Bunker Hill Mining Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition or Plan of Operation SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this report, including statements in the following discussion, are what are known as “forward looking statements”, which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as “plans,” “intends,” “will,” “hopes,” “seeks,” “anticipates,” “expects “and the like often identify such forward looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward looking statements include statements concerning the Company’s plans and objectives with respect to the present and future operations of the Company, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. Numerous factors and future events could cause the Company to change such plans and objectives or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits. Therefore, the reader is advised that the following discussion should be considered in light of the discussion of risks and other factors contained in this report and in the Company’s other filings with the SEC. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results. Description of Business Corporate Information The Company was incorporated under the laws of the State of Nevada, U.S.A on February 20, 2007 under the name Lincoln Mining Corp. On February 11, 2010, the Company changed its name to Liberty Silver Corp and subsequently, on September 29, 2017, the Company changed its name to Bunker Hill Mining Corp. The Company’s registered office is located at 1802 N. Carson Street, Suite 212, Carson City Nevada 89701, and its head office is located at 82 Richmond Street East, Toronto, Ontario, Canada, M5C 1P1, and its telephone number is 416-477-7771. The Company’s website is www.bunkerhillmining.com. Information appearing on the website is not incorporated by reference into this report. Background and Overview The Company’s sole focus is the development and restart of its 100% owned Bunker Hill mine (the “Mine”) in Idaho, USA. The Mine remains the largest single producing mine by tonnage in the Silver Valley region of northwest Idaho, producing over 165 million ounces of silver and 5 million tons of base metals between 1885 and 1981. The Mine is located within Operable Unit 2 of the Bunker Hill Superfund site (EPA National Priorities Listing IDD048340921), where cleanup activities have been completed. The Company purchased the Mine on January 7, 2022 for $5,400,000 in cash. Prior to purchasing the Mine, the Company had entered into a series of agreements with Placer Mining Corporation (“Placer Mining”), the prior owner, for the lease and option to purchase the Mine. The first of these agreements was announced on August 28, 2017, with subsequent amendments and/or extensions announced on November 1, 2019, July 7, 2020, and November 20, 2020. Under the most recent of these agreements, the Company was required to make payments pursuant to an agreement with the U.S. Environmental Protection Agency (“EPA”) whereby for so long as the Company leases, owns and/or occupies the Mine, the Company would make payments to the EPA on behalf of Placer Mining in satisfaction of the EPA’s claim for historical water treatment cost recovery in accordance with the Settlement Agreement reached with the EPA in 2018. Immediately prior to the purchase of the Mine, the Company’s liability to EPA in this regard totaled $11,000,000. Concurrent with the purchase of the Mine, the Company assumed incremental liabilities of $8,000,000 to the EPA, consistent with the terms of the amended Settlement Agreement with the EPA that was executed in December 2021 (see “EPA 2018 Settlement Agreement & 2021 Amended Settlement Agreement” in the “Our Business” section above). In early 2020, a new management team comprised of former executives from Barrick Gold Corp. assumed leadership of the Company. Since that time, the Company conducted multiple exploration campaigns, published multiple economic studies and Mineral Resource Estimates, and advanced the rehabilitation and development of the Mine. In December 2021, it announced a project finance package with Sprott Private Resource Streaming & Royalty Corp. (“SRSR”), an amended Settlement Agreement with the EPA, and the purchase of the Bunker Hill Mine, setting the stage for a restart of the Mine. Key milestones following the purchase of the mine have included the purchase and demobilization of a process plant to site, advancement of engineering and a Prefeasibility Study envisaging the restart of the Mine, the completion of the primary portion of the ramp decline connecting the 5 and 6 Levels and securing of $96,000,000 of financing commitments from SRSR. 23 Results of Operations The following discussion and analysis provide