Gatos Silver 10Q 2021 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 001-39649

GATOS SILVER, INC.

(Exact name of registrant as specified in its charter)


Delaware	27-2654848
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

8400 E. Crescent Parkway, Suite 600

Greenwood Village, CO 80111

(Address of principal executive offices) (Zip Code)

(303) 784-5350

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	GATO	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☑
		Emerging growth company	☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The Company has 700,000,000 shares of common stock, par value $0.001, authorized of which 69,134,494 were issued and outstanding as of November 1, 2021.

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TABLE OF CONTENTS



		Page
	Part I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Shareholders’ Equity (Deficit)	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
Item 4.	Controls and Procedures	29
	Part II - OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Mine Safety Disclosures	31
Item 5.	Other Information	31
Item 6.	Exhibits	31

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PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

GATOS SILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except for share and per share amounts)


	September 30,		December 31,
	2021		2020
ASSETS
Current Assets
Cash and cash equivalents	$	12,398	$	150,146
Related party receivables		1,280		1,727
Other current assets		1,058		3,879
Total current assets		14,736		155,752
Non‑Current Assets
Investment in affiliates		393,608		109,597
Other non-current assets		41		61
Total Assets	$	408,385	$	265,410
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable and other accrued liabilities	$	4,043	$	4,024
Non-Current Liabilities
Credit Facility, net of debt issuance costs		12,583		—
Shareholders' Equity
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,134,494 and 59,183,076 shares outstanding as of September 30, 2021 and December 31, 2020		117		108
Paid‑in capital		542,193		409,728
Accumulated deficit		(150,551)		(147,423)
Treasury stock, at cost, NaN and 144,589 shares as of September 30, 2021 and December 31, 2020, respectively		—		(1,027)
Total shareholders' equity		391,759		261,386
Total Liabilities and Shareholders' Equity	$	408,385	$	265,410

See accompanying notes to the condensed consolidated financial statements.

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GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except for share and per share amounts)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Expenses
Exploration	$	479	$	134	$	1,397	$	516
General and administrative		5,994		1,965		14,008		4,345
Amortization		31		7		45		24
Total expenses		6,504		2,106		15,450		4,885

Other income (expense)
Equity income (loss) in affiliates		1,600		3,447		22,592		(18,069)
Term Loan closing fee		(10,000)		—		(10,000)		—
Other loss		(95)		(908)		(270)		(3,253)
Net other income (expense)		(8,495)		2,539		12,322		(21,322)
Net income (loss) from continuing operations	$	(14,999)	$	433	$	(3,128)	$	(26,207)
Net loss from discontinued operations		—		(1,618)		—		(4,943)
Net loss	$	(14,999)	$	(1,185)	$	(3,128)	$	(31,150)
Net income (loss) per share:
Basic⁽¹⁾
Continuing operations	$	(0.22)	$	0.01	$	(0.05)	$	(0.65)
Discontinued operations	$	—	$	(0.04)	$	—	$	(0.12)
	$	(0.22)	$	(0.03)	$	(0.05)	$	(0.77)
Diluted⁽¹⁾
Continuing operations	$	(0.22)	$	0.01	$	(0.05)	$	(0.65)
Discontinued operations	$	—	$	(0.04)	$	—	$	(0.12)
	$	(0.22)	$	(0.03)	$	(0.05)	$	(0.77)
Weighted average shares outstanding:
Basic⁽¹⁾		67,325,644		40,506,144		62,210,848		40,505,790
Diluted⁽¹⁾		67,325,644		40,506,144		62,210,848		40,505,790

(1)	Prior period results have been adjusted to reflect the two-for-one reverse split in October 2020.

See accompanying notes to the condensed consolidated financial statements.

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GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except for share amounts)


	Number		Amount
	Common	Treasury	Common		Treasury		Paid‑in		Accumulated
	Stock	Stock	Stock		Stock		Capital		Deficit		Total
Balance at December 31, 2020	59,183,076	144,589	$	108	$	(1,027)	$	409,728	$	(147,423)	$	261,386
Stock‑based compensation	—	—		—		—		1,078		—		1,078
Issuance of common stock	182,453	—		—		—		1,559		—		1,559
DSUs converted to common stock	43,523	—		—		—		—		—		—
Other	—	—		—		—		(262)		—		(262)
Net loss	—	—		—		—		—		(1,620)		(1,620)
Balance at March 31, 2021	59,409,052	144,589	$	108	$	(1,027)	$	412,103	$	(149,043)	$	262,141
Stock‑based compensation	—	—		—		—		2,490		—		2,490
Issuance of common stock	331,497	—		—		—		2,662		—		2,662
DSUs converted to common stock	33,652	—		—		—		—		—		—
Other	—	—		—		—		(7)		—		(7)
Net income	—	—		—		—		—		13,491		13,491
Balance at June 30, 2021	59,774,201	144,589	$	108	$	(1,027)	$	417,248	$	(135,552)	$	280,777
Stock‑based compensation	—	—		—		—		2,167		—		2,167
Issuance of common stock, net	9,288,747	(144,589)		9		1,027		121,637		—		122,673
DSU compensation	—	—		—		—		1,141		—		1,141
DSUs converted to common stock	71,546	—		—		—		—		—		—
Net loss	—	—		—		—		—		(14,999)		(14,999)
Balance at September 30, 2021	69,134,494	—	$	117	$	—	$	542,193	$	(150,551)	$	391,759

See accompanying notes to the condensed consolidated financial statements.

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GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) (Continued)

(In thousands, except for share amounts)


	Number⁽¹⁾		Amount
	Common	Treasury	Common		Treasury		Paid-in		Accumulated
	Stock	Stock	Stock		Stock		Capital		Deficit			Total
Balance at December 31, 2019	40,323,430	144,589	$	80	$	(1,027)	$	375,921	$	(225,583)		149,391
Stock-based compensation	—	—		—		—		1,031		—		1,031
DSU compensation	—	—		—		—		61		—		61
Net loss	—	—		—		—		—		(17,821)		(17,821)
Balance at March 31, 2020	40,323,430	144,589	$	80	$	(1,027)	$	377,013	$	(243,404)	$	132,662
Stock-based compensation	—	—		—		—		1,086		—		1,086
Net loss	—	—		—		—		—		(12,144)		(12,144)
Balance at June 30, 2020	40,323,430	144,589	$	80	$	(1,027)	$	378,099	$	(255,548)	$	121,604
Stock-based compensation	—	—		—		—		1,105		—		1,105
Net loss	—	—		—		—		—		(1,185)		(1,185)
Balance at September 30, 2020	40,323,430	144,589	$	80	$	(1,027)	$	379,204	$	(256,733)	$	121,524

(1)	Prior period results have been adjusted to reflect the two-for-one reverse split in October 2020.

See accompanying notes to the condensed consolidated financial statements.

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GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	Nine Months Ended
	September 30,
	2021		2020
OPERATING ACTIVITIES
Net loss	$	(3,128)	$	(31,150)
Plus net loss from discontinued operations		—		4,943
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Amortization		45		24
Stock‑based compensation expense		5,755		3,043
Equity (income) loss in affiliates		(22,592)		18,069

Changes in operating assets and liabilities:
Receivables from related‑parties		446		(3,788)
Accounts payable and other accrued liabilities		1,159		146
Other current assets		2,821		(4)
Operating cash flows from discontinued operations		—		(3,181)
Net cash used by operating activities		(15,494)		(11,898)

INVESTING ACTIVITIES
Investment in affiliates		(261,439)		(8,383)
Investing cash flows from discontinued operations		—		(22)
Net cash used by investing activities		(261,439)		(8,405)

FINANCING ACTIVITIES
Related‑party convertible debt		—		15,000
Credit Facility		13,000		—
Financing costs		(7,274)		(722)
Issuance of common stock		132,873		—
Issuance of treasury stock		1,027		—
Other		(441)		260
Financing cash flows from discontinued operations		—		307
Net cash provided by financing activities		139,185		14,845
Net decrease in cash and cash equivalents		(137,748)		(5,458)
Cash and cash equivalents, beginning of period		150,146		9,085
Cash and cash equivalents, end of period		12,398		3,627
Less cash of discontinued operations		—		619
Cash of continuing operations, end of period	$	12,398	$	3,008
Interest paid	$	67	$	—

Supplemental disclosure of noncash transactions:
Deferred financing costs included in accounts payable and accrued liabilities	$	—	$	882
Director fees in accrued liabilities converted to deferred share units	$	1,141	$	61
Conversion of related party accounts receivable into LGJV capital contributions	$	—	$	9,448

See accompanying notes to the condensed consolidated financial statements.

