Gold Resource Annual Report 2007

Plain-text annual report

Gold Resource Corporation is a mining company fo- cused on production and pursuing development of gold and silver projects that feature low operating cost and produce high return on capital invested. The Company has 100% interest in four potential high-grade gold and silver properties in Mexico’s southern state of Oaxaca. The Company’s flagship property, its El Aguila Project, is targeting gold production in 2008. GOLD RESOURCE CORPORATION A Mining Company Focused on Production Markets: OTC BB: GORO FSE: GIH US Ofﬁce 222 Milwaukee St. Suite 301 Denver, CO 80206 303-320-7708 (Ofﬁce) 303-320-7835 (Fax) Mexico Ofﬁce Macedonio Alcala, N201-205 Col. Centro, c.p. 68000 Oaxaca, Oaxaca, Mexico 011-52-55-50-181-129 100% Interest in Four High-Grade Properties Solaga Oaxaca El Aguila Las Margaritas El Rey MEXICO TABLE OF CONTENTS President’s Letter ...........................................2 & 3 Focused Exploration ......................................4 & 5 El Aguila Project ...................................................6 Production Targets ................................................7 Environment ..........................................................8 Social Responsibility ............................................9 Management’s Discussion and Analysis ........10-13 Auditors Report ...................................................14 Consolidated Financial Statements ................15-19 Notes to Consolidated Financial Statements ..20-27 Corporate Information ........................................28 Gold Resource Corporation 1 2007 Annual Report PRE SIDE NT ’ S LETTER Dear Fellow Shareholders, We expect to emerge as a low cost gold producer in 2008, a short two years af- ter becoming a publicly-traded company. Construction of our ﬂagship El Aguila Project, in the southern state of Oaxaca, Mexico, is underway and includes a 300,000 tonne per year mill. Our ﬁrst year’s targeted production, from the El Aguila open pit mine, is 70,000 ounces of gold at a cash cost of $100 per ounce of gold produced. Gold Resource Corporation’s approach to the business of mining is based on ﬁnancial performance, not just “ounces in the ground”. Quality ounces are im- portant to us. Fundamental in our approach to the business of mining is that a project must be able to repay its capital investment in one year or less. We believe this disciplined approach will yield not only accelerated value, but greater value for our shareholders and we expect to be judged on per share performance and on per share growth in value. Equally important to us is achieving production at the earliest point in time so we can build the Com- pany with cash ﬂow, not continued equity sales. In this way we create the greatest value with the fewest shares outstanding. We made our production decision for the El Aguila Project back in April 2007 based on an anticipated 6 month repayment of capital and an internal estimated minimum mine life of 3 years. Then, in October of 2007, we increased both the estimated mine life and production targets, and now feel the geological potential of this property could be much greater than 6 years. We completed our production funding December 5th, 2007 raising $22.2 million at $4.00 per share. Construction began February 4th, 2008 and we believe we are on schedule to produce gold by the end of 2008. Today, on the exploration front, we are pleased and impressed with the continuing success of our focused exploration program at the El Aguila Project. The La Arista area and the El Arroyo area, two new discoveries made within this past year at the El Aguila Project, are yielding high-grade polymetallic values over signiﬁcant underground minable widths. We are targeting to produce 100,000 gold equivalent ounces in year 2 from gold and silver at the La Arista deposit at an expected zero cash cost per gold equivalent ounce because we will use the valuable base metal revenues as credits to reduce costs of gold equivalent produc- tion. Gold Resource Corporation 2 2007 Annual Report We remain focused on establishing cash ﬂow from which to build the Company. We have numerous ex- ploration targets at the El Aguila Project as well as our other three properties, El Rey, Las Margaritas, and Solaga. Our primary exploration thrust for all these areas will wait until they can be supported by cash ﬂow. As the number of mining friendly venues in the world shrinks and political risk becomes a deﬁning factor, we are very pleased to be in Mexico. Mexico is a country with a proud 500 year history of mining. We are par- ticularly pleased with our Mexican personnel who are very capable, competent and get the job done. Whether it is the support of the local indigenous people who see the beneﬁts they will receive or the cooperation of the Mexican regulatory agencies who work with us to make sure the environment is protected, all are enthusiastic about the El Aguila Project. Combining this positive reception with the tremendous geologic potential we see and Mexico is the place for us to build value for our shareholders. The year 2008 will be a transforming year for Gold Resource Corporation. We could not have reached this point, however, without the support and conﬁdence of those who shared our vision early on. With your help and with the hard work from the many good people at Gold Resource Corporation, we are bringing that vision to life. I would like to take this opportunity to personally thank each and every one of you. Together, we will see Gold Resource Corporation emerge as a low cost gold producer. Sincerely, William W. Reid President “Equally important to us is achieving production at the ear- liest point in time so we can build the Company with cash flow, not continued equity sales. In this way we create the greatest value with the fewest shares outstanding.” Please see Company’s 10-K ﬁling for “Risk Factors” and “Forward-Looking Statements”. Gold Resource Corporation 3 2007 Annual Report P r e s i d e n t ’ s L e t t e r FOC USE D E XPL OR ATION DISCOVERY At our El Aguila Project, our focused exploration program has established a very robust, extensive and high-grade epithermal system encompassing miner- alization both of the low sulﬁdation type (gold and silver only) and the inter- mediate type (gold, silver, copper, lead and zinc). Epithermal systems form some of the richest and most sought after deposits in the world and have been responsible for some of the most economically signiﬁcant mines in Mexico. Our successful discoveries to date include the El Aguila open pit deposit that will be mined our ﬁrst year and several high-grade vein deposits that will be mined underground beginning in the second year, El Aire, La Arista, and El Arroyo. We believe this is only the beginning of what will be discovered at this exceptional, new district. Gold Resource Corporation 4 2007 Annual Report “Epithermal systems form some of the richest and most sought after deposits in the world and have been responsible for some of the most economically signiﬁcant mines in Mexico.” Observations on epithermal mineralization at El Aguila and La Arista-El Aire, Oaxaca, Mexico “This district has numerous areas of alteration, some with strong geochemical anomalies. In particular, the surface alteration over the top of the El Aire and La Arista veins is strong, both siliciﬁcation and quartz-adularia, and although the strike extent has not been determined, it is at least 400 meters. Combined with the very good grades over 300 m vertical extent on the La Arista vein, this system has several positive features and may continue to grow with drill- ing.” Dr. J. W. Hedenquist - January, 2008 World recognized expert in epithermal deposits La Arista discovery Hole #7080 (drilled at 45 deg) highlights include: 7.5 meters of 8.01 g/t Au, 329.1 g/t Ag, 0.76% Cu, 1.92% Pb, 9.92% Zn Gold Resource Corporation 5 2007 Annual Report EL A GU IL A P ROJECT Mill Layout Design CONSTRUCTION Construction at the El Aguila Proj- ect includes a mill that can process 300,000 tonnes per year, an open pit mine for ﬁrst year of production and infrastructure including a mine village for our staff. The mill will be very ﬂexible with the ability to make both dore (gold and silver) bars and ﬂotation con- centrates (copper concentrates, lead concentrates and zinc con- centrates). This is in line with our concept of shipping high-grade ore from any of our four properties to El Aguila mill for processing. Open Pit Design Gold Resource Corporation 6 2007 Annual Report El Aguila Project Production Targets Cash Cost Year Ounces $100 1 Gold 70k 2 3-6 100k 120k AuEq AuEq $ 0 $ 0 PRODUCTION TARGETS PRODUCTION TARGETS First year production is targeted at 70,000 ounces of gold from our El Aguila open pit with an estimated cash cost of $100 per ounce gold produced. Silver also produced this ﬁrst year will be used as a credit against production costs of the gold. Second year production is targeted from the La Arista high-grade vein with its polymetallic (gold, silver, copper, lead, zinc) mineralization. The beneﬁt of polymetallic mineralization is that while recovering gold and silver from each tonne of rock, base metals are also re- covered. Any base metal revenues are in addition