information that is believed to be relevant to an assessment and understanding of the results of operation and financial condition of the Company for the three and six months ended June 30, 2023 and June 30, 2022. Unless otherwise stated, all figures herein are expressed in U.S. dollars, which is the Company’s functional currency. Comparison of the three and six months ended June 30, 2023 and 2022 Revenue During the three and six months ended June 30, 2023, and 2022, respectively, the Company generated no revenue. Expenses During the three and six months ended June 30, 2023, the Company reported total operating expenses of $3,336,973 and $5,522,461, respectively (total operating expenses of $ 3,979,862 and $9,466,536 for the three and six months ending June 30, 2022, respectively). The decrease in total operating expenses was primarily due to (i) a decrease in mine preparation expenses of $1,821,223, and $4,382,302 (ii) a decrease in consulting and wages expenses of $636,137 and $2,222,699 for the three and six months ending, respectively. Mine preparation expenses were $nil in the six months ended June 30, 2023, primarily as a result of the Company determining that costs directly attributed to the mine after September 30, 2022 (upon the release of the prefeasibility study) constituted mine development costs (capitalized to non-current assets) instead of mine preparation costs (expense) given the existence of probable mineral reserves and an economic study incorporating them. The decrease in consulting and wages expenses was impacted by a lower volume of transactions and a lower bonus accrual in the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022. Net Income (loss) and Comprehensive Income (loss) The Company had net loss of $16,857,782 for the three months ended June 30, 2023 (net income of $12,054,781 for the three months ended June 30, 2022). Offsetting the decrease in operating expenses (as described above), net loss in the three months ended June 30, 2023 was impacted by a $21,015,772, increase in the loss due to change in derivative liability (loss of $13,246,561 for the three months ended June 30, 2023 compared to gain of $7,769,211 for the three months ended June 30, 2022) and a loss of $1,884,232 for the 3 months ending June 30, 2023 relating to the change in fair of convertible debentures compared to a gain of 626,075 for the 3 months ending June 30, 2022). Both changes in fair value were driven by a proportionally greater incline in the Company’s share price for the three months ending June 30, 2023, relative to a decline in share price in the three months ending June 30, 2022. The change in net loss was further impacted by a decrease of $1,496,683 gain on extinguishment in debt in the three months ending June 30, 2023, compared to the 3 months ending June 30, 2022. A gain of $7,117,420 was recognized in the three months ending June 30, 2023, relating to the sale of mineral properties, compared with a $8,614,103 gain on EPA settlement in the three months ending June 30, 2022. Net loss for the three months ending June 30, 2023, included the initial recognition of a deferred tax liability and corresponding deferred tax expense relating to the closing of the stream transaction ($3,508,741 for the six months ending June 30, 2023, compared to $nil for the 6 months ending June 30, 2022). The Company had net loss of $15,066,635 for the six months ended June 30, 2023 (net income of $9,173,895 for the six months ended June 30, 2022). Offsetting the decrease in operating expenses (as described above), net loss in the six months ended June 30, 2023 was impacted by a $20,243,206 increase in the loss due to change in derivative liability (loss of $9,019,987 for the six months ended June 30, 2023 compared to gain of $11,223,2019 for the six months ended June 30, 2022) and a loss of $194,531 for the 3 months ending June 30, 2023 relating to the change in fair of convertible debentures compared to a gain of 552,606 for the 3 months ending June 30, 2022). Both changes in fair value were driven by a proportionally greater incline in the Company’s share price for the six months ending June 30, 2023, relative to a decline in share price in the six months ending June 30, 2022. The change in net loss was further impacted by a decrease of $1,496,683 gain on extinguishment in debt in the six months ending June 30, 2023, compared to the 3 months ending June 30, 2022. A gain of $7,117,420 was recognized in the six months ending June 30, 2023, relating to the sale of mineral properties, compared with a $8,614,103 gain on EPA settlement in the six months ending June 30, 2022. Net loss for the six months ending June 30, 2023, included the initial recognition of a deferred tax liability and