16 to modify the current exception to income tax accounting that required companies to defer the income tax effect of certain intercompany transactions. ASU No. 2016-16 only allows companies to defer the income tax effect of intercompany inventory transactions under an exception to the guidance on income taxes that currently applies to intercompany sales and transfers of all assets. The update to the standard was adopted by the Company beginning January 1, 2018 and adoption of the update did not have any impact on the consolidated financial statements or disclosures.

Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities: In January 2016, the FASB issued ASU No. 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The update to the standard was adopted by the Company beginning January 1, 2018. The new guidance requires entities to measure equity investments (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income. Transitional guidance provided that entities with unrealized gains or losses on available for sale (“AFS”) equity  securities were required to reclassify those amounts to beginning retained earnings in the year  of adoption. As a result, the Company has reclassified the beginning amount of accumulated other comprehensive income related to AFS securities to accumulated deficit and all changes in fair-values of these securities is now reflected in the Statement of Operations in the Company’s net loss for the period.

Recently Issued Accounting Pronouncements

Leases – Amendments: In February 2016, the FASB issued ASU 2016-02 “leases (ASC 842)” which provides that a lessee should recognize the assets and the liabilities that arise from leases, including operating leases. Under the new requirements, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and the right-of-use asset representing the right to the underlying asset for the lease term. For leases with a term of twelve months or less, the lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from the previous GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within such fiscal year, with early adoption permitted. The ASU requires a modified retrospective transition method with the option to elect a package of practical

expedients. There are three practical expedients for which an election must be made to apply and the election must be applied to all leases, as follows:

The Company expects to elect to apply all of the practical expedients available. During the first quarter the Company has begun preliminary analysis of the effect of the standard on its financial statements as well as review of major contracts. Based on the Company’s preliminary analysis, it is not expected that the adoption of ASC 842 will result in significant changes to the financial statements. However, the analysis remains ongoing. A quantitative estimate of the effect is not reasonably estimable as of the date of this report.

NOTE 2   INVESTMENTS

The Company’s investment portfolio consists of marketable equity securities and warrants of certain publicly-traded companies. As at December 31, 2017, the Company classified the marketable equity securities as available-for-sale securities, which are recorded at fair value based upon quoted market prices with changes in fair value recorded in Other Comprehensive Income (“OCI”). The gains and losses for available-for-sale securities are not reported in Net (Loss) in the Statement of Operations until the securities are sold or if there is an other-than-temporary decline in fair value below cost. In the comparable period ending March 31, 2017, the Company recorded a gain, net of tax, in other comprehensive income, of $3.9 million.

The Company adopted ASU 2016-01 as of January 1, 2018 and as a result has reclassified the accumulated OCI balance of $3.0 million related to marketable equity securities to beginning Accumulated Deficit (see Statement of Changes in Shareholders Equity). As a result of adoption of this guidance, the Company now recognizes changes in fair value of these securities in the Statement of Operations. During the three months ended March 31, 2018, the Company sold marketable equity securities for proceeds of $2.7 million. The Company realized a loss of $0.8 million on the sale, which is included in the Statement of Operations. During the comparable period ended March 31, 2017, the Company did not sell any marketable equity securities. During the three months ended, March 31, 2018, the Company had an unrealized loss on equity securities in the amount of $1.1 million, which is included in the Statement of Operations

The Company maintains a portfolio of warrants on equity interests in publicly-traded securities for investment purposes which are not used in any hedging activities. The warrants are recorded at fair value using the Black-Scholes option pricing model. As the warrants meet the definition of derivative instruments, unrealized gains or losses arising from their revaluation are recorded in the Statement of Operations. During the three months ended March 31, 2018, the Company recorded an unrealized loss of $0.9 million (March 31, 2017 – $1.8 million gain).

The following is a summary of the balances as of March 31, 2018 and December 31, 2017:

As of March 31, 2018, the cost of the marketable equity securities and warrants was approximately $1.4 million (December 31, 2017 - $3.3 million).

NOTE 3   INVENTORIES

Inventories at March 31, 2018 and December 31, 2017 consist of the following:

A portion of leach pad inventories at March 31, 2018 in the amount of $9.3 million (December 31, 2017 - $10.4) is expected to be recovered beyond twelve months, and has been included in other assets.

NOTE 4 MINERAL PROPERTY INTERESTS

The Company’s Mineral Property Interests include the El Gallo 1 mine in Mexico, the Gold Bar project in Nevada, the Los Azules project in Argentina, the Black Fox mine and other properties in Timmins, Canada, and other properties located in Mexico and Nevada.

The Company conducts a review of potential triggering events for impairment on all its mineral projects on a quarterly basis. When events or changes in circumstances indicate that the related carrying amounts may not be recoverable, the Company carries out a review and evaluation of these assets for impairment, in accordance with its accounting policy. During the three months ended March 31, 2018, no such triggering events were identified with respect to the carrying values of the Company’s Nevada, Argentina, Mexico, or Timmins properties.