to the gold and silver revenues and are applied against production costs of gold and silver. This is in line with industry practice in which base metal revenues are used to lower gold produc- tion costs. The net effect of La Arista’s impressive polymetallic mineralization is that yearly targeted production of 100,000 ounces or more, of gold or gold equivalent (AuEq)(gold and silver), should result in zero cash costs to produce the gold and silver. Please see Company’s 10-K ﬁling for “Risk Factors” and “Forward-Looking Statements”. Gold Resource Corporation 7 2007 Annual Report EN V IRONM ENT Reclamation Nursery ENVIRONMENT Gold Resource Corporation is committed to protecting and enhancing the environment at its operations. At the El Aguila Project, the mill design, the ancillary facilities and the fact that the majority of the mineraliza- tion discovered to date will be mined from underground, all result in a relatively small footprint limiting the Project’s environmen- tal impact. We have an ongoing plant nursery and na- tive seedlings program to provide for our revegetation responsibilities, a solid waste management program has been instituted and we will begin reclamation as soon as an area is no longer needed. At Gold Resource Corporation’s mine vil- lage, Hacienda Minera Tres Palmas, con- struction of the buildings is “green” using recycled materials including recycled plastic block walls that then hold a stucco ﬁnish. Gold Resource Corporation 8 2007 Annual Report Salina Blanca natural travertine and springs deposit S OC I AL R E SPON SIBILITY COMMUNITY ACTION Gold Resource Corporation is committed to ben- eﬁting and enhancing the communities in which it operates. We strive to become a positive communi- ty member while distributing net beneﬁts including employment opportunities, healthcare, city infra- structure, career training, education scholarships, community partnership programs and sustainable development. The Company’s focus to hire locally ﬁrst, coupled with job training and career building, will add signiﬁcant employment to the surrounding area both directly and indirectly through related ser- vices. Higher learning scholarships for school children will assist the community while sharing the vision that children’s education will bring value far beyond company operations. The construc- tion of Gold Resource Corporation’s mine village, Hacienda Minera Tres Palmas, includes an em- ployee health clinic to service the local community members as well. Gold Resource Corporation will continue the dental program it initiated over a year ago. As Gold Resource Corporation’s projects evolve so too will its participation as a community mem- ber. Construction is underway to improve the local town of San Jose De Gracia’s water system and our past, current and future road improvements will assist with town infrastructure as well. Our assistance with the local town entrance and church improvements, “Christmas gifts for every child”, and our contribution to help establish a local tourist attraction, Salina Blanca, for sustainable develop- ment, further demonstrates our commitment to the community. It is important to Gold Resource Corporation that its assistance and positive impact reach beyond its mining operations. Gold Resource Corporation 9 2007 Annual Report M ANA GEM ENT ’S DIS CUS SION AND AN ALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This discussion analyzes our ﬁnancial condition at December 31, 2007 and compares it to our ﬁnancial condition at December 31, 2006. This discussion also summarizes the results of our operations for the year ended December 31, 2007 and compares those results to the year ended December 31, 2006. Overview We are a company engaged in the exploration of gold and silver properties, primarily in Mexico, with a goal of production in the near future. We pursue exploration of gold and silver projects that we believe feature low operating costs and have the potential to produce a high return on the capital invested. We hold a 100% interest in four properties in Mexico’s southern State of Oaxaca. Min- eral exploration requires signiﬁcant capital and our assets and resources are limited. We have never received revenue from operations and have relied on equity ﬁnancing to fund our operations to date. We completed our IPO in August 2006 at $1.00 per share and received gross proceeds of $4,600,000. We raised additional capital pursuant to two private placements of our common stock; one in December 2006 for gross proceeds of $5,186,400 and one in December 2007 for gross proceeds of $22,234,000. We used the initial IPO and December 2006 private placement funds to continue exploration at the El Aguila property. In April 2007, we decided to move forward with construction of the El Aguila property in an ef- fort to commence commercial production. We anticipate using the funding provided by our December 2007 private placement to fund construction. Our decision to accelerate construction was made based upon drilling data that we believe provides evidence of mineralized material in amounts sufﬁcient to proceed with construction activities. However, we have not commenced a feasibility study that would allow us to classify any of our mineralized material as proven or probable reserves, as those terms are deﬁned by the SEC in Industry Guide 7, “Description of Property by Issuers Engaged or to Be Engaged in Signiﬁcant Mining Operations.” The SEC deﬁnition of “reserve” is “that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination.” Our ability to demonstrate the existence of proven or probable reserves would require us to continue exploration drilling that demonstrated the existence of sufﬁcient mineralized material and to complete a positive feasibility study. A feasibility study must demonstrate with reasonable certainty that the deposit can be legally and economically extracted and produced. At this time, we have neither undertaken these additional activities nor implemented plans to undertake these activities in the future. Accordingly, the mineralized material drilled by us or developed by us should not be considered proven or probable mineral reserves. Additionally, the assumptions used by us in our decision to undertake construction of the mill and mine may prove to be inaccurate. Thus, we may never be able to recover sufﬁcient mineralized material to become proﬁtable. In accordance with accounting principles generally accepted in the United States, all expenditures for exploration and evaluation of our properties to date have been expensed as incurred. Furthermore, until mineralized material is classiﬁed as proven or probable reserves, substantially all expenditures for mine construction have been or will be expensed as incurred. Certain expenditures, such as for rolling stock, processing equipment, and facilities may be capitalized, subject to our evaluation of the expenditures as an asset with future realizable value. Since substantially all of our expenditures to date have been expensed and we expect to expense signiﬁcant expenditures incurred during 2008, most of our investment in mining properties does not appear as an asset on our balance sheet. We plan to continue exploration of the El Aguila property at the same time that we undertake efforts to place the property into production. We also intend to continue exploration of the El Rey property in 2008. Our ultimate objective is to become a producer of gold, silver and possibly other associated base metals. We are unable at this time to predict when, if ever, that objective will be achieved. Gold Resource Corporation 10 2007 Annual Report Anticipated Production. While we intend to continue exploration at the El Aguila Project for the foreseeable future, we are moving forward with our plans to make improvements to the property for anticipated production. This will include acquisition of equipment and construction of a mill. We presently anticipate mining by open pit and building a mill that is designed to process 850 tonnes of ore per day through a ﬂotation section and 150 tonnes of ore per day through an agitated leach section, subject to receiving the necessary permits. Based on preliminary estimates, which we continue to reﬁne, we expect to require $20,000,000 to construct a mill and prepare the property for production. Only after a mine and a mill are constructed and operational could we expect any rev- enue. We have engaged Lyntek, Inc. of Denver, Colorado, on a month to month basis to design and build the mill at the El Aguila Proj- ect. This design work is substantially complete and we have already purchased much of the equipment such as the ball mill, ﬂoat cells and the crushing plant. We are in the process of ordering the balance of the equipment. We have applied for permits from the Mexican government which will allow us to commence construction of the mill, however, we have not received approval to date. We remain optimistic that upon receipt of such approval in the near future, we will be able to complete construction and commence production during the second half of 2008. We expect the mining to be done under contract with a third party contractor. Our primary target for production in 2008 will be gold from the near-surface mineralization