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GATOS SILVER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands, except share, per share, option, and stock unit amounts)

1. Description of Business

Organization and Nature of Business

Gatos Silver, Inc. (“Gatos Silver” or “the Company”) is a silver dominant production, development and exploration company that discovered a new silver and zinc-rich mineral district in southern Chihuahua State, Mexico.

The Company’s primary efforts are focused on the operation of the Los Gatos Joint Venture (“LGJV”) in Chihuahua, Mexico. On January 1, 2015, the Company entered into the LGJV to develop the Los Gatos District (“LGD”) with Dowa Metals and Mining Co., Ltd. (“Dowa”). Until July 15, 2021, the LGJV operating entities consisted of Minera Plata Real S. de R.L. de C.V (“MPR”), Operaciones San Jose del Plata S. de R.L. de C.V. and Servicios San Jose del Plata S. de R.L. de C.V. (“Servicios”) (collectively the “LGJV Entities”). Effective July 15, 2021, Servicios was merged into MPR.

Dowa completed its $50,000 funding requirement to the LGJV on April 1, 2016, thereby acquiring a 30% interest in the LGJV and the right to purchase future zinc-concentrate production at market rates. The LGJV completed a feasibility study in January 2017 and a technical update to the feasibility study in July 2020. In May 2019, Dowa increased its ownership interest by 18.5% to 48.5% through the conversion of the remaining Dowa MPR Loan (as defined in Note 9 —Commitments, Contingencies and Guarantees) to equity. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa. See Note 9—Commitments, Contingencies and Guarantees for further discussion. As of September 30, 2021, the LGJV ownership is 70.0% Gatos Silver and 30.0% Dowa.

On September 1, 2019, the LGJV commenced commercial production of its 2 concentrate products: a lead concentrate and a zinc concentrate. The LGJV’s lead and zinc concentrates are currently sold to third-party customers.

The Company continues to perform additional definition drilling to further define and expand mineralization of the Cerro Los Gatos deposit, and is performing definition and exploratory drilling at the nearby Esther deposit. On December 5, 2020, the LGJV began the current infill and extension drilling program at the Cerro Los Gatos deposit. On May 7, 2021, the LGJV restarted drilling at the Esther zone.

The Company’s other Mexico exploration efforts are conducted through its wholly-owned subsidiary, Minera Luz del Sol S. de R.L. de C.V. (“MLS”). In March 2021, MLS commenced a 5,400-meter exploration program on its wholly-owned Santa Valeria project, located approximately 15 kilometers from the Cerro Los Gatos deposit.

Discontinued Operations

In October 2020, the Company completed the distribution of its wholly-owned subsidiary, Silver Opportunity Partners LLC (“SOP”), and SOP has been presented as discontinued operations in the Company’s condensed consolidated financial statements. See Note 11 – Discontinued Operations for additional detail.

2. Summary of Significant Accounting Policies

Basis of Consolidation and Presentation

The financial statements represent the condensed consolidated financial position and results of operations of Gatos Silver, Inc. and its subsidiary, MLS. Unless the context otherwise requires, references to Gatos Silver or the Company mean Gatos Silver, Inc. and its consolidated subsidiary. All equity interest in the Company’s wholly-owned subsidiary, SOP, was distributed to its stockholders in October 2020. The accounts for SOP have been presented as discontinued operations in the accompanying interim condensed consolidated financial statements.

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The interim condensed consolidated financial statements are unaudited, but include all adjustments, consisting of normal recurring entries, which are necessary for a fair presentation for the dates and periods presented. Interim results are not necessarily indicative of results for a full year. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all financial information and disclosures required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 10- K”).

Summary of Significant Accounting Policies

The consolidated financial statements for the year ended December 31, 2020, disclose those accounting policies considered significant in determining results of operations and financial position. There have been no material changes to, or in the application of, the accounting policies previously identified and described in the 2020 10-K.

Recent Accounting Pronouncements

The Company adopted the provision of Accounting Standards Update No. 2019-12, Income Taxes (Topic 740). This provision did not have a material impact on the financial statements. There have been no additional accounting pronouncements issued or adopted during the nine months ended September 30, 2021, which are expected to have a material impact on the financial statements.

3. Property, Plant and Equipment, net

Mineral Properties

Mining Concessions

In Mexico, mineral concessions from the Mexican government can only be held by Mexican nationals or Mexican-incorporated companies. The concessions are valid for 50 years and are extendable provided the concessions are kept in good standing. For concessions to remain in good standing a semi-annual fee must be paid to the Mexican government and an annual report describing the work accomplished on the property must be filed. These concessions may be cancelled without penalty with prior notice to the Mexican government. MLS is the concession holder of a series of claims titles granted by the Mexican government.

Santa Valeria Concession

The Company is required to make a production royalty payment of 1% of the net smelter returns on production. The Company may terminate the agreement upon prior notice.

4. Accounts Payable and Other Accrued Liabilities


	September 30,		December 31,
	2021		2020
Accounts payable	$	263	$	560
Accrued expenses		955		1,240
Accrued compensation		2,565		1,964
Other		260		260
Total accounts payable and other current liabilities	$	4,043	$	4,024

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5. Related-Party Transactions

LGJV

The Company has a services agreement with the LGJV to provide certain consulting and administrative services. The Company earned $1,250 and $900 under this agreement for the three months ended September 30, 2021 and 2020, respectively, and during the nine months ended September 30, 2021 and 2020, the Company earned $3,750 and $3,000, respectively. The Company received $4,117 and NaN from the LGJV under this agreement for the nine months ended September 30, 2021 and 2020. The Company had receivables under this agreement of $833 and $1,200 as of September 30, 2021 and December 31, 2020, respectively. The Company also incurs certain LGJV costs and provides short term advances that are reimbursed by the LGJV.

SSMRC

The Company has a Management Services Agreement with Sunshine Silver Mining & Refining Corporation (“SSMRC”) (formerly Silver Opportunity Partners Corporation), pursuant to which the Company provides certain limited executive and managerial advisory services to SSMRC until terminated by either party. SSMRC reimburses the Company for costs of such services. The Company earned NaN from SSMRC under this agreement for the three months ended September 30, 2021 and 2020, respectively, and during the nine months ended September 30, 2021 and 2020, the Company earned $16 and NaN, respectively.

6. Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed similarly, except that weighted average common shares is increased to reflect the potential dilution that would occur if stock options outstanding were exercised or converted into common stock. The dilutive effects are calculated using the treasury stock method.

For both the three and nine months ended September 30, 2021 and 2020, all stock options outstanding have been excluded from the dilutive earnings per share calculation as their effect would be anti-dilutive.

7. Stockholders’ Equity

The Company is authorized to issue 700,000,000 shares of $0.001 par value common stock and 50,000,000 shares of $0.001 par value preferred stock.

On July 19, 2021, the Company completed a public offering of 8,930,000 shares of common stock at a price of $14.00 per share, resulting in net proceeds of $118,894, after deducting underwriting discounts and commissions and expenses paid by the Company. On August 18, 2021, the Company issued an additional 286,962 shares of common stock at a price of $14.00 per share, through the exercise of the over-allotment option, with net proceeds from the additional issuance of $3,837, after deducting underwriting discounts and commissions and expenses paid by the Company.

