Note 14 - Acquisition of Klondex Mines Ltd.

9 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Business Combination Disclosure [Text Block]

Note

14.

Acquisition of Klondex Mines Ltd.

On

July 20, 2018,

we acquired all of the issued and outstanding common shares of Klondex Mines Ltd. ("Klondex") for consideration valued at

$2.24

per Klondex share (the "Arrangement"). The acquisition resulted in our

100%

ownership of

three

producing gold mines, along with interests in various gold exploration properties, in northern Nevada. The acquisition is expected to increase our annual gold production, gives us ownership of operating gold mines and identified gold reserves and other mineralized material, and provides access to a large land package with known mineralization. Under the terms of the Arrangement, each holder of Klondex common shares had the option to receive either (i)

$2.47

in cash (the “Cash Alternative”), (ii)

0.6272

of a Hecla share per Klondex share (the “Share Alternative”), or (iii)

US$0.8411

in cash and

0.4136

of a Hecla share per Klondex share (the “Combined Alternative”), subject in the case of the Cash Alternative and the Share Alternative to pro-ration based on a maximum cash consideration of

$153.2

million and a maximum number of Hecla shares issued of

75,276,176.

Klondex shareholders also received shares of a newly formed company which holds the Canadian assets previously owned by Klondex (Havilah Mining Corporation (“Havilah”)). Klondex had

180,499,319

issued and outstanding common shares prior to consummation of the Arrangement. An additional

1,549,626

Klondex common shares were issued immediately prior to consummation of the Arrangement related to conversion of in-the-money Klondex options and certain outstanding restricted share units, resulting in a total of

182,048,945

issued and outstanding Klondex common shares at the time of consummation of the Arrangement. In connection with the Arrangement, we also issued an aggregate of

4,136,000

warrants to purchase

one

share of our common stock (“Hecla Warrants”) to holders of warrants to purchase Klondex common shares. Of the Hecla Warrants,

2,068,000

 have an exercise price of

$8.02

and expire in

April 2032,

and 

2,068,000

 have an exercise price of

$1.57

and expire in

February 2029.

In addition, we settled share-based payment awards held by Klondex directors and employees for cash of

$2.0

million. Consideration for the Arrangement was cash of

$161.7

million,

75,276,176

shares of our common stock valued at

$242.4

million, and issuance of the Hecla Warrants valued at

$10.2

million, for total consideration of

$414.2

million. The cash consideration includes

$7.0

million for our subscription for common shares of Havilah and

$1.5

million for settlement of certain equity compensation instruments.

The following summarizes the preliminary allocation of purchase price to the fair value of assets acquired and liabilities assumed as of the date of acquisition (in thousands):

Consideration:
Cash payments	$	161,704
Hecla stock issued (75,276,176 shares at $3.22 per share)		242,389
Hecla warrants issued		10,155
Total consideration	$	414,248
Fair value of net assets acquired:
Assets:
Cash	$	12,874
Accounts receivable		3,453
Inventory - supplies		6,564
Inventory - finished goods, in-process material and stockpiled ore		10,302
Other current assets		2,583
Properties, plants, equipment and mineral interests		502,285
Non-current investments		1,596
Non-current restricted cash and investments		9,504
Total assets		549,161
Liabilities:
Accounts payable and accrued liabilities		17,270
Accrued payroll and related benefits		10,352
Accrued taxes		421
Lease liability		2,080
Debt		35,086
Asset retirement obligation		19,571
Deferred tax liability		50,133
Total liabilities		134,913
Net assets	$	414,248

We do

not

believe there are any specific elements of the allocation of purchase price above that are subject to change. However, the overall allocation is preliminary and is subject to change.

Our results for the

nine

months ended

September 

30,

2018

include sales of products of

$11.5

million and a net loss of

$10.1

million since the acquisition date related to the operations acquired through the Arrangement.

The unaudited pro forma financial information below represents the combined results of our operations as if the acquisition had occurred at the beginning of the periods presented. The unaudited pro forma financial information is presented for informational purposes only and is

not

indicative of the results of operations that would have occurred if the acquisition had taken place at the beginning of the periods presented, nor is it indicative of future operating results.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(in thousands, except per share amounts)	2018			2017			2018		2017
Sales	$	156,731		$	182,489		$	543,741	$	573,950
Net (loss) income		(20,735	)		(8,877	)		4,694		2,523
(Loss) income applicable to common shareholders		(20,873	)		(9,015	)		4,280		(2,937	)
Basic and diluted (loss) income per common share		(0.04	)		(0.02	)		0.01		(0.01	)

The pro forma financial information includes adjustments to eliminate amounts related to the Canadian assets previously owned by Klondex, which were transferred to Havilah and

not

acquired by us, and costs related to the acquisition.