at El Aguila. Any silver contained in the mineralization will be produced as a by-product, the revenue from which will help offset the costs of producing the gold. In the following year, if activities go as planned, we intend to undertake production of gold from an underground mine at the nearby El Aire vein. Since we believe that area contains base metals such as copper, lead and zinc, we intend to produce those as by-products, the revenue from which would help offset the costs of producing the gold. The mineralization from both the near-surface mineralization and the anticipated underground mine will be processed at the proposed mill at the El Aguila Project. Additional Capital Investment. In addition to expenses of exploration and constructing a mill, we also anticipate making in- frastructure improvements at the El Aguila Project. Foremost among these expenses is the construction of a four kilometer access road to the proposed mill site and mining camp improvements, which will be necessary to enter the production phase. We recently received a permit from the appropriate Mexican federal agency to build the road and construction is underway. We purchased ﬁve hectares of land for the camp location, together with a permitted water well, for a price of $152,522. We estimate costs of approximately $750,000 to complete the road and $1,500,000 to build the camp for employee housing. We commenced these capital improvements in the ﬁrst quarter of 2008. Corporate Overhead. Included in our plan of operation are the expenses of overseeing our business and paying other general and administrative expenses. These expenses primarily include salaries and consulting fees, rent, travel and professional fees. We currently estimate these expenses at $140,000 per month based on existing commitments and expectations. We expect these expenses will be paid from our cash position and future equity offerings, if necessary, until such time, if ever, we are successful in placing one or more of our properties into production. Liquidity and Capital Resources As of December 31, 2007, we had working capital of $21,282,704, consisting of current assets of $22,051,156 and current li- abilities of $768,452. This represents an increase of $13,867,497 from the working capital balance of $7,415,207 as of December 31, 2006. We completed a private placement on December 5, 2007 whereby we sold 5,558,500 shares of our common stock at $4.00 per share for which we received gross proceeds of $22,234,000. We agreed to pay ﬁnders’ fees consisting of cash and stock to certain individuals and entities that assisted with locating purchasers. We issued 263,900 shares of our common stock and paid cash fees of $522,000 to the ﬁnders, resulting in net cash proceeds of $21,712,000. During 2007, the cash proceeds from this private placement represented all of the cash provided by ﬁnancing activities. During 2006, cash provided by ﬁnancing activities was $9,339,900, which included proceeds from our initial public offering and from our 2006 private placement and from the exercise of stock options. Gold Resource Corporation 11 2007 Annual Report We expect that substantially all of the proceeds from the ﬁnancing activities will be used to fund the further exploration of our mining properties and to continue the implementation of our business plan. Our most signiﬁcant expenditures are expected to be the design and construction costs of the mine site, the mill site, including processing equipment, and the camp site for our mine workers. In addition, we are continuing our exploratory drilling program to further delineate the area of mineralized content. Furthermore, we continue to incur operating expenses, including (a) approximately $140,000 per month for salaries and other corporate overhead; and (b) legal and accounting fees associated with our status as a public company. We believe that we will need to obtain additional funding during 2008 to continue our construction plans. We have never received revenue from gold or other mineral sales. We have historically relied on equity ﬁnancings or loans (including loans from our ofﬁcers) to continue funding our operations. From inception through December 31, 2007, we received $36,532,591 in cash, services and other consideration through issuance of our common stock. As of December 31, 2007, we did not have any outstanding debt ﬁnancing, as all previous borrowings have been repaid or converted into equity. We do not believe that we are a candidate for conventional debt ﬁnancing and we have not made arrangements to borrow funds for working capital requirements. We will be dependent on additional ﬁnancing to expand our exploration efforts beyond current plans and may require additional fund- ing to complete construction of metal processing facilities. Although we believe we have identiﬁed sufﬁcient mineralized content to proceed with construction plans, our assets do not meet the deﬁnition of proven or probable reserves set forth in Industry Guide 7 of the SEC. Accordingly, we have expensed all exploration and evaluation costs and our investment in mineral properties does not appear as an asset on our balance sheet. During the year ended December 31, 2007, we spent $5,731,771 on acquisition, exploration and evaluation activities. This compares to $628,851 spent dur- ing 2006. Exploration of our properties accelerated in late 2006, and throughout 2007 following successful completion of our IPO in 2006, and subsequent private placements in 2006 and 2007. From inception to December 31, 2007, we have spent $8,502,443 on the acquisition and exploration of our various properties, including approximately $7,880,000 which has been spent on the currently active properties known as El Aguila, Las Margaritas, El Rey and Solaga. Net cash used in operating activities was $6,908,890 during the year ended December 31, 2007, compared to $1,795,858 during 2006. As more fully explained in the overview above, we accelerated exploration and improvement of our mining properties with the proceeds from our common stock offerings. In addition, cash spent on general and administrative expenses increased during 2007 compared to 2006, primarily in support of increasing exploration and business development activities. Net cash used in investing activities was $456,152 in 2007 compared to $59,966 in 2006. During 2007, we commenced the acquisition of certain assets to be used in the improvement of our mine site and began the acquisition of processing equipment. Results of Operations – Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 For the year ended December 31, 2007 we reported a net loss of $8,076,342, or $(0.28) per share, compared to a net loss of $2,686,762, or $(0.13) per share for 2006. In neither year did we report any revenue except interest income. We expect to incur losses until such time, if ever, as we begin generating revenue from operations. We are considered an exploration stage company for account- ing purposes, since we have not received any revenue from mineral sales. Total costs and expenses were $8,318,855 in 2007 compared to $2,743,851 in 2006, an increase of $5,575,004 or 203%. Min- eral property costs for the year ended December 31, 2007, including acquisition and exploration costs, increased $5,102,920 from $628,851 in 2006 to $5,731,771 in 2007. The increase reﬂects our increasing exploration and construction activities at our various properties located in and around the El Aguila Project. During the latter part of 2006, we began to increase our exploration spending and committed to an initial exploratory drilling contract for $300,000. We subsequently expanded our drilling program and aggregate drilling costs during 2007 were approximately $2,700,000. General and administrative expense for the year ended December 31, 2007 increased to $1,809,154 compared to $1,470,061 during 2006. The increase of $339,093 primarily reﬂects increased wage and salary costs of approximately $30,000, an increase of $28,000 in legal and accounting fees associated with SEC reporting requirements, and $211,500 of investor relations expenses necessary to disseminate information to potential and existing investors. Travel expenses increased from $103,241 to $173,559. The increase represents increased travel to the mineral properties in Mexico, as well as meetings with investors. We incurred stock compensation expenses of $730,450 for the year ended December 31, 2007 compared to $626,900 for 2006. During 2007, we issued 170,000 restricted shares of common stock as partial compensation for investor relations services valued at a weighted average price of $3.39. We also issued 15,000 shares of common stock valued at $3.68 per share in recognition of consult- ing services performed in Mexico. The cost of shares issued was determined using quoted market values either at the time of the stock grant or at the average stock price during the period of service. Gold Resource Corporation 12 2007 Annual Report During 2006, we issued 100,000 restricted shares of common stock valued at $1.00 per share to a director as partial compensa- tion for his service to the Board of Directors. We also issued 35,000 shares of common stock valued at $1.71 to two employees for their services. We also