corresponding deferred tax expense relating to the closing of the stream transaction ($3,508,741 for the six months ending June 30, 2023, compared to $nil for the 6 months ending June 30, 2022). The Company had comprehensive loss of $17,231,197 and $14,633,038 for the three and six months ended June 30, 2023, respectively (comprehensive income of $12,426,367 and $9,545,481 for the month three and six ended June 30, 2022, respectively). Comprehensive (loss) income for the three and six months ended June 30, 2023, is inclusive of a ($373,415) and $433,597 gain on change in fair value on own credit risk ($371,586 and $371,586 for the three and six months ended June 30, 2022, respectively). Liquidity and Capital Resources Current Assets and Total Assets As of June 30, 2023, the Company had total current assets of $42,831,724, compared to total current assets of $7,741,052 at December 31, 2022 – an increase of $35,090,672; and total assets of $67,863,964, compared to total assets of $32,929,892 at December 31, 2022 – an increase of $34,934,072. The increase in current assets and total assets was primarily due to the closing of the $46,000,000 Stream, net of repayment of the $5,000,000 Bridge Loan and transaction related costs. Current Liabilities and Total Liabilities As of June 30, 2023, the Company had total current liabilities of $18,353,350 and total liabilities of $104,296,588, compared to total current liabilities of $10,155,582 and total liabilities of $59,106,835 at December 31, 2022. Current liabilities decreased primarily as a result of the repayment of the $5,000,000 Bridge Loan from the proceeds of the Stream. Total liabilities increased primarily as a result of closing of the $46,000,000 Stream (net of repayment of the $5,000,000 Bridge Loan) and an increase in the carrying values of the CD1 and CD2 and settlement of RCD. 24 Working Capital and Shareholders’ Deficit As of June 30, 2023, the Company had a working capital balance of $24,478,374 and a shareholders’ deficiency of $36,432,624 compared to a working capital deficit of $2,414,530 and a shareholders’ deficiency of $26,176,943 as of December 31, 2022. The working capital balance increased during the six months ended June 30, 2023, primarily due to cash received from closing of the $46,000,000 Stream (net of repayment of the $5,000,000 Bridge Loan and transaction related costs) and cash received from the closing of a brokered private placement of special warrants of the Company, partially offset by operating expenses and capital expenditures incurred during the period. The shareholders’ deficiency decreased due to net loss for the six months ended June 30, 2023, partially offset by an increase due to proceeds received from equity financing in the six months ended June 30, 2023. Cash Flow During the six months ended June 30, 2023, the Company had a net cash increase of $34,425,054, primarily due to the closing of a brokered private placement of special warrants of the Company and proceeds received from the exercise of warrants and closing of the Stream agreement with SRSR. Cash expenditures during the six months ended June 30, 2023, were primarily related to working capital requirements. Subsequent Events Conversion of March 2023 Special Warrants On July 24, 2023, the “March 2023, Special Warrants” automatically converted into one share of common stock of the company and one common stock purchase warrant of the company which entitles each warrant holder therof to acquire one share of common stock of the Company at an exercise price of $0.15 per Warrant share until March 27, 2026. 2023 RSU Grant On July 4, 2023, 6,735,354 RSU’s were granted to employees and executives of the Company. The RSU awards vest in one-third increments on March 31 of 2024, 2025 and 2026. 2023 DSU Grant On July 4, 2023, 1,611,826 DSU’s were granted to directors of the Company. The DSU awards vest immediately. On July 6, 2023, 245,454 DSU’s were granted to a director of the Company. The DSU award vest on July 6, 2024. New Director On July 6, 2023, the Company appointed Paul Smith to its Board of Directors and Chair of its new Growth Committee. AGM Results and Amendments to Equity Compensation Plans The Company held its Annual General Meeting (the “Meeting”) on August 4, 2023. The nominees for the Board of Directors listed in the Company’s management information circular dated July 6, 2023 (the “Circular”), being (i) Sam Ash, (ii) Mark Cruise, (iii) Dickson Hall, (iv) Cassandra Joseph, (v) Pamela Saxton, (vi) Paul Smith and (vii) Richard Williams, were elected to the board of directors of the Company (the “Board”) to hold office until the next annual meeting of shareholders or until their successors are duly appointed or elected. In addition, at