Stock Option Transactions

The Company’s stock options have a contractual term of 10 years and entitle the holder to purchase shares of the Company’s common stock. The options granted to the Company’s employees and LGJV personnel prior to 2020 have a requisite service period of four years and vest in equal annual installments. Starting in 2020, the options granted to the Company’s employees and LGJV personnel generally have a requisite service period of three years. The sign on options granted to the Company’s President in June 2021 vest in three equal tranches, the first of which vested immediately, and the remainder on the first and second anniversaries of employment with the Company, subject to continued employment on such vesting dates. The options granted to non-employee directors prior to 2020 have a requisite service period of one year and vest in equal monthly installments. The options granted to non-employee directors in January 2020 have a requisite service period of one and a half years and vest in monthly installments. The options granted to non-employee directors in June 2020 have a requisite service period of one year and vest in semi-annual installments.

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The Company granted 489,719 and 810,333 stock options during the nine months ended September 30, 2021 and 2020, respectively. The weighted-average grant-date fair value per share was $9.53 and $6.73 for the nine months ended September 30, 2021 and 2020, respectively. The Company received $4,862 from stock options exercised during the nine months ended September 30, 2021.

Total unrecognized stock-based compensation expense as of September 30, 2021, was $8,346 which is expected to be recognized over a weighted average period of 1.9 years.

Stock option activity for the nine months ended September 30, 2021, is summarized in the following tables:


		Weighted‑
		Average
Director and Employee Options	Shares	Exercise Price
Outstanding at December 31, 2020	5,411,930	$	12.52
Granted	489,719	$	16.72
Exercised	585,735	$	8.30
Forfeited	15,000	$	7.00
Outstanding at September 30, 2021	5,300,914	$	13.39
Vested at September 30, 2021	3,366,804	$	15.11


		Weighted‑
		Average
LGJV Personnel Options	Shares	Exercise Price
Outstanding at December 31, 2020	43,676	$	7.23
Outstanding and vested at September 30, 2021	43,676	$	7.23

Deferred Stock Unit Transactions

Deferred stock units (“DSUs”) are awarded to directors at the discretion of the Board of Directors. The DSUs are fully vested on the grant date and each DSU entitles the holder to receive 1 share of the Company’s common stock upon the director’s cessation of continuous service. In addition, senior executives are eligible to elect to defer receipt of any portion of cash compensation or equity compensation awards other than from the exercise of stock options and take payment in the form of DSUs. Non-employee directors are eligible to elect to defer receipt of any portion of annual retainers or meeting awards and take payment in the form of DSUs. The DSU entitles the holder to receive one share of the Company’s common stock at either a date specified in the deferral election or cessation of service, whichever comes first. The fair value of the DSUs are equal to the fair value of the Company’s common stock on the grant date.

At September 30, 2021, there were 144,958 DSUs outstanding. The Company granted 110,965 and 5,103 DSUs during the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, 148,721 DSUs were converted to common stock.

8. Fair Value Measurements

The Company establishes a framework for measuring the fair value of financial assets and liabilities and nonfinancial assets and liabilities, which are measured at fair value on a recurring (annual) basis in the form of a fair value hierarchy that prioritizes the inputs into valuation techniques used to measure fair value into three broad levels. This hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs. Further, financial assets and liabilities should be classified by level in their entirety based upon the lowest level of input that was significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2: Quoted prices in inactive markets for identical assets or liabilities, quoted prices for similar assets or liabilities in active markets, or other observable inputs either directly related to the asset or liability or derived principally from corroborated observable market data.

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Level 3: Unobservable inputs due to the fact there is little or no market activity. This entails using assumptions in models which estimate what market participants would use in pricing the asset or liability.

Financial Assets and Liabilities

At September 30, 2021, and December 31, 2020, the Company’s financial instruments consisted of cash and cash equivalents, receivables, accounts payable and other current liabilities. The carrying amounts of these financial instruments approximate fair value due to their short maturities.

Non-Financial Assets and Liabilities

The Company discloses and recognizes its non-financial assets and liabilities at fair value on a non-recurring basis. The estimated fair value for these non-financial assets and liabilities are classified as Level 3 of the fair value hierarchy, as the valuation was determined based on internally developed assumptions that market participants would use in the pricing of such assets without observable inputs and no market activity.

The Company recorded its initial investment in affiliates at fair value. The estimated fair value for this non-financial asset is classified as Level 3 of the fair value hierarchy, as the valuation was determined based on internally developed assumptions with few observable inputs and no market activity.

9. Commitments, Contingencies and Guarantees

In determining its accruals and disclosures with respect to loss contingencies, the Company will charge to income an estimated loss if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Legal expenses associated with the commitments and contingencies are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.

The Company’s mining and exploration activities are subject to various laws, regulations and permits governing the protection of the environment. These laws, regulations and permits are continually changing and are generally becoming more restrictive. The Company has made, and expects to make in the future, expenditures to comply with such laws, regulations and permits, but cannot predict the full amount of such future expenditures.

In July 2017, the LGJV Entities entered into a loan agreement (the “Term Loan”) with Dowa whereby the LGJV Entities could borrow up to $210,000 for LGD development, with a maturity date of December 29, 2027. Interest on the Term Loan accrued daily at LIBOR plus 2.35% per annum, with the interest added to the amount borrowed until commencement of production. During 2018, the LGJV paid Dowa a $4,200 closing fee. Commencing June 30, 2021, repayment of the Term Loan in 14 consecutive semi-annual equal payments of the aggregate principal and capitalized interest began. The Company was required to pay an arrangement fee on the borrowing, calculated as 2% per annum of 70% of the outstanding principal balance, payable in semi-annual installments, on that date which was 2 business days prior to June 30 and December 31 each fiscal year until maturity, commencing after the initial drawdown which occurred in July 2018. The Term Loan also required additional principal payments equal to 70% of excess cash flows (as defined).

On July 26, 2021, the Term Loan was repaid in full through capital contributions made to the LGJV by the Company and Dowa in pro-rata amounts equal to their ownership in the LGJV of 70% and 30%, respectively. In conjunction with the repayment, the Company and the LGJV paid closing fees to Dowa of $10,000 and $1,585, respectively.

On January 23, 2018, the LGJV entered into a loan agreement with Dowa (the “Dowa MPR Loan”) whereby the LGJV could borrow up to $65,700 to continue LGD development. Interest on this loan accrued daily at LIBOR plus 1.5% per annum and was added to the amount borrowed. The amount borrowed plus accrued interest was due the earlier of June 30, 2019, or upon the Cerro Los Gatos mine’s substantial completion. If the Company’s 70% portion of the Dowa MPR Loan was not repaid in full on or before the due date, Dowa could elect to convert all or a portion of the principal amount into additional LGJV ownership at a favorable conversion rate.

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The Company contributed $18,200 to the LGJV in May 2019 to provide funding for a partial repayment of principal and interest related to the Dowa MPR Loan. In late May 2019, the Dowa MPR Loan was fully extinguished with a cash payment of $18,200 and the conversion of the remaining $50,737 of principal and interest. The conversion of the remaining principal and interest increased Dowa’s ownership in the LGJV entities by 18.5% to 48.5%. On March 11, 2021, the Company repurchased the 18.5% interest from Dowa, for a total consideration of $71,550, increasing the Company’s ownership in the LGJV to 70.0%. These transactions resulted in a $47,400 higher basis than the underlying net assets of the LGJV Entities. This basis difference is being amortized over the LGJV Entities proven and probable reserves.

On May 30, 2019, the LGJV entered into a working capital facility agreement (the “WCF”) with Dowa whereby the LGJV could borrow up to $60,000 to fund the working capital and sustaining capital requirements of the LGD. Interest on this loan accrued daily at LIBOR plus 3.0% per annum and all outstanding principal and interest was to mature on June 28, 2021. The Company was required to pay an arrangement fee on the borrowing, calculated as 15.0% per annum of 70.0% of the average daily principal amount outstanding under the WCF during such fiscal quarter. On March 11, 2021, the full $60,000 amount outstanding under the WCF was extinguished of which the Company’s pro-rata capital contribution to the LGJV was $42,000.