issued 250,000 restricted shares of common stock valued at $1.10 to a ﬁrm that provided investor relations ser- vices and we issued 30,000 shares of restricted common stock valued at $1.45 to a consultant who provided investor relations services. During the year ended December 31, 2007, we also granted stock options to a public relations consultant to purchase 50,000 shares of common stock at an exercise price of $3.68 per share, all of which vested in 2007. We used an option pricing model to value the options at $83,192. Total compensation expense related to option grants recorded during 2007 was $99,482, including all options issued during 2007 and options issued during prior years that required the allocation of certain amounts to 2007. During the year ended December 31, 2006 we granted stock options to purchase 1,200,000 shares of common stock at an exer- cise price of $1.00 per share, of which 1,150,000 vested in 2006 and 50,000 vested in 2007. We used an option pricing model to value the options. The 1,200,000 options were valued at $163,340 and the expense was allocated partially to 2007 ($16,290) and partially to 2006 ($147,050). Interest income increased to $242,513 in 2007 compared to $57,089 in 2006, an increase of $185,424, or 325%. The increase is due to the proceeds from our 2007 and 2006 private placement ﬁnancings which have been deposited in short term interest bear- ing accounts. Monthly interest earnings from invested cash is expected to decline in future months as we utilize the cash balances for operating and exploration activities. GOLD RESOURCE CORPORATION MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over ﬁnancial reporting. The Securities Exchange Act of 1934 deﬁnes internal control over ﬁnancial reporting in Rules 13a-15(f) and 15d-15(f) as a process designed to provide reasonable assurance regarding the reliability of ﬁnancial reporting and the preparation of ﬁnancial state- ments for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: - Pertain to the maintenance of records that in reasonable detail accurately and fairly reﬂect the transactions and disposition of assets; - Provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁnancial statements in accor- dance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and - Provide reasonable assurance regarding prevention and timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our ﬁnancial statements. Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems that are determined to be effective provide only reasonable assurance with respect to ﬁnancial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over ﬁnancial reporting based on criteria for effective internal control over ﬁnancial reporting described in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organi- zations of the Treadway Commission. Based on its assessment, management concluded that we maintained effective internal control over ﬁnancial reporting as of December 31, 2007. Gold Resource Corporation 13 2007 Annual Report REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Gold Resource Corporation Denver, Colorado We have audited the accompanying consolidated balance sheet of Gold Resource Corporation as of December 31, 2007 and the related consolidated statements of operations, changes in shareholders’ equity and cash ﬂows for the years ended December 31, 2006 and 2007. These consolidated ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated ﬁnancial statements based upon our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assur- ance about whether the consolidated ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated ﬁnancial state- ments. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by man- agement, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated ﬁnancial statements referred to above present fairly, in all material respects, the ﬁnancial position of Gold Resource Corporation as of December 31, 2007, and the results of its operations and its cash ﬂows for the years ended December 31, 2006 and 2007, in conformity with accounting principles generally accepted in the United States of America. April 10, 2008 Denver, Colorado Gold Resource Corporation 14 2007 Annual Report GOLD RESOURCE CORPORATION AND SUBSIDIARIES (An Exploration Stage Company) CONSOLIDATED BALANCE SHEETS As of December 31, 2007 and 2006 ASSETS Current assets: Cash and cash equivalents Refundable tax payments Other current assets Total current assets Investment in mineral properties Property and equipment - net Other assets Total assets 2007 2006 $ 22,007,216 — 43,940 22,051,156 — 504,951 1,469 $ 22,557,576 $7,660,258 193,271 12,841 7,866,370 — 96,279 1,469 $7,964,118 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses Total current liabilities $ 768,452 768,452 $ 451,163 451,163 Shareholders’ equity: Preferred stock - $0.001 par value, 5,000,000 shares authorized: no shares issued and outstanding Common stock - $0.001 par value, 60,000,000 shares authorized: 34,146,952 and 28,139,552 shares issued and outstanding, respectively Additional paid-in capital (Deﬁcit) accumulated during the exploration stage Other comprehensive income: Currency translation adjustment — — 34,147 36,498,444 (14,673,211) 28,139 14,062,002 (6,596,869) (70,256) 19,683 Total shareholders’ equity 21,789,124 7,512,955 Total liabilities and shareholders’ equity $22,557,576 $7,964,118 The accompanying notes are an integral part of these consolidated ﬁnancial statements. Gold Resource Corporation Gold Resource Corporation 15 2007 Annual Report 2007 Annual Report 15 GOLD RESOURCE CORPORATION AND SUBSIDIARIES (An Exploration Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2007 and 2006 and for the period from Inception (August 24, 1998) to December 31, 2007 Revenues: Gold sales Costs and Expenses: Property acquisition Property exploration and evaluation Management contract - U. S. Gold, related party General and administrative Salaries and beneﬁts Legal and accounting Investor relations Travel related All other general and administrative Stock based compensation Stock awards Grant of stock options Depreciation Total costs and expenses Operating (loss) Other income: Interest income (Loss) before income taxes Provision for income taxes Net (loss) Other comprehensive income: Currency translation gain (loss) Net comprehensive (loss) Net (loss) per common share: Basic and Diluted 2007 2006 Inception (August 24, 1998) to (December 31, 2007) $ — $ — $ — 20,581 5,711,190 — 880,098 234,154 342,083 173,559 179,260 630,968 99,482 47,480 8,318,855 (8,318,855) 242,513 (8,076,342) — (8,076,342) 100,000 528,851 — 850,490 206,465 130,583 103,241 179,282 479,262 8,023,181 752,191 1,871,022 552,705 495,068 351,564 438,162 479,850 147,050 18,039 2,743,851 (2,743,851) 1,698,318 246,532 72,767 14,980,772 (14,980,772) 57,089 (2,686,762) — (2,686,762) 307,561 (14,673,211) — (14,673,211) (89,939) $(8,166,281) 19,544 $(2,667,218) (70,256) $(14,743,467) $ (0.28) $ (0.13) Weighted average shares outstanding: Basic and Diluted 28,645,038 20,218,659 The accompanying notes are an integral part of these consolidated ﬁnancial statements. Gold Resource Corporation 16 2007 Annual Report GOLD RESOURCE CORPORATION AND SUBSIDIARIES (An Exploration Stage Company) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) For the period from Inception (August 24, 1998) to December 31, 2007 Balance at Inception, August 24, 1998 Shares for contributed capital at $0.005 per share - related parties Net (loss) Balance, December 31, 1998 Shares for contributed capital at $0.005 per share - related parties Net (loss) Balance, December 31, 1999 Shares issued for management contract at $0.17 per share - related party Net (loss) Balance, December 31, 2000 Shares issued for management contract at $0.14 per share - related party Conversion of debentures at $0.25 per share - related parties Sale of shares for cash at $0.25 per share Net (loss) Balance, December 31, 2001 Shares issued for cash at $0.25 per share Shares issued for cash at $0.17 per share Net (loss) Balance, December 31, 2002 Shares issued for cash at $0.25 per share Share issuance costs forgiven Net (loss) Balance, December 31, 2003 Shares issued for cash at $0.25 per share Shares issued in repayment of loan related to exploration agreement at $0.42 per share Shares issued as stock grant at $0.25 per share Net (loss) Balance, December 31, 2004 Stock grant at $0.25 per share Stock option exercised at $0.25 per share Stock issued for cash at $0.25 per share Stock issued for satisfaction of payables at $0.25 per share Shares issued for cash at $0.47 per share Shares issued for cash at $0.50 per share Shares issued for cash at $0.50 per share Net (loss) Number of Common Shares Par Value of Common Shares Additional Paid-In Capital Accumulated (Deﬁcit) Comprehensive Income (Loss) Total Shareholders’ Equity (Deﬁcit) - $ - $ - $ - $ - - 2,800,000 - 2,800,000 1,000,000 - 3,800,000 1,226,666 - 5,026,666 2,800 - 2,800 1,000 - 3,800 1,226 - 5,026 (1,400) - (1,400) (500) - (1,900) 202,578 - 200,678 - (1,657) (1,657) - (663) (2,320) - (205,110) (207,430) 1,333,334 1,334 187,053 - 200,000 820,000 - 7,380,000 392,000 1,351,352 - 9,123,352 577,000 - - 9,700,352 608,000 200 820 - 7,380 392 1,351 - 9,123 577 - - 9,700 