the Meeting, the shareholders of the Company approved: (ii) the re-appointment of MNP LLP Chartered Professional Accountants as auditor of the Company for the ensuing year; (ii) the Company’s amended and restated stock option plan (the “Amended and Restated Stock Option Plan”); and (iii) the Company’s amended and restated restricted stock unit incentive plan (the “Amended and Restated RSU Plan” and, together with the Stock Option Plan, the “Security Based Compensation Plans”). The Security Based Compensation Plans were each approved by the Board on July 5, 2023 and are being implemented to comply with the policies of the TSX Venture Exchange (the “TSXV”) in connection with Bunker Hill’s application to list its common stock (the “Common Shares”) on the TSXV. The Amended and Restated Stock Option Plan is a rolling plan meaning that the maximum number of Common Shares issuable thereunder is 10% of the issued and outstanding Common Shares (on a non-diluted basis) at the time of the grant of options. The Amended and Restated RSU Plan is a fixed plan meaning the maximum number of Common Shares issuable thereunder is fixed at 26,581,075, being 10% of the issued and outstanding Common Shares (on a non-diluted basis as at July 5, 2023. Additional information regarding the Security Based Compensation Plans, including details regarding the amendments, can be found in the Circular posted on Bunker Hill’s SEDAR+ profile at www.sedarplus.ca. 25 Critical accounting estimates The preparation of the interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Estimates and judgments are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual outcomes can differ from these estimates. The key sources of estimation uncertainty that have a significant risk of causing material adjustment to the amounts recognized in the financial statements are: Share-based payments Management determines costs for share-based payments using market-based valuation techniques. The fair value of the share awards and warrant liabilities are determined at the date of grant using generally accepted valuation techniques and for warrant liabilities at each balance sheets date thereafter. Assumptions are made and judgment used in applying valuation techniques. These assumptions and judgments include estimating the future volatility of the stock price and expected dividend yield. Such judgments and assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates. Convertible loans, promissory notes, stream obligation and warrants Estimating the fair value of derivative warrant liability requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the issuance. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the warrants derivative liability, volatility and dividend yield and making assumptions about them. The fair value estimates of the convertible loans use inputs to the valuation model that include risk-free rates, equity value per common share, USD-CAD exchange rates, spot and futures prices of minerals, expected equity volatility, expected volatility in minerals prices, discount for lack of marketability, credit spread, expected mineral production over the life of the mine, and project risk/estimation risk factors. The stream obligation inputs used to determine the future cash flows and effective interest for the amortized cost calculation include futures prices of minerals and expected mineral production over the life of the mine. The fair value estimates may differ from actual fair values and these differences may be significant and could have a material impact on the Company’s balance sheets and the consolidated statements of operations. Assets are reviewed for an indication of impairment at each reporting date. This determination requires significant judgment. Factors that could trigger an impairment review include, but are not limited to, significant negative industry or economic trends, interruptions in exploration activities or a significant drop in precious metal prices. Accrued liabilities The Company has to make estimates to accrue for certain expenditures due to delay in receipt of third-party vendor invoices. These accruals are made based on trends, history and knowledge of activities. Actual results may be different. The Company makes monthly estimates of its water treatment costs, with a true-up to the annual invoice received from the IDEQ. Using the actual costs in the annual invoice, the Company will then reassess its estimate for future periods. Given the nature, complexity and variability of the various actual cost items included in the invoice, the Company has used the most recent invoice as its estimate of the water treatment costs for future periods. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.