The Company guarantees the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of September 30, 2021, the LGJV had $7,588 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $19, with varying maturity dates through August 2023.

10.Debt

On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Facility”). The Credit Facility provides for a revolving line of credit in a principal amount of $50,000 and has an accordion feature which allows for an increase in the total line of credit up to $100,000, subject to certain conditions. The Credit Facility matures on July 31, 2024. Loans under the Credit Facility will bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordance with the Company’s consolidated net leverage ratio as of the end of the applicable period. The Credit Facility contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations under the Credit Facility may be accelerated upon the occurrence of certain customary events of default. The Company was in compliance with all covenants under the Credit Facility as of September 30, 2021.

On July 19, 2021, the Company borrowed $13,000 under the Credit Facility at a rate of LIBOR plus 3%. The Company has presented the Credit Facility net of the debt issuance costs and will amortize the debt issuance costs on a straight-line basis over the term of the Credit Facility. The Company recognized amortization of debt issuance costs of $25 for both the three and nine months ended September 30, 2021. Unamortized debt issuance cost was $417 as of September 30, 2021.

The Company recognized interest expense of $82 for both the three and nine months ended September 30, 2021, which has been recorded on the statements of operations under other loss. The Company paid interest of $67 for both the three and nine months ended September 30, 2021.

11. Discontinued Operations

In October 2020, the Company completed the distribution of its reportable U.S. segment, which was comprised of SOP. To effect the distribution, the Company distributed, on a pro rata basis, all equity interest of SOP to its stockholders of record immediately prior to completion of the initial public offering. Shareholders received approximately 0.10594 shares of common stock of SOP for every share of the Company’s common stock held. SOP became a wholly owned subsidiary of a newly created Delaware corporation named Silver Opportunity Partners Corporation, subsequently renamed SSMRC.

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The results of operations for SOP have been reflected as discontinued operations in the condensed consolidated statement of operations for the three and nine months ended September 30, 2020, and consist of the following:


	Three Months Ended		Nine Months Ended
	September 30, 2020		September 30, 2020
Operating Expenses of Discontinued Operations
Exploration	$	102	$	318
Pre-development		506		1,554
General and administrative		423		1,300
Amortization		588		1,774
Total expenses		1,619		4,946

Other Income of Discontinued Operations
Other income		(1)		(3)
Net loss of discontinued operations	$	1,618	$	4,943

The cash flow activity from discontinued operations for the nine months ended September 30, 2020, have been reflected as discontinued operations in the condensed consolidated statement of cash flows for the nine months ended September 30, 2020, and consists of the following:


	September 30,
	2020
Operating Activities of Discontinued Operations
Net loss	$	(4,943)

Adjustments to reconcile net loss to net cash used by operating activities:
Amortization		1,774
Stock compensation expense		179
Accretion expense		82
Changes in operating assets and liabilities:
Accounts payable and other accrued liabilities		(226)
Other current assets		(47)
Net cash used by operating activities of discontinued operations		(3,181)
Investing Activities of Discontinued Operations
Purchase of property, plant and equipment		(22)
Net cash used by investing activities of discontinued operations		(22)
Financing Activities of Discontinued Operations
PPP Loan proceeds		307
Net cash provided by financing activities of discontinued operations		307

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12. Segment Information

The Company operates in a single industry as a corporation engaged in the acquisition, exploration and development of primarily silver mineral interests. The Company has mineral property interests in Mexico. The Company’s reportable segments are based on the Company’s mineral interests and management structure and include Mexico and Corporate segments. The Mexico segment engages in the development and exploration on the Company’s Mexican mineral properties and includes the Company’s investment in the LGJV. Financial information relating to the Company’s segments is as follows:


	Three Months Ended September 30, 2021						Three Months Ended September 30, 2020
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	479	$	—	$	479	$	134	$	—	$	134
General and administrative		577		5,417		5,994		195		1,770		1,965
Amortization		—		31		31		—		7		7
Equity income in affiliates		1,600		—		1,600		3,447		—		3,447
Term Loan closing fee		—		10,000		10,000		—		—		—
Net other loss (income)		15		80		95		(2)		910		908
Total assets		61,373		347,012		408,385		37,359		75,574		112,933


	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	1,397	$	—	$	1,397	$	516	$	—	$	516
General and administrative		909		13,099		14,008		447		3,898		4,345
Amortization		—		45		45		—		24		24
Equity income (loss) in affiliates		22,592		—		22,592		(18,069)		—		(18,069)
Term Loan closing fee		—		10,000		10,000		—		—		—
Net other loss		34		236		270		22		3,231		3,253
Total assets	$	61,373	$	347,012	$	408,385	$	37,359	$	75,574	$	112,933

13. Investment in Affiliate

During the three months ended September 30, 2021 and 2020, the Company recognized $1,600 and $3,447 of income, respectively, and during the nine months ended September 30, 2021 and 2020, the Company recognized $22,592 of income and a $18,069 loss, respectively, on its investment in the LGJV Entities, representing its ownership share of the LGJV Entities’ results. The equity income or loss in affiliate includes amortization of the carrying value of the investment in excess of the underlying net assets of the LGJV Entities. This basis difference is being amortized over the utilization of the LGJV Entities’ proven and probable reserves.

The LGJV Entities combined balance sheets as of September 30, 2021, and December 31, 2020, and the combined statements of income (loss) for the three months and nine months ended September 30, 2021 and 2020, are as follows:

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LOS GATOS JOINT VENTURE

COMBINED BALANCE SHEETS (UNAUDITED)

(in thousands)


	September 30,		December 31,
	2021		2020
ASSETS
Current Assets
Cash and cash equivalents	$	9,941	$	1,676
Receivables		6,961		3,988
Inventories		10,027		10,315
VAT receivable		47,096		50,732
Other current assets		2,543		2,891
Total current assets		76,568		69,602
Non‑Current Assets
Mine development, net		222,128		202,874
Property, plant and equipment, net		192,675		196,942
Total non‑current assets		414,803		399,816

Total Assets	$	491,371	$	469,418

LIABILITIES AND OWNERS' CAPITAL

Current Liabilities
Accounts payable and accrued liabilities	$	32,951	$	35,767
Related party payable		1,299		1,703
Accrued interest		45		101
Unearned revenue		—		3,276
Equipment loans		6,365		7,084
Dowa Term Loan		—		31,826
Working Capital Facility		—		60,000
Total current liabilities		40,660		139,757

Non‑Current Liabilities
Dowa Term Loan		—		187,767
Equipment loans		1,224		6,120
Reclamation obligations		12,846		12,162
Total non‑current liabilities		14,070		206,049

Owners' Capital
Capital contributions		540,638		271,368
Paid‑in capital		18,405		16,366
Accumulated deficit		(122,402)		(164,122)
Total owners' capital		436,641		123,612
Total Liabilities and Owners' Capital	$	491,371	$	469,418

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LOS GATOS JOINT VENTURE

COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Sales	$	56,991	$	44,021	$	178,326	$	81,181

Expenses
Cost of sales		26,374		17,224		70,275		45,496
Royalties		1,181		1,343		3,480		1,372
Exploration		1,595		166		3,505		574
General and administrative		3,414		1,900		9,493		6,550
Depreciation, depletion and amortization		12,734		11,817		36,388		33,077
Other		—		—		—		3,416
		45,298		32,450		123,141		90,485
Other expense
Interest expense		847		2,862		5,320		9,805
Loss on Term Loan extinguishment		4,359		—		4,359		—
Arrangement fee		—		1,576		2,090		6,285
Accretion expense		228		212		684		636
Other income		(61)		—		(80)		(108)
Foreign exchange loss		47		(867)		342		4,655
		5,420		3,783		12,715		21,273

Income (loss) before taxes		6,273		7,788		42,470		(30,577)

Mexico mining tax		750		—		750		—

Net income (loss)	$	5,523	$	7,788	$	41,720	$	(30,577)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the “Report”) and the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2020 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 10-K”), filed with the Securities and Exchange Commission (“SEC”) on March 29, 2021.