608 49,800 204,180 - 641,711 97,608 223,322 - 962,641 143,673 25,327 - 1,131,641 151,392 - - (346,498) (553,928) - - (788,629) (1,342,557) - - (496,046) (1,838,603) - - - - - - - - - - - - - - - - - (17) (17) - - 29 12 - 1,400 (1,657) (257) 500 (663) (420) 203,804 (205,110 (1,726) 188,387 50,000 205,000 (346,498) 95,163 98,000 224,673 (788,646) (370,810) 144,250 25,327 (496,017) (697,250) 152,000 1,200,000 1,200 498,800 - - 500,000 600,000 - 12,108,352 1,750,000 10,000 276,000 1,280,000 2,728,500 122,000 30,000 - 600 - 12,108 1,750 10 276 1,280 2,729 122 30 - 149,400 - 1,931,233 435,750 2,490 68,724 318,720 1,272,271 60,878 14,970 - - (853,593) (2,692,196) - - - - - - - (1,217,911) - (73) (61) - - - - - - - 200 150,000 (853,666) (748,916) 437,500 2,500 69,000 320,000 1,275,000 61,000 15,000 (1,217,711) Gold Resource Corporation 17 2007 Annual Report GOLD RESOURCE CORPORATION AND SUBSIDIARIES (An Exploration Stage Company) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) For the period from Inception (August 24, 1998) to December 31, 2007 (CONTINUED) Balance, December 31, 2005 Stock options exercised at $0.25 per share Stock options granted Director stock grant at $1.00 per share Shares issued for cash at $1.00 per share, net of issue costs Shares issued for investor relations services at $1.14 per share Shares issued for cash at $1.20 per share, net of issue costs Shares issued for investment banking services at $1.20 per share Employee stock grants at $1.71 per share Net (loss) Balance, December 31, 2006 Shares issued for investor relations services at weighted average price of $3.39 per share Shares issued for consulting services in Mexico at $3.68 per share Stock options granted Shares issued for cash at $4.00 per share, net of issue costs Shares issued for investment banking services Net (loss) Balance, December 31, 2007 Number of Common Shares Par Value of Common Shares Additional Paid-In Capital Accumulated (Deﬁcit) Comprehensive Income (Loss) 18,304,852 240,000 - 100,000 18,305 240 - 100 4,105,036 59,760 147,050 99,900 (3,910,107) - - - 4,600,000 4,600 4,346,600 280,000 280 319,720 4,322,000 4,322 4,924,378 - - - 139 - - - - - - Total Shareholders’ Equity (Deﬁcit) 213,373 60,000 147,050 100,000 4,351,200 320,000 4,928,700 257,700 35,000 - 28,139,552 257 35 - 28,139 (257) 59,815 - 14,062,002 - - (2,686,762) (6,596,869) - - 19,544 19,683 - 59,850 (2,667,218) 7,512,955 170,000 170 575,598 15,000 - 15 - 55,185 99,482 5,558,500 5,559 21,706,441 - - - - - - - - 575,768 55,200 99,482 21,712,000 263,900 - (264) - 34,146,952 $ 34,147 $ 36,498,444 264 - - (8,076,342) - (89,939) $(14,673,211) $ (70,256) - (8,166,281) $ 21,789,124) Gold Resource Corporation 18 2007 Annual Report GOLD RESOURCE CORPORATION AND SUBSIDIARIES (An Exploration Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2007 and 2006 and for the period from Inception (August 24, 1998) to December 31, 2007 Cash ﬂows from operating activities: Net (loss) Adjustments to reconcile net (loss) to net cash used by operating activities: Depreciation Stock compensation Management fee paid in stock Related party payable paid in stock Foreign currency translation adjustment Issuance cost forgiven Changes in operating assets and liabilities: Operating assets Accounts payable and accrued liabilities Other liabilities - related parties Other Total adjustments Net cash (used in) operating activities Cash ﬂows from investing activities: Capital expenditures Net cash (used in) investing activities Cash ﬂows from ﬁnancing activities: Cash proceeds from initial public stock offering Cash proceeds from other sales of stock Cash proceeds from exercise of options Proceeds from debentures - founders Proceeds from exploration funding agreement - Canyon Resources Net cash provided by ﬁnancing activities: Net increase in cash and equivalents Cash and equivalents at beginning of year Cash and equivalents at end of year Supplemental Cash Flow Information Interest paid Income taxes paid Non-cash investing and ﬁnancing activities: Conversion of Canyon Resources funding into common stock Conversion of founders debentures into 2007 2006 Inception (August 24, 1998) to December 31, 2007) $(8,076,342) $(2,686,762) $(14,673,211) 47,480 730,450 - - (89,939) - 162,172 317,289 - - 1,167,452 (6,908,890) (456,152) (456,152) - 21,712,000 - - - 21,712,000 14,346,958 7,660,258 $22,007,216 $ - $ - 18,039 626,900 - - 19,544 - (191,135) 426,326 (8,770) - 890,904 (1,795,858) (59,966) (59,966) 4,351,200 4,928,700 60,000 - - 9,339,900 7,484,076 176,182 $7,660,258 $ - $ - 72,767 1,944,850 392,191 320,000 (70,256) 25,327 (43,940) 768,452 - (4,569) 3,404,822 (11,268,389) (577,718) (577,718) 4,351,200 28,889,623 62,500 50,000 500,000 33,853,323 22,007,216 - $22,007,216 $ - $ - $ - $ - $ 500,000 common stock $ - $ - $ 50,000 The accompanying notes are an integral part of these consolidated ﬁnancial statements. Gold Resource Corporation 19 2007 Annual Report GOLD RESOURCE CORPORATION AND SUBSIDIARIES (An Exploration Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 1. Summary of Signiﬁcant Accounting Policies Basis of Presentation. Gold Resource Corporation (the “Company”) was organized under the laws of the State of Colorado on August 24, 1998. The Company has been engaged in the exploration for precious and base metals, primarily in Mexico, as an exploration stage company. It plans to develop mineral properties and ultimately become a producer of gold, silver, and base metals. The Company has not generated any revenues from operations. The consolidated ﬁnancial statements included herein are expressed in United States dollars, the Company’s reporting currency. Basis of Consolidation. The consolidated ﬁnancial statements include the accounts of the Company and its wholly owned Mexican corporation subsidiaries, Don David Gold S.A. de C.V. and Golden Trump Resources S.A. de C.V. The expenditures of Don David Gold and Golden Trump Resources are generally incurred in Mexican pesos. Signiﬁcant intercompany accounts and transac- tions have been eliminated. Estimates. The preparation of ﬁnancial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. Management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. Estimates that are critical to the accompany- ing consolidated ﬁnancial statements include the identiﬁcation and valuation of proven and probable reserves, treatment of explora- tion and development costs as either an asset or an expense, valuation of deferred tax assets, and the likelihood of loss contingencies. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reason- able under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabili- ties that are not readily apparent from other sources. Actual results could differ from these estimates. Estimates and assumptions are revised periodically and the effects of revisions are reﬂected in the ﬁnancial statements in the period it is determined to be necessary. Statements of Cash Flows. The Company considers cash in banks, deposits in transit, and highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents. Exploration and Development Costs. Mineral property acquisition, exploration and related costs are expensed as incurred unless proven and probable reserves exist and the property is a commercially minable property. If it has been determined that a mineral property can be economically developed, the costs incurred to develop such property, including costs to further delineate the ore body and develop the property for production, may be capitalized. In addition, the Company may capitalize previously expensed acquisition and exploration costs if it is later determined that the property can economically be developed. Interest costs, if any, al- locable to the cost of developing mining properties and to constructing new facilities would be capitalized until operations commence. Mine development costs incurred either to develop new ore deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production would also be capitalized. All such capitalized costs, and estimated future development costs, if any, will be amortized using the units-of-production method over the estimated life of the ore body. The units-of-production method requires an estimate of proven and probable reserves. Until we establish proven and probable reserves, we will generally not capitalize mining costs and will not report any amortization expense. Costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations. Costs of abandoned projects are charged to operations upon abandonment. We evaluate, at least quarterly, the carrying value of capitalized mining costs and related property, plant and equipment costs, if any, to determine if these costs are in excess of their net realizable val- ue and if a permanent impairment needs to be recorded. The periodic evaluation of carrying value of capitalized costs and any related property, plant and equipment costs are based upon expected future cash ﬂows and/or estimated salvage value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” Property and Equipment. All items of property and equipment are carried at cost not in excess of their estimated net real- izable value. Normal maintenance and repairs are charged to earnings while expenditures for major maintenance and betterments are capitalized. Gains or losses on disposition are recognized in operations. Gold Resource Corporation 20 2007 Annual Report Depreciation. Depreciation of property and equipment is computed using straight-line methods over the estimated economic lives, as follows: Trucks and autos Ofﬁce furniture and equipment Computer hardware and software Exploration equipment 4 to 5 years 5 to 10 years 3 years 6 to 8 years Property Retirement Obligation. The Company follows SFAS 143, “Accounting for Asset Retirement Obligations.” SFAS 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period that it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company has determined that it has no material property retirement obligations as of December 31, 2007. Stock Option Plans. Effective January 1, 2006, the Company implemented SFAS 123, “Accounting for Stock-Based Com- pensation,” requiring the Company to provide compensation costs for the Company’s stock option plans determined in accordance with the fair value based method prescribed in SFAS 123, as amended. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model and provides for expense recognition over the service period, if any, of the stock option. Prior to January 1, 2006, the Company applied APB Opinion 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for all stock option plans. Under APB Opinion 25, no compensation cost was recognized for stock options issued to employees as the exercise price of the Company’s stock options granted equaled or exceeded the market price of the underly- ing common stock on the date of grant. Per Share Amounts. SFAS 128, “Earnings Per Share,” provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of shares outstanding during the period (28,645,038 for 2007 and 20,218,659 for 2006). Diluted earnings per share reﬂect the potential dilution of securities that could share in the earnings of the Company, similar to fully diluted earnings per share. Potentially dilutive securities, such as common stock options, are excluded from the calculation when their effect would be anti- dilutive. For the period ended December 31, 2007, outstanding options to purchase 2,650,000 shares of common stock would have an anti-dilutive effect and were therefore excluded from the calculation. Income Taxes. The Company accounts for income taxes under SFAS 109, “Accounting for Income Taxes”. Temporary differ- ences are differences between the tax basis of assets and liabilities and their reported amounts in the ﬁnancial statements that will result in taxable or deductible amounts in future years. In accordance with FIN 48 (effective January 1, 2007) which clariﬁes SFAS 109, the Company recognizes in its ﬁnancial statements the impact of any tax position that more than likely will be sustained in an examination, based on the technical merits of the position. Business Risks. The Company continually reviews the mining and political risks it encounters in its operations. It mitigates the likelihood and potential severity of these risks through the application of high operating standards. The Company may be affected to various degrees by changes in environmental regulations, including those for future site restoration and reclamation costs. The Compa- ny’s business is subject to extensive licensing, permitting, governmental legislation, control and regulations. The Company endeavors to be in compliance with these regulations at all times. Fair Value of Financial Instruments. SFAS 107, “Disclosures About Fair Value of Financial Instruments,” requires disclo- sure of fair value information about ﬁnancial instruments. FASB Statement No. 157, “Fair Value Measurements” (SFAS 157) deﬁnes fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2007. The respective carrying value of certain on-balance-sheet ﬁnancial instruments approximate their fair values. These ﬁnancial instruments include cash, cash equivalents, refundable tax payments, accounts payable and accrued liabilities. Fair values were assumed to approximate carrying values for these ﬁnancial instruments since they are short term in nature and their carrying amounts approxi- mate fair value, or they are receivable or payable on demand. Concentration of Credit Risk. The Company’s operating cash balances are maintained in two primary ﬁnancial institutions and periodically exceed federally insured limits. The Company believes that the ﬁnancial strength of these institutions mitigates the un- derlying risk of loss. To date, these concentrations of credit risk have not had a signiﬁcant impact on the Company’s ﬁnancial position or results of operations. Foreign Operations. The Company’s present activities are in Mexico. As with all types of international business operations, currency ﬂuctuations, exchange controls, restrictions on foreign investment, changes to tax regimes, political action and political insta- bility could impair the value of the Company’s investments. Gold Resource Corporation 21 2007 Annual Report Foreign Currency Translation. The local currency, the Mexican peso, is the functional currency for the Company’s sub- sidiaries. Current assets and current liabilities are translated using the exchange rate in effect at the balance sheet date. Other assets and liabilities are translated using historical exchange rates. Revenues and expenses are translated at the average exchange rate for the year. Translation adjustments are reported as a separate component of stockholders’ equity. Recent Pronouncements. In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). Under this standard, an entity is required to provide additional information that will assist investors and other users of ﬁnancial information to more easily understand the effect of the company’s choice to use fair value on its earnings. Further, the entity is required to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. This standard does not eliminate the disclosure requirements about fair value measurements included in FAS 157 and FAS No. 107, Disclosures about Fair Value of Financial Instruments. FAS 159 is effective for ﬁscal years beginning after November 15, 2007. Management is currently evaluating the requirements of FAS 159 and has not yet determined the impact on its ﬁnancial statements. In December 2007 the FASB issued FAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). This statement replaces SFAS 141, Business Combinations. The statement provides guidance for how the acquirer recognizes and measures the iden- tiﬁable assets acquired, liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R provides for how the acquirer recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. The statement deter- mines what information to disclose to enable users to be able to evaluate the nature and ﬁnancial effects of the business combination. The provisions of SFAS 141R are effective as of January 1, 2009 and do not allow early adoption. Management is currently evaluating the impact of adopting this statement. In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160), which becomes effective on January 1, 2009. This standard establishes accounting and reporting standards for ownership inter- ests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufﬁcient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. Management is currently evaluating the impact of adopting this statement. There were various other accounting standards and interpretations issued during 2007 and 2006, none of which are expected to a have a material impact on the Company’s consolidated ﬁnancial position, operations or cash ﬂows. 2. Mineral Properties We currently have an interest in four properties, the El Aguila property, the Las Margaritas property, the El Rey property and the Solaga property. We lease claims comprising the El Aguila Project from an individual who serves as our consultant in Mexico and the Solaga property from an entity partially owned by our consultant in Mexico. We own mining concessions for the El Rey property, which are subject to a 2% royalty on production payable to this consultant. All of these properties are in the exploration stage and have no proven or probable reserves. El Aguila and Las Margaritas. Effective October 14, 2002, we leased a prospective gold/silver property comprised of three concessions, El Aguila, El Aire and La Tehuana, from Jose Perez Reynoso, a consultant to our company. The lease agreement is sub- ject to a 4% net smelter return royalty where production is sold in the form of gold/silver dore and 5% for production sold in concen- trate form. Prior to 2007 we have made periodic advance royalty payments under the lease totaling $260,000 and no further advance royalty payments are due. El Rey. We have acquired claims in another area of the Sierra Madre del Sur region of Mexico by ﬁling concessions under the Mexican mining laws. The mineral concessions making up the El Rey property are located within the San Baltazar Chichicapam Ejido. During the year ended December 31, 2007, we spent $449,000 on exploratory drilling at El Rey. Solaga. In February 2007 we leased a 100% interest in a property known as the Solaga property. The lease required us to pay $10,000 at the time of execution, perform $25,000 of work and grant the