The definition of proven and probable reserves is set forth in the SEC Industry Guide 7. If proven and probable reserves exist at the Company’s properties, the relevant capitalized mineral property interests and asset retirement costs are charged to expense based on the units of production method upon commencement of production. The Company’s Black Fox and Gold Bar properties have proven and probable reserves compliant with SEC Industry Guide 7.

While El Gallo 1 does not have proven and probable reserves compliant with SEC Industry Guide 7, the Company capitalized costs associated with the acquisition of the mineral property interests. These costs are being amortized using either the straight line or units-of-production methods over the stated mine life. For the three months ended March 31, 2018, the Company recorded $0.8 million (March 31, 2017 - $0.5 million) of amortization expense related to the El Gallo 1 Mine, which is included in Production Costs Applicable to Sales in the Statement of Operations.

For the three months ended March 31, 2018, the Company recorded $2.7 million (March 31, 2017 – $nil) of amortization expenses related to the Black Fox mine, which is included in Production Costs Applicable to Sales in the Statement of Operations.

NOTE 5   INVESTMENT IN MINERA SANTA CRUZ S.A. (“MSC”) – SAN JOSÉ MINE

The Company accounts for investments over which it exerts significant influence but does not control through majority ownership using the equity method of accounting. In applying the equity method of accounting to the Company’s investment in MSC, MSC’s financial statements, which are originally prepared by MSC in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, are translated into U.S. GAAP by MSC’s management. As such, the summarized financial data under this heading is presented in accordance with U.S. GAAP.

The Company’s 49% attributable share of results of operations from its investment in MSC was a loss of $0.2 million for the three months ended March 31, 2018 (March 31, 2017 – income of $0.2 million). These amounts include the amortization of the fair value increments arising from the purchase price allocation and related income tax recovery. Included in the income tax recovery is the impact of fluctuations in the exchange rate between the Argentina peso and the U.S. dollar on the peso-denominated mineral property interest fair value increment and deferred tax liability associated with the investment in MSC recorded as part of the acquisition of Minera Andes.     

During the period ended March 31, 2018, the Company did not identify any potential triggering events for impairment in relation to its investment in MSC, and consequently the Company did not record any impairment during the period.

During the three months ended March 31, 2018, the Company received $4.9 million in dividends from MSC, compared to $2.5 million during the same period in 2017.

Changes in the Company’s investment in MSC for the three months ended March 31, 2018 and year ended December 31, 2017 are as follows:

A summary of the operating results from MSC for the three months ended March 31, 2018 and 2017 is as follows:

As of March 31, 2018, MSC had current assets of $89.7 million, total assets of $387.6 million, current liabilities of $38.4 million and total liabilities of $91.7 million on an unaudited basis. These balances include the adjustments to fair value

and amortization of the fair value increments arising from the purchase price allocation, net of impairment charges. Excluding the fair value increments from the purchase price allocation, net of impairment charges, MSC had current assets of $89.1 million, total assets of $233.6 million, current liabilities of $38.4 million, and total liabilities of $66.6 million as at March 31, 2018.

NOTE 6 RECLAMATION OBLIGATIONS

The Company is responsible for reclamation of certain past and future disturbances at its properties. The most significant properties subject to these obligations are the Tonkin property in Nevada, the El Gallo 1 mine in Mexico, and the Timmins properties in Canada.

A reconciliation of the Company’s asset retirement obligations for the three months ended March 31, 2018 and for the year ended December 31, 2017 are as follows:

The Company adjusted its estimated liability in relation to the Gold Bar project for disturbance caused up to March 31, 2018.

NOTE 7   INCOME AND MINING TAXES

The Company’s income tax expense differs from the amount computed by applying the U.S. federal and state statutory corporate income tax rate of 21% and 35%, for the three months ended March 31, 2018 and 2017, respectively, to income before taxes primarily as a result of valuation allowances being applied to losses, changes in the deferred taxes associated with marketable securities and changes in deferred tax liabilities associated with mineral property interests. The deferred tax liability is impacted by fluctuations in the foreign exchange rate between the Argentina peso and U.S. dollar.

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. We are applying the guidance in SAB 118 when accounting for the enactment date effects of the Act. At March 31, 2018, the Company has not completed the accounting for the tax effects of enactment of the Act; however, in certain cases, the Company has made a reasonable estimate of the effects on the existing deferred tax balances and the one-time transition tax.

During the three months ended March 31, 2018, the Company has not made any adjustments to the provisional amounts recorded as of December 31, 2017. The Company will continue to refine its calculations as additional analysis is completed. Estimates may also be affected as a more thorough understanding of the tax law is developed. These changes could be material to income tax expense.