Forward-Looking Statements

This Report contains statements that constitute “forward looking information” and “forward-looking statements” within the meaning of U.S. and Canadian securities laws. Forward-looking statements are often identified by words such as ‘‘may,’’ ‘‘might,’’ ‘‘could,’’ ‘‘would,’’ ‘‘achieve,’’ ‘‘budget,’’ ‘‘scheduled,’’ ‘‘forecasts,’’ ‘‘should,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential’’ or ‘‘continue,’’ the negative of these terms and other comparable terminology. These forward-looking statements may include, but are not limited to, those relating to projections of our future financial performance, our anticipated growth strategies and anticipated trends in our industry, production from the Cerro Los Gatos Mine (“CLG”), our expectations relating to further exploration of the Los Gatos District (“LGD”) and the Santa Valeria property, estimated calculations of mineral reserves and resources at our properties, anticipated expenses, tax benefits, future strategic infrastructure development at the CLG and our requirements for additional capital.

All forward-looking statements speak only as of the date on which they are made. These statements are not a guarantee of future performance and involve certain risks, uncertainties and assumptions concerning future events that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. Important factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

●

we have a history of negative operating cash flows and net losses and we may not sustain profitability;

●

we are dependent on two principal projects for our future operations;

●

the Los Gatos Joint Venture (“LGJV”) has historically had significant debt and may incur further debt in the future, which could adversely affect the LGJV’s and our financial health and ability to obtain financing in the future and pursue certain business opportunities;

●

we have outstanding indebtedness and may incur further debt in the future, and the degree to which we are leveraged may have a material adverse effect on our business financial condition or results of operations and cash flows;

●

mineral reserve and mineral resource calculations at the CLG and the LGD are only estimates and actual production results may vary significantly from the estimates;

●

our mineral exploration efforts are highly speculative in nature and may be unsuccessful;

●

actual capital costs, operating costs, production and economic returns may differ significantly from those we have anticipated and there are no assurances that any future development activities will result in profitable mining operations;

●

our operations involve significant risks and hazards inherent to the mining industry;

●

the title to some of the mineral properties may be uncertain or defective;

●

the widespread outbreak of the COVID-19 pandemic and any other health epidemics, communicable diseases or public health crises could also adversely affect us, particularly in regions where we conduct our business operations;

●

the prices of silver, zinc and lead are subject to change and a substantial or extended decline in the prices of silver, zinc or lead could materially and adversely affect our revenues and the value of our mineral properties;

●

the Mexican government, as well as local governments, extensively regulate mining operations, which impose significant actual and potential costs on us, and future regulation could increase those costs, delay receipt of regulatory refunds or limit our ability to produce silver and other metals;

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●

our operations are subject to additional political, economic and other uncertainties not generally associated with U.S. operations; and

●

we are required to obtain, maintain and renew environmental, construction and mining permits, which is often a costly and time-consuming process and may ultimately not be possible.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and information included in this Report and those described from time to time in our filings with the SEC, including, but not limited to, our 2020 10-K. These risks and uncertainties, as well as other risks of which we are not aware or which we currently do not believe to be material, may cause our actual future results to be materially different than those expressed in our forward-looking statements. Undue reliance should not be placed on these forward-looking statements. We do not undertake any obligation to make any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing or to reflect the occurrence of unanticipated events, except as required by law. Certain forward-looking statements are based on assumptions, qualifications and procedures, which are set out only in the technical report entitled “Los Gatos Project, Chihuahua, Mexico,” dated July 1, 2020, which was prepared in accordance with the requirements of subpart 1300 of Regulation S-K and Canadian National Instrument 43-101 — Standards of Disclosure for Mineral Projects (the “Los Gatos Technical Report”). For a complete description of assumptions, qualifications and procedures associated with such information, reference should be made to the full text of the Los Gatos Technical Report, which was filed as Exhibit 96.1 to our Registration Statement on Form S-1 (File No. 333-249224), filed with the SEC on October 1, 2020.

Overview

We are a U.S.-based precious metals production, development and exploration company with the objective of becoming a premier silver producer. We are currently focused on the production and continued development of the CLG and the further exploration and development of the LGD through the LGJV with Dowa:

●

The CLG, located within the LGD, Chihuahua, Mexico, consists of a 2,500 tpd polymetallic mine and processing facility that commenced production on September 1, 2019. The Los Gatos Technical Report, which has an effective date of July 1, 2020, estimates that the deposit contains approximately 9.6 million diluted tonnes of proven and probable mineral reserves (or approximately 6.7 million diluted tonnes of proven and probable mineral reserves on a 70.0% basis, representing the Company’s current ownership interest in the LGJV), with approximately 6.4 million diluted tonnes of proven mineral reserves (or approximately 4.5 million diluted tonnes of proven mineral reserves on a 70.0% basis) and approximately 3.3 million diluted tonnes of probable mineral reserves (or approximately 2.3 million diluted tonnes of probable mineral reserves on a 70.0% basis). The Los Gatos Technical Report states average proven and probable mineral reserve grades are 306 g/t silver, 0.35 g/t gold, 2.76% lead and 5.65% zinc.

●

The LGD, located in Chihuahua, Mexico, is located approximately 120 kilometers south of Chihuahua City and is comprised of a 103,087 hectares land position, constituting a new mining district. The LGD consists of 14 mineralized zones, which include three identified silver, lead and zinc deposits that contain mineral resources—the CLG, the Esther deposit and the Amapola deposit—as well as 11 additional high priority targets defined by high grade drill intersections and over 150 kilometers of outcropping quartz and calcite veins. The area is characterized by a predominant silver, lead and zinc epithermal mineralization. On September 1, 2019, the LGJV commenced production at the CLG. A core component of the LGJV’s business plan is to explore the highly prospective, underexplored LGD with the objective of identifying additional mineral deposits that can be mined and processed, possibly utilizing the CLG plant infrastructure.

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Operational Update

In the first three quarters of 2021, the LGJV achieved the following production from CLG:


CLG Production (100% Basis)	Q3 2021		Q2 2021		Q1 2021		2021 YTD
Tonnes mined (wmt - unreconciled)	242,899		240,047		209,832		692,778
Tonnes milled (dmt - reconciled)	234,054		230,656		203,479		668,189
Tonnes milled per day (dmt)	2,544		2,535		2,261		2,448
Average Grades
Silver grade (g/t)	256		322		261		282
Gold grade (g/t)	0.30		0.35		0.32		0.32
Lead grade (%)	2.35		2.51		2.00		2.3
Zinc grade (%)	4.10		4.41		3.24		3.95
Contained Metal
Silver ounces (millions)	1.7		2.1		1.5		5.3
Gold ounces - in lead concentrate (thousands)	1.3		1.5		1.1		3.9
Lead pounds - in lead concentrate (millions)	10.8		11.2		7.6		29.6
Zinc pounds - in zinc concentrate (millions)	13.5		14.5		8.7		36.7
Recoveries (combined lead and zinc concentrate)
Silver	89	%	89	%	85	%	88	%
Gold	63	%	63	%	60	%	62	%
Lead	91	%	90	%	87	%	90	%
Zinc	74	%	75	%	71	%	74	%

COVID-19 Pandemic

In March 2020, the World Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic temporarily affected our operations in 2020 in part due to the loss of revenue resulting from the 45-day government mandated temporary suspension of all nonessential activities at the LGJV’s CLG site and the expenses associated with the development and implementation of COVID-19 protocols. We believe we have taken appropriate steps to minimize the risk to our employees and to maintain normal business operations. We may take further actions as may be required by government authorities or as we determine are in the best interests of our employees and business partners which may cause additional closures of some or all of our operations in the future.

While the full impact of this pandemic is unknown, we are closely monitoring the developments of the outbreak and continually assessing the potential impact on our business. More recently, new variants of COVID-19, such as the Delta variant, that are significantly more contagious than previous strains, have emerged. The spread of these new strains is causing many government authorities to reimplement tighter restrictions in an effort to lessen the spread of COVID-19 and its variants. Any prolonged disruption of our operations and closure of facilities could result in additional costs being incurred, production and development delays, cost overruns and operational restart costs that would negatively impact our business, financial condition and results of operations. The degree to which the pandemic impacts our business, financial condition and results of operations will depend on future developments, which are highly uncertain, continuously evolving and in many cases cannot be predicted, including, but not limited to, the duration and spread of the pandemic and its variants; its severity; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and the potential hesitancy to utilize them; general economic factors, such as increased inflation; supply chain constraints; and labor supply issues. Accordingly, there remains significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. See “Part I, Item 1A. Risk Factors” in the 2020 10-K for additional risks we face due to the COVID-19 pandemic.

Exploration Update

The Company is active in three separate exploration drilling programs that collectively are estimated to require 51,400 meters of exploration and definition drilling at an expected total cost of $7,700 thousand including Dowa's share of LGJV exploration expenditures. The programs are further detailed below.

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Cerro Los Gatos Infill and Extension Drilling Program

On December 5, 2020, the LGJV commenced a 90-hole, 27,000-meter fill and extension drilling program at the CLG within the LGJV with the goal of converting the CLG’s established 3.7 million tonnes of inferred resources to the measured and indicated category and to discover additional resources along the northwest and southeast extensions of the CLG deposit. Once completed, the Company intends to incorporate the additional measured and indicated resources into a new mine plan that will increase the proven and probable reserves and further support a possible expansion of the CLG’s production rate from 2,500 tpd to 3,000 tpd. The LGJV expanded the drilling program to 132 holes during the third quarter of 2021. The $4,400 thousand program is anticipated to be completed by June 30, 2022. As of September 30, 2021, 78 holes have been drilled.

Los Gatos District Resource Expansion

On May 12, 2021, the LGJV commenced a second exploration program to expand resources throughout the LGD. The initial target is a 59-hole, 19,000-meter campaign with 50-meter spacing at the Esther deposit, to expand its initial indicated resource of 0.46 million tonnes at 133 g/t silver, 2.1% zinc, 0.7% lead and inferred resource of 2.29 million tonnes at 98 g/t silver, 3.0% zinc, and 1.6% lead. Esther is located about four kilometers from the CLG and contains similar styles of mineralization and geochemistry. The $2,700 thousand program is anticipated to be complete by January 31, 2022. As of September 30, 2021, 18 holes have been drilled.

Santa Valeria Project

In March 2021, the Company commenced an 18-hole, 5,400-meter exploration program on its wholly-owned Santa Valeria property. The Santa Valeria target has been developed through regional geologic work by the Company’s exploration team, which defined a large basin structure hosting the mineralization zones within the LGD. Santa Valeria is geologically comparable to CLG, and the Company believes it may contain similar mineral content. As of September 30, 2021, the $600,000 program was completed, and the Company is analyzing the drill data.

Components of Results of Operations

Operating Expenses

Exploration Expenses

We conduct exploration activities under mining concessions in Mexico. We expect exploration expenses to increase significantly as we continue to expand our exploration activities at the LGD and our other exploration properties. Our exploration expenses primarily consist of drilling costs, lease concession payments, assay costs and geological and support costs at our exploration properties.

General and Administrative Expenses

Our general and administrative expenses consist of salaries and benefits, stock compensation, professional and consultant fees, insurance and other general administration costs. Our general and administrative expenses have increased and are expected to further increase significantly as we operate as a public company. We expect higher costs related to salaries, benefits, stock compensation, legal fees, compliance and corporate governance, accounting and audit expenses, stock exchange listing fees, transfer agent and other shareholder-related fees, directors’ and officers’ and other insurance costs, and other administrative costs. We are party to a Management Services Agreement with SSMRC, pursuant to which we will provide certain limited executive and managerial advisory services to SSMRC. SSMRC reimburses us for costs of providing such services.

Equity Income (Loss) in Affiliates

Our equity income (loss) in affiliates relates to our proportional share of net income or loss incurred from the LGJV and the amortization of the basis difference between our investment in the LGJV and the net assets of the LGJV.

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LGJV Arrangement Fee

Our LGJV arrangement fee consisted of arrangement fees related to the Term Loan and the Working Capital Facility (“WCF”) with Dowa prior to their extinguishment on July 26, 2021, and March 11, 2021, respectively. The arrangement fees were based on a fixed 1% and 15% rate for the Term Loan and the WCF, respectively, and 70% of the outstanding principal of the respective facility. These arrangement fees were solely our responsibility. We did not incur LGJV arrangement fees beyond July 26, 2021, on the WCF or Term Loan.

Income Taxes

As we have incurred substantial losses from our exploration and pre-development activities, we may receive further benefits in the form of deferred tax assets that can reduce our future income tax liabilities, if it is more likely than not that the benefit will be realized before expiration. Historically, we have not recognized these potential benefits in our financial statements and have fully reserved for such net deferred tax assets, as we believe it is more likely than not that the full benefit of these net deferred tax assets will not be realized before expiration.

Royalties

Exploration activities are conducted on the LGD mining concessions and on the Company’s 100% owned Santa Valeria concessions in Mexico. Mineral and concession lease payments are required to be paid to various entities to secure the appropriate claims or surface rights. Certain of these agreements also have royalty payments that were triggered when we began producing and selling metal-bearing concentrate.

Results of Operations

The following table presents certain information relating to our operating results for the three and nine months ended September 30, 2021 and 2020. In accordance with generally accepted accounting principles in the United States (“GAAP”), these financial results represent the consolidated results of operations of our Company and its subsidiary (in thousands).


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2021		2020		2021		2020
Expenses
Exploration	$	479	$	134	$	1,397	$	516
General and administrative		5,994		1,965		14,008		4,345
Amortization		31		7		45		24
Total expenses		6,504		2,106		15,450		4,885

Other income (expense)
Equity income (loss) in affiliates		1,600		3,447		22,592		(18,069)
Term Loan closing fee		(10,000)		—		(10,000)		—
Other loss		(95)		(908)		(270)		(3,253)
Net other income (expense)		(8,495)		2,539		12,322		(21,322)
Net income (loss) from continuing operations	$	(14,999)	$	433	$	(3,128)	$	(26,207)
Net loss from discontinued operations		—		(1,618)		—		(4,943)
Net loss	$	(14,999)	$	(1,185)	$	(3,128)	$	(31,150)

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Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

For the three months ended September 30, 2021, we experienced a net loss from continuing operations of $14,999 thousand compared to net income of $433 thousand for the three months ended September 30, 2020. The $15,432 thousand decrease in net income from continuing operations was primarily attributable to the $10,000 thousand Term Loan closing fee paid to Dowa, the $1,847 thousand decrease in equity income in affiliates from the LGJV operations, and the $4,029 thousand increase in general and administrative expense due to: 1) higher legal, consulting and directors and officer’s insurance costs related to public company governance and reporting requirements, 2) increased stock-based compensation expense, and 3) costs relating to a separation agreement entered into with a departing executive officer during the current year quarter.

The decrease in equity income in the LGJV’s operating income for the three months ended September 30, 2021, resulted from the loss on the Term Loan extinguishment, lower ore grades processed, estimated Mexico mining taxes, new in 2021, based on estimated income of the mining entity of the LGJV, and estimated statutorily entitled employee profit sharing on the LGJV operations, also new in 2021, during the three months ended September 30, 2021, partially offset by higher metals prices and higher throughput for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, and higher interest expense and arrangement fees incurred on the WCF and Term Loan for the three months ended September 30, 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

For the nine months ended September 30, 2021, we experienced a net loss from continuing operations of $3,128 thousand compared to a net loss of $26,207 thousand for the nine months ended September 30, 2020. The $23,079 thousand decrease in net loss from continuing operations was primarily attributable to the $40,661 thousand change in equity income (loss) in affiliates from the LGJV operations, partially offset by the $10,000 thousand Term Loan closing fee paid to Dowa and the $9,663 thousand increase in general and administrative expense due to: 1) higher legal, consulting and directors and officer’s insurance costs related to public company governance and reporting requirements, 2) increased stock-based compensation expense, and 3) costs relating to a separation agreement entered into with a departing executive officer during the current year quarter.

The improvement in equity income (loss) in the LGJV’s operating income, for the nine months ended September 30, 2021, resulted primarily from: the increase in our ownership in the LGJV from 51.5% to 70.0% on March 11, 2021; mining and processing activities operating near design throughput for the nine months ended September 30, 2021, compared to the ramp-up to design throughput during the nine months ended September 30, 2020; and significantly higher metals prices for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.

Liquidity and Capital Resources

As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents of $12,398 thousand and $150,146 thousand, respectively, and working capital of $10,693 thousand and $151,728 thousand, respectively. The decrease in cash and cash equivalents and working capital were primarily due to our $71,550 thousand repurchase of the 18.5% interest in the LGJV from Dowa, the $42,000 thousand capital contribution to the LGJV used to extinguish our 70% share of the WCF, the $144,809 thousand capital contribution to the LGJV used to extinguish our 70% share of the Term Loan repayment, and the $10,000 thousand closing fee paid to Dowa; partially offset by proceeds from the July 2021 follow-on public offering and $13,000 thousand borrowing under the Credit Facility. As a result of the 18.5% repurchase, our ownership in the LGJV increased to 70.0% and Dowa’s ownership was reduced to 30% on March 11, 2021.

On July 19, 2021, we completed a public offering of 8,930,000 shares of common stock at a price of $14.00 per share, resulting in net proceeds of $118,894 thousand, after deducting underwriting discounts and commissions and expenses paid by us. On August 18, 2021, the Company issued an additional 286,962 shares of common stock at a price of $14.00 per share, through the exercise of the over-allotment option, with net proceeds from the additional issuance of $3,837 thousand, after deducting underwriting discounts and commissions and expenses paid by us.

On July 12, 2021, the Company entered into a Revolving Credit Facility (the “Credit Facility”). The Credit Facility provides for a $50,000 thousand revolving line of credit and has an accordion feature, which allows for an increase in the total line of credit up to $100,000 thousand, subject to certain conditions. As of September 30, 2021, $13,000 thousand was outstanding under the Credit Facility. For additional information, see “—Liquidity and Capital Resources—Revolving Credit Facility” below.

We guarantee the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of September 30, 2021, the LGJV had $7,588 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount.

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We believe we have sufficient cash and access to borrowings and other resources to carry out our business plans for at least the next 12 months. We are focused on our forward-looking liquidity needs. We are evaluating our ongoing fixed cost structure as well as decisions related to project retention, advancement and development. We may be required to raise additional capital or take other measures to fund future exploration and development. Significant development activities, if warranted, may require that we arrange for financing in advance of planned expenditures. In addition, we expect to continue to increase our current financial resources with external financings as long as our long-term business needs require us to do so. There can be no assurance that external financing will be available to us on acceptable terms, or at all. We manage liquidity risk through our credit facility and the management of our capital structure.

We may be required to provide funds to the LGJV to support operations at the CLG which, depending upon the circumstances, may be in the form of equity, various forms of debt, joint venture funding or some combination thereof. There can be no assurance that additional funds will be available to us on acceptable terms, or at all. If we raise additional funds by issuing equity or convertible securities, substantial dilution to existing stockholders may result. Additionally, if we raise additional funds by incurring new debt obligations, the terms of the debt may require significant cash payment obligations, as well as covenants and specific financial ratios that may restrict our ability to operate our business.

Dowa Debt Agreements

Dowa Term Loan

On July 11, 2017, we entered into the Term Loan with Dowa whereby the LGJV could borrow up to $210,000 thousand to finance the development of the Los Gatos project, with a maturity date of December 29, 2027. Interest accrued daily at LIBOR plus 2.35% per annum, and the interest was added to the amount borrowed until production commenced at the Los Gatos project. The LGJV was obligated to pay 14 consecutive semi-annual payments totaling the aggregate principal amount and capitalized interest beginning June 30, 2021, with payments made two business days prior to the end of each June and December. We guaranteed 70.0% of the Term Loan and were required to pay an arrangement fee on the borrowing, calculated as 2% per annum on 70% of the outstanding principal balance, payable in semi-annual installments.

On July 26, 2021, the LGJV repaid all amounts owed to Dowa under the Term Loan. In conjunction with the Term Loan repayment, the Company also paid Dowa a $10,000 thousand closing fee. To fund its 70% portion of the Term Loan repayment, the Company loaned $144,800 thousand to the LGJV. This loan was converted into a capital contribution to the LGJV on July 26, 2021. Dowa’s 30% portion of the Term Loan was also converted into a capital contribution on July 26, 2021. The LGJV paid $386 thousand of outstanding accrued interest and a $1,585 thousand closing fee related to the Term Loan repayment.

Los Gatos Working Capital Facility

On May 30, 2019, we entered into the WCF with the LGJV and Dowa, under which Dowa agreed to provide a maximum of $60,000 thousand for the benefit of the LGJV, with a maturity date of June 28, 2021. Interest payable under the WCF was LIBOR plus 3% per annum and was payable by the LGJV. We guaranteed 70% of this facility and were required to pay an arrangement fee on the borrowing, calculated as 15.0% per annum on 70.0% of the average daily principal amount outstanding during the relevant fiscal quarter. The full principal amount of the WCF was drawn down by the LGJV as of September 2019. On March 11, 2021, we and Dowa contributed $42,000 thousand and $18,000 thousand, respectively, in capital to the LGJV, extinguishing the WCF.

Revolving Credit Facility

On July 12, 2021, the Company entered into the Credit Facility. The Credit Facility provides for a $50,000 thousand revolving line of credit with an accordion feature, which allows for an increase in the total line of credit up to $100,000 thousand, subject to certain conditions. The Credit Facility matures on July 31, 2024. The Credit Facility contains affirmative and negative covenants that are customary for credit agreements of this nature. The affirmative covenants consist of a leverage ratio, a liquidity covenant and an interest coverage ratio. The negative covenants include, among other things, limitations on asset sales, mergers, acquisitions, indebtedness, liens, dividends and distributions, investments and transactions with affiliates. Obligations under the Credit Facility may be accelerated upon the occurrence of certain customary events of default. Loans under the Credit Facility bear interest at a rate equal to either the LIBOR rate plus a margin ranging from 3.00% to 4.00% or the U.S. Base Rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company, in each case, with such margin determined in accordance with a pricing grid based upon the Company’s consolidated net leverage ratio as of the end of the applicable period.

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On July 19, 2021, the Company borrowed $13,000 thousand under the Credit Facility at a rate of LIBOR plus 3%. As of September 30, 2021, $13,000 thousand was outstanding under the Credit Agreement.

Cash Flows

The following table presents our sources and uses of cash for the periods indicated:


	Nine Months Ended
	September 30,
	2021		2020

	(in thousands)
Net cash provided by (used by)
Operating activities	$	(15,494)	$	(11,898)
Investing activities		(261,439)		(8,405)
Financing activities		139,185		14,845
Total change in cash	$	(137,748)	$	(5,458)

Cash used by operating activities was $15,494 thousand and $11,898 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $3,596 thousand increase in cash usage was primarily due to the $10,000 thousand closing fee paid to Dowa and higher general and administrative costs, partially offset by favorable working capital changes from operations and discontinued operations spun off in October 2020.