lessor a 4% net smelter return on any production. We have conducted no exploration on this property to date. Gold Resource Corporation 22 2007 Annual Report 3. Property and Equipment At December 31, 2007, property and equipment consisted of the following: Land Trucks and autos Ofﬁce furniture and equipment Exploration equipment Subtotal Accumulated depreciation Total 4. Income Taxes 2007 $152,522 131,509 88,385 205,302 577,718 (72,767) $ 504,951 2006 $ — 60,203 50,693 10,670 121,566 (25,287) $ 96,279 At December 31, 2007, the Company has tax loss carryforwards approximating $7,400,000 that expire at various dates through 2027. The principle difference between the net loss reported for book purposes and the taxable loss reported for tax purposes relates to the taxation of foreign subsidiaries. Secondly, stock based compensation expenses are generally deductible in different peri- ods and in different amounts than the expense recognized for book purposes. The tax effects of temporary differences that give rise to signiﬁcant portions of the deferred tax assets and deferred liabilities at December 31, 2007 and 2006 are presented below: Deferred tax assets: Net operating loss carryforward Foreign losses Stock based compensation Total deferred tax assets Valuation allowance Net deferred tax asset 2007 2006 $ 2,537,000 2,167,000 278,000 4,982,000 (4,982,000) $ -- $ 1,972,000 -- -- 1,972,000 (1,972,000) $ -- At this time, the company is unable to determine if it will be able to beneﬁt from its deferred tax asset. There are limitations on the utilization of net operating loss carryforwards, including a requirement that losses be offset against future taxable income, if any. In addition, there are limitations imposed by certain transactions which are deemed to be ownership changes. Accordingly, a valuation allowance has been established for the entire deferred tax asset. The change in the valuation allowance was approximately $2,616,000 during 2007. A reconciliation of the tax provision for 2007 and 2006 at statutory rates is comprised of the following components: Tax at statutory rates Book to tax adjustments: Stock and option grants Valuation allowance Tax provision 5. Shareholders’ Equity (Deﬁcit) 2007 $(2,746,000) 34,000 2,712,000 2006 $(914,000) 217,000 697,000 $ -- $ -- Effective February 21, 2005, the Company declared and effected a 100% forward stock split where one additional share of common stock, par value $.001, was issued for each common share outstanding as of that date. All of the ﬁnancial information in this report has been adjusted to reﬂect the effect of this two-for-one stock split and the increase in authorized shares. The Company was formed August 24, 1998 by William W. Reid and David C. Reid (the “Founders”). During 1998 and 1999, the Founders received 3,800,000 shares of common stock valued at $1,900 for administrative and organization expenses. The Com- pany remained generally inactive through 1999. Commencing July 1, 2000, the Company and US Gold, a publicly traded Colorado corporation, entered into a management contract whereby US Gold provided general management of the business activities of the Company through December 31, 2001. Under this management contract, US Gold was issued 2,560,000 shares of common stock of the Company. The 2,560,000 shares were valued at $392,191 or approximately $.15 per share. Through this arrangement the Company beneﬁted from experienced manage- Gold Resource Corporation 23 2007 Annual Report ment without the need to raise cash funding for the related cost of such management and administration. The Company was, however, responsible for all additional funding needed. During 2001, the Founders made convertible debenture loans to the Company of $50,000 and then converted $50,000 in con- vertible debentures into 200,000 shares of common stock of the Company at a conversion price of $.25 per share. In September 2001, the Company commenced the sale of its common shares under exemptions offered by federal and state securities regulations. During 2001, the Company sold 820,000 shares at $.25 per share (total $205,000). During 2002, the Company sold 392,000 shares at $.25 per share ($98,000) to various parties and 1,351,352 shares at ap- proximately $.17 per share ($224,673) to an institutional investor, RMB International (Dublin) Limited (“RMB”). During 2003, the Company sold 577,000 shares at $.25 per share raising net proceeds of $144,250. Effective September 30, 2003, U.S. Gold acquired the RMB shares in exchange for U.S. Gold shares, and terminated the obligation of the Company to pay RMB approximately $25,327 in transaction costs, which was added back into paid-in-capital. During 2004, the Company sold 608,000 shares at $.25 per share raising net proceeds of $152,000. Also during 2004, the Company issued 1,200,000 shares at approximately $.42 per share to Canyon for $500,000 in repayment of a loan for funding of exploration cost at the El Aguila property. Also during 2004, the Company made a stock grant of 600,000 shares at $.25 per share or $150,000 to a consultant of the Company, Jose Perez Reynoso. Effective January 2, 2005, the Company made common stock awards to its two executive ofﬁcers and a consultant of an aggregate 1,750,000 shares for services performed during 2004 and 2005. The shares were valued at $437,500 (or $0.25 per share) which was recorded as stock based compensation expense of $350,000 in 2004 and $87,500 in 2005. In this distribution of com- mon stock, William W. Reid received 1,000,000 shares, David C. Reid received 500,000 shares and William F. Pass received 250,000 shares. Also effective January 2, 2005, a stock option agreement with William F. Pass covering 400,000 shares of common stock at exercise price of $.25 per share was reduced by 250,000 shares leaving 150,000 shares remaining subject to option. During 2005 an individual exercised stock options for 10,000 shares for $2,500. In June 2005, the Company issued 1,280,000 shares to U.S. Gold Corporation in satisfaction of $320,000 owed for a prior year management contract. During 2005, the Company sold 428,000 shares to individual investors for cash proceeds of $145,000 (276,000 shares at $0.25 per share and 152,000 shares at $0.50 per share). In addition, during July and August 2005, the Company closed transactions under a Subscription Agreement and Stock Purchase Option Agreement with Heemskirk Consolidated Limited (“Heemskirk”), an Australian global mining house, whereby Heemskirk purchased 2,000,000 shares of common stock of the Company at $0.50 per share. A ﬁnder’s fee of 140,000 shares was paid to a third party (resulting in a net value of $0.47 per share). Heemskirk had previously purchased (in April, 2005) 150,000 shares of common stock at $0.50 per share and the Company had paid a ﬁnder’s fee of 10,500 shares. The Company agreed to give Heem- skirk a ﬁrst right of offer for any ﬁnancings, including sale of equity, the Company may pursue, subject to the prior rights of Canyon discussed above. In a similar transaction during August 2005, the Company sold 400,000 shares to another investor raising $200,000 and paid a ﬁnder’s fee to a third party of 28,000 shares. These transactions resulted in the issuance of 2,728,500 shares for net cash proceeds of $1,275,000 ($0.47 per share). During 2006, the Company sold 4,600,000 shares of common stock at $1.00 per share in a public offering under a Form SB-2 registration statement that was declared effective on May 15, 2006. The Company received cash proceeds of $4,351,200 (net of ﬁnd- ers’ fees of $248,800). During 2006, the Company completed a private placement of 4,322,000 shares of common stock at $1.20 per share, and received net cash proceeds of $4,928,700, after deducting ﬁnders’ fees of $257,700. The Company also issued 257,700 shares of com- mon stock as ﬁnders’ fees in connection with this private placement. During 2006, the Company received cash proceeds of $60,000 pursuant to the exercise of options to purchase 240,000 shares at $0.25 per share. Gold Resource Corporation 24 2007 Annual Report In May, 2006, the Company made a common stock award of 100,000 shares to a director. These shares were valued at $100,000. In December, 2006, the Company made a common stock award of 35,000 shares to two employees. These shares were val- ued at $59,850. In October, 2006, the Company issued 250,000 shares of restricted common stock in exchange for investor relations services. These shares were valued at $275,000. Pursuant to a contract effective November 1, 2006, the Company agreed to issue shares of common stock to a consultant per- forming investor relations work on its behalf. The 30,000 shares issued in November 2006 were valued at $1.50 per share, or $45,000. The 30,000 shares issued in February 2007 were valued at $2.428 per share, or $72,840. The 30,000 shares issued in May 2007 were valued at $3.39 per share or $101,670. In November, 2007, 30,000 shares were issued at a value of $4.14 per share or $124,200, and 20,000 shares were issued at a value of $4.235 per share or $84,703. The Company agreed to issue an additional 10,000 shares for services performed during December 2007 valued at $4.375 per share or $43,745. On May 1, 2007, the Company entered into an investor