The Act subjects a US shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected

to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, the Company is still evaluating the effects of the GILTI provisions and have not yet determined which accounting policy will be adopted. At March 31, 2018, because the Company is still evaluating the GILTI provisions and analysis of future taxable income subject to GILTI, the Company has performed the GILTI calculation for the current year only, and has not provided additional GILTI on deferred items.

For the three months ended March 31, 2018, the Company reduced the deferred income tax liability by $1.2 million (March 31, 2017 - $1.6 million) as a result of the increased exploration spending in Los Azules, giving rise to a deferred tax benefit partially offset by the appreciation of the Argentina Peso.  This reduction was partially offset by the recognition of a deferred mining tax liability in relation to the Black Fox mine.

NOTE 8   SHAREHOLDERS’ EQUITY

Stock options

During the three months ended March 31, 2018, 35,199 shares of common stock were issued upon exercise of stock options under the Equity Incentive Plan, at the weighted average exercise price of $1.15 per share for proceeds of $0.1 million.  This compares to 20,000 shares of common stock issued upon exercise of stock options (at the weighted average exercise price of $2.34 per share for proceeds of $0.1 million) during the same period of 2017 under the Equity Incentive Plan.

Shareholders’ distributions

During the three months ended March 31, 2018, the Company paid a semi-annual shareholders’ distribution of $0.005 (March 31, 2017 - $0.005) per share of common stock, for a total of $1.7 million (March 31, 2017 - $1.5 million).

Equity Issuances

On April 26, 2017, the Company issued 12,687,035 shares of common stock in consideration for the acquisition of 100% of the issued and outstanding common shares of Lexam VG Gold (“Lexam”) by way of an Arrangement Agreement dated February 13, 2017 and related Plan of Arrangement (the “Arrangement”). Pursuant to the Arrangement, each common share of Lexam was exchanged for 0.056 of a common share of the Company and each option to purchase a common share of Lexam was exchanged for a replacement option entitling the holder to acquire 0.056 share of the Company’s common stock.

Separately, on September 22, 2017, the Company issued 20,700,000 shares of common stock and 10,350,000 warrants in a public offering for net proceeds of $43.2 million, after deducting issuance costs of $3.4 million. Each share of common stock sold entitled the holder to receive one-half of a warrant, and each whole warrant entitles the holder to purchase one share of common stock at a price of $2.70. Warrants are exercisable at any time prior to September 28, 2018, after which the warrants will expire and be of no value.

The Company concluded that both common stock and warrants are equity-linked financial instruments and should be accounted for permanently in the Shareholder’s Equity section in the Consolidated Balance Sheet, with no requirement to subsequently revalue any of the instruments. Based on the relative fair values, the Company allocated $39.4 million to common stock and $3.8 million to warrants, net of issuance costs. The Company used the Black-Scholes pricing model to determine the fair value of warrants using the following assumptions:

All 10,350,000 warrants remain outstanding and unexercised as of March 31, 2018.

Flow-through shares

On December 19, 2017, the Company issued 4,000,000 flow-through common shares (within the meaning of subsection 66(15) of the Income Tax Act (Canada)) priced at $2.50 per share for total proceeds of $10 million. The purpose of the offering was to fund exploration activities on the Company’s properties in the Timmins region of Canada. The total proceeds were allocated between the sale of tax benefits and the sale of common shares. Upon issuance, the Company recorded a liability for the flow-through premium received in the amount of $1.6 million, which was accounted for as a reduction to the proceeds of sale. The obligation is fulfilled when eligible expenditures are incurred. As at March 31, 2018, the Company reduced the flow-through premium by $0.6 million to $1 million to reflect the effect of the cost incurred to date. The reduction of the flow-through premium was recognized in income and mining tax recovery on the statement of operations.

The proceeds of the flow-through shares offering are shown as Restricted cash on the Consolidated Balance Sheet. During the three months ended March 31, 2018, $1.2 million of the restricted cash was spent for Timmins exploration activities as intended, reducing the restricted cash to $8.8 million.

NOTE 9   STOCK-BASED COMPENSATION

During the three months ended March 31, 2018, the Company recorded stock option expense of $0.2 million. This compares to $0.3 million for the three months ended March 31, 2017.

NOTE 10   NET (LOSS) INCOME PER SHARE

Basic net (loss) income per share is computed by dividing the net (loss) income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed similarly except that the weighted average number of common shares is increased to reflect all dilutive instruments.

Below is a reconciliation of the basic and diluted weighted average number of common shares outstanding and the computations for basic and diluted net loss per share for the three months ended March 31, 2018 and 2017:

For the three month periods ended March 31, 2018 and 2017, as the Company was in a loss position, all potentially dilutive instruments were anti-dilutive and therefore not included in the calculation of diluted net loss per share.  

NOTE 11   RELATED PARTY TRANSACTIONS

The Company recorded the following expense (income) in respect to the related parties outlined below: