Derivative at Fair Value

12 Months Ended

Dec. 31, 2021

Derivative at Fair Value

Derivative at Fair Value

7. Derivative at Fair Value

On December 3, 2019 the Company entered into an amendment to the Velardeña oxide plant lease agreement (the “Hecla Lease”) with Minera Hecla, S.A. de C.V. (“Hecla”), a Mexican corporation and wholly-owned subsidiary of Hecla Mining Company, reducing the variable per tonne fee contained in the lease agreement from $22.00 to $11.00. Under certain silver price and delivered ore head grade limits, the variable per tonne fee could be increased back to the previous $22.00 per tonne. Pursuant to ASC Topics 815-Derivatives and Hedging (“ASC 815”) and 842-Leases (“ASC 842”), arrangements with variable lease payments must be evaluated to assess whether they contain embedded derivatives. If embedded derivatives are not “clearly and closely related” to the lease contract, they must be bifurcated and accounted for separately from the host contract. The Company determined that the potential for the Company to receive an additional $11.00 variable per tonne fee if certain conditions relating to the silver price and delivered ore head grades are met does not qualify for the “clearly and closely related” exception, and as a result, the potential additional $11.00 variable per tonne fee constitutes a derivative that must be valued and accounted for apart from the host lease contract. Per the guidance of ASC 842, the Company determined that the amendment to the Hecla Lease constituted a modification that must be accounted for as a new lease commencing on December 2, 2019, the date the amendment was agreed upon by both parties.  The Company treated the fair value of the derivative received at the time of the modification to the lease agreement as an upfront lease payment that was amortized over the remaining life of the lease on a straight line basis and recorded a “Derivative at fair value” asset of approximately $0.2 Million on the Consolidated Balance Sheet related to the amended Hecla Lease. On July 7, 2020, the Company received notification from Hecla terminating the Hecla Lease, effective November 30, 2020, therefore, at December 31, 2020, the Company no longer recorded a derivative value related to the Hecla Lease.

For the year ended December 31, 2020 the Company recognized a reduction of $254,000 to “Revenue - plant lease” on the Company’s Condensed Consolidated Statements of Operations related to the change in the fair value of the derivative between December 31, 2019 and the termination of the Hecla Lease on November 30, 2020 (see Note 17). During the year ended December 31, 2020, the Company also recognized approximately $180,000 “Revenue - plant lease” on the Company’s Consolidated Statements of Operations related to the amortization of deferred revenue.