relations contract for international investors that required the issu- ance of 50,000 shares of restricted common stock during the second quarter of 2007. These shares were valued at fair market value of $148,500. On October 2, 2007, the Company agreed to issue 15,000 shares of common stock for consulting services performed in Mexico. These shares were valued at $3.68 per share or $55,200 and were recorded as stock compensation during the year ended December 31, 2007. On December 5, 2007, the Company completed the sale of 5,558,500 shares of common stock in a private placement for a price of $4.00 per share, for aggregate gross proceeds of $22,234,000. The sales were made pursuant to a subscription agreement be- tween the Company and each subscriber. In connection with the private placement, the Company agreed to pay ﬁnders’ fees of $522, 000 cash and 263,900 shares of common stock. The Company may continue to raise capital through the sale of its common shares and may also seek other funding or corpo- rate transactions to achieve its business objectives. As of December 31, 2007, the Founders beneﬁcially own a total of 7,264,845 shares (excluding options), or approximately 21% of the outstanding shares. The Company has a non-qualiﬁed stock option and stock grant plan under which stock options and stock grants may be granted to key employees, directors and others (the “Plan”). Options to purchase shares under the Plan must be granted at fair value as of the date of the grant. A total of 6,000,000 common shares have been reserved under the Plan. Effective January 1, 2006, the Company implemented the rules of SFAS 123(R), “Accounting for Stock-Based Compensa- tion,” which requires the Company to expense as compensation the value of grants and options under the Plan as determined in accor- dance with the fair value based method prescribed in SFAS 123(R). The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. During the year ended December 31, 2006, stock options were granted to purchase 1,200,000 shares of common stock. Grants covering 1,100,000 shares were issued to an employee and a director at an exercise price of $1.00 and a term of thirty-three months. All options vested in 2006. Stock option compensation expense of $141,350 was calculated based upon a fair value calcu- lation using the following assumptions: expected life of 2.75 years, stock price of $1.00 at date of grant, dividend yield of 0%, and interest rate of 5%. Grants covering 100,000 shares were issued to a service provider with an exercise price of $1.00 per share and a term of twenty-four months. Options covering 50,000 shares vested in 2006 and options covering 50,000 shares vested in 2007. Stock option compensation expense of $21,440 was calculated based upon a fair value calculation using the following assumptions: expected life of two years, stock price of $1.00 at date of grant, dividend yield of 0%, and interest rate of 5%. The total cost of the 1,200,000 options issued during 2006 was $163,340. The expense allocated to 2006 was $147,050 and the expense allocated to 2007 was $16,290. Gold Resource Corporation 25 2007 Annual Report During the year ended December 31, 2007, stock options were granted to a public relations consultant to purchase 50,000 shares of common stock at an exercise price of $3.68 per share and a term of two years and a vesting period during 2007. Stock option compensation expense of $83,192 was calculated based upon a fair value calculation using the following assumptions: expected life of two years, stock price of $3.68 at date of grant, dividend yield of 0%, and interest rate of 4%. 2007 2006 Weighted Average Exercise Price Shares Weighted Average Exercise Price $ 0.60 $ 3.68 — — $ 0.65 1,640,000 1,200,000 — (240,000) 2,600,000 $ 0.25 $ 1.00 — 0.25 $ 0.60 Shares 2,600,000 50,000 — — 2,650,000 Outstanding, beginning of year Granted Terminated Exercised Outstanding, end of year Options exercisable, end of year 2,650,000 $ 0.65 2,550,000 $ 0.59 Weighted Average Fair Value of Options Granted during year $ 1.66 $ 0.13 6. Rental Expense and Commitments and Contingencies Effective October 1, 2005, the Company entered into a 3 year lease on ofﬁce space in Denver, Colorado. Required payments approximate $1,500 per month. Remaining minimum lease obligations for future calendar years will be $13,400 in 2008. Rent expense for 2007 was $27,000. Effective January 1, 2006, the Company entered into employment agreements with its executive ofﬁcers which extend for a three-year term. Pursuant to the terms of those agreements, William Reid’s annual salary is $240,000 and David Reid’s annual salary is $170,000. Each individual also participates in health and other insurance programs maintained by the Company. The employment agreements are automatically renewable for one-year terms unless either party gives notice to the other that they do not wish to renew the agreement, not less than 120 days prior to expiration. Pursuant to the terms of the employment agreements, the employee would be entitled to certain payments in the event his em- ployment is terminated under certain circumstances. If the Company terminates the agreement without cause, or either executive ofﬁcer terminates the agreement “with good reason,” the Company would be obligated to pay two years of compensation in accordance with its regular pay periods. Termination by an executive ofﬁcer with good reason includes a change in control. 7. Related Party Transactions US Gold— Effective July 1, 2000, the Company and US Gold entered into a management contract whereby US Gold provided general management of the business activities of the Company through December 31, 2001 in exchange for 2,560,000 shares of common stock of the Company valued at $392,191 or approximately $.15 per share, representing the actual allocated internal costs recorded by US Gold in its performance of the contract. Effective January 1, 2002, the Company and US Gold entered into a second Management Con- tract with a duration of one year (the “2002 Management Contract”). Under the 2002 Management Contract, US Gold provided general management of the business activities of the Company through December 31, 2002 in exchange for payment of $30,000 per month to US Gold. The Company paid US Gold $30,000 under the 2002 Management Contract and owed US Gold $330,000 at December 31, 2004. In June 2005, the Company paid $10,000 and issued 1,280,000 shares to US Gold Corporation in satisfaction of $320,000 owed. Gold Resource Corporation 26 2007 Annual Report In July 2005, in connection with a change in control of US Gold, the employment agreements of Messrs. William Reid, David Reid and William Pass with that entity were terminated. In partial payment of the obligations of US Gold under those agreements, that entity transferred all its shares in the company to the two former US Gold employees and Mr. Pass and US Gold no longer owns an interest in our Company. Jose Perez Reynoso— The Company has certain contractual business arrangements with Jose Perez Reynoso, a Mexican national and consultant to the Company. Mr. Reynoso has been retained as a full-time consultant to the Company at $7,000 per month through November 2006, $9,000 per month effective December 2006, and $10,000 per month effective August 2007 under a month-to-month arrangement. The Company also leased the El Aguila Property from Mr. Reynoso under terms which required advance royalty payments to Mr. Reynoso aggregating $260,000. 8. Subsequent Events Effective January 13, 2008 the Company agreed to issue 10,000 restricted shares of common stock for investor relations con- sulting services performed during January 2008. The 10,000 shares were valued at $42,470 ($4.247 per share). On January 15, 2008, a Director of the Company exercised options to purchase 50,000 shares of the Company’s common stock at the exercise price of $1.00 per share. Gold Resource Corporation 27 2007 Annual Report Transfer Agent Corporate Stock Transfer Denver, CO 303-282-4800 Auditors Stark, Winter, Schenkein & CO., LLP Denver, CO 303-694-6700 Legal Counsel Dufford & Brown, P.C. Denver, CO 303-861-8013 CORP OR AT E IN FORM AT ION Directors & Management William (Bill) W. Reid President, CEO and Director David Reid Vice President of Exploration and Director Jose (Pepe) Perez Reynoso Manager of Mexican Operations Jason Reid Vice President of Corporate Development Frank (Monty) L. Jennings Chief Financial Ofﬁcer Financial Consultant Bill M. Conrad Director VP Brishlin Resources, Inc. Trading Symbols: OTC BB: GORO Frankfurt: GIH Shares Outstanding: 34,206,952 Shareholders of Record: 150 Dividend: None 2007 Low Bid High Bid 1st Qtr $1.30 $3.97 2nd Qtr. $2.70 $3.85 2nd Qtr. 1st Qtr 2006 Low Bid (commencing September 14) High Bid 3rd Qrt. $3.57 $4.83 3rd Qrt. $0.90 $1.15 4th Qtr. $3.39 $5.10 4th Qtr. $1.00 $1.90 Shareholders may access our SEC ﬁlings, including the most recent 10-K, from our website at www.goldresourcecorp.com Gold Resource Corporation 28 2007 Annual Report Engineered To Maximize Shareholder Value Gold Resource Corporation 222 Milwaukee Street, Suite 301 Denver, Colorado 80206 Phone: (303) 320-7708 www.Goldresourcecorp.com

Continue reading text version or see original annual report in PDF format above