Cash used by investing activities was $261,439 thousand and $8,405 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $253,034 thousand increase was primarily due to the $144,809 thousand capital contribution to the LGJV used to extinguish our 70% share of the Term Loan repayment, the $71,550 thousand acquisition of the 18.5% interest in the LGJV from Dowa and the $42,000 thousand pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March 2021.

Cash provided by financing activities was $139,185 thousand and $14,845 thousand for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, cash provided by financing activities primarily reflected the $125,599 thousand in net proceeds from the issuance of common stock in a follow-on public offering and the $13,000 thousand in borrowings under the Credit Facility. For the nine months ended September 30, 2020, cash provided by financing activities primarily reflected the $15,000 thousand in proceeds from related party borrowings.

Results of LGJV Operations

The following table presents information relating to the LGJV’s financial condition as of September 30, 2021 and December 31, 2020, and the operating results for the three and nine months ended September 30, 2021 and 2020, in accordance with GAAP. Pursuant to the purchase of the 18.5% interest from Dowa on March 11, 2021, our current ownership of the LGJV is 70.0%.

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LOS GATOS JOINT VENTURE

COMBINED BALANCE SHEETS (UNAUDITED)

(in thousands)


	September 30,		December 31,
	2021		2020
ASSETS

Current Assets
Cash and cash equivalents	$	9,941	$	1,676
Receivables		6,961		3,988
Inventories		10,027		10,315
VAT receivable		47,096		50,732
Other current assets		2,543		2,891
Total current assets		76,568		69,602
Non-Current Assets
Mine development, net		222,128		202,874
Property, plant and equipment, net		192,675		196,942
Total non-current assets		414,803		399,816

Total Assets	$	491,371	$	469,418

LIABILITIES AND OWNERS' CAPITAL

Current Liabilities
Accounts payable and accrued liabilities	$	32,951	$	35,767
Related party payable		1,299		1,703
Accrued interest		45		101
Unearned revenue		—		3,276
Equipment loans		6,365		7,084
Dowa Term Loan		—		31,826
Working Capital Facility		—		60,000
Total current liabilities		40,660		139,757

Non-Current Liabilities
Dowa Term Loan		—		187,767
Equipment loans		1,224		6,120
Reclamation obligations		12,846		12,162
Total non-current liabilities		14,070		206,049
Owners' Capital
Capital contributions		540,638		271,368
Paid-in capital		18,405		16,366
Accumulated deficit		(122,402)		(164,122)
Total owners' capital		436,641		123,612
Total Liabilities and Owners' Capital	$	491,371	$	469,418

At September 30, 2021, and December 31, 2020, the LGJV had current assets of $76,568 thousand and $69,602 thousand, respectively. The increase in total current assets was primarily due to an increase in cash and trade receivables generated from operations on the higher sales volumes generated in 2021, partially offset by a decrease in value added tax (“VAT”) receivables primarily from the ability to retain VAT collected from the higher concentrate sales. At September 30, 2021, and December 31, 2020, the LGJV had noncurrent assets of $414,803 thousand and $399,816 thousand, respectively. The increase in noncurrent assets was due to sustaining capital expenditures, primarily for mine development at the CLG, partially offset by depletion and depreciation for the nine months ended September 30, 2021.

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At September 30, 2021, and December 31, 2020, the LGJV had current liabilities of $40,660 thousand and $139,757 thousand, respectively. The decrease in current liabilities was primarily due to the extinguishment of the $60,000 thousand WCF on March 11, 2021, and the extinguishment of the $31,286 thousand current portion of the Term Loan in July 2021. At September 30, 2021, and December 31, 2020, the LGJV had noncurrent liabilities of $14,070 thousand and $206,049 thousand, respectively. The decrease in non-current liabilities was primarily due to the principal payment and the July 2021 extinguishment of the Term Loan and scheduled equipment loan payments.

LOS GATOS JOINT VENTURE

COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Sales	$	56,991	$	44,021	$	178,326	$	81,181

Expenses
Cost of sales		26,374		17,224		70,275		45,496
Royalties		1,181		1,343		3,480		1,372
Exploration		1,595		166		3,505		574
General and administrative		3,414		1,900		9,493		6,550
Depreciation, depletion and amortization		12,734		11,817		36,388		33,077
Other		—		—		—		3,416
		45,298		32,450		123,141		90,485
Other expense
Interest expense		847		2,862		5,320		9,805
Loss on Term Loan extinguishment		4,359		—		4,359		—
Arrangement fee		—		1,576		2,090		6,285
Accretion expense		228		212		684		636
Other income		(61)		—		(80)		(108)
Foreign exchange loss		47		(867)		342		4,655
		5,420		3,783		12,715		21,273

Income (loss) before taxes		6,273		7,788		42,470		(30,577)

Mexico mining tax		750		—		750		—

Net income (loss)	$	5,523	$	7,788	$	41,720	$	(30,577)

For the three months ended September 30, 2021, the LGJV had net income of $5,523 thousand compared to net income of $7,788 thousand for the three months ended September 30, 2020. The decrease in net income was primarily due to the loss on the Term Loan extinguishment in July 2021, partially offset by lower interest expense due to lower interest rates, lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan.

For the nine months ended September 30, 2021, the LGJV had net income of $41,720 thousand compared to a net loss of $30,577 thousand for the nine months ended September 30, 2020. The change in net income (loss) was primarily due to increased revenue as a result of 30%, 35% and 17% increases in realized silver, zinc and lead prices, respectively, 67% and 50% higher production rates of lead and zinc concentrates, respectively, 27% and 9% higher silver and zinc ore grades, respectively, and lower interest expense due to lower interest rates, lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan, partially offset by 1% lower lead ore grades and costs incurred directly related to the two-month Mexican government ordered temporary suspension of operations relating to the COVID-19 pandemic during the prior year period.

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The following table presents summarized information relating to the LGJV’s cash flows for the nine months ended September 30, 2021 and 2020.

LOS GATOS JOINT VENTURE

COMBINED STATEMENT OF CASH FLOWS

(in thousands)


	Nine Months Ended September 30,
	2021		2020
Net cash provided by (used by)
Operating activities	$	84,964	$	31,411
Investing activities		(57,698)		(44,208)
Financing activities		(19,001)		13,492
Total change in cash	$	8,265	$	695

Cash provided by operating activities was $84,964 thousand and $31,411 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $53,553 thousand increase in cash provided by operating activities was primarily due to the increase in revenue due to higher metals prices, higher processed ore tonnes and higher ore grades for the nine months ended September 30, 2021, compared to the prior year period, partially offset by increased receivables from customers.

Cash used by investing activities was $57,698 thousand and $44,208 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $13,490 thousand increase in cash used was primarily due to higher expenditures for property, plant and equipment and mine development.

Cash (used by) provided by financing activities was ($19,001) thousand and $13,492 thousand for the nine months ended September 30, 2021 and 2020, respectively. The $32,493 thousand change in financing cash flows was primarily due to the $144,809 thousand retirement of the Term Loan in July 2021, the $60,000 thousand extinguishment of the WCF in March 2021, and the $15,913 thousand Term Loan payment in June 2021, partially offset by the $207,209 thousand of capital contributions in 2021 and the proceeds from the $18,904 thousand related party loans to the LGJV during the nine months ended September 30, 2020.

Non-GAAP Financial Measures

We use certain measures that are not defined by GAAP to evaluate various aspects of our business. These non-GAAP financial measures are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.

Cash Costs and All-In Sustaining Costs

Cash costs and all-in sustaining costs (“AISC”) are non-GAAP measures. AISC was calculated based on guidance provided by the World Gold Council (“WGC”). WGC is not a regulatory industry organization and does not have the authority to develop accounting standards for disclosure requirements. Other mining companies may calculate AISC differently as a result of differences in underlying accounting principles and policies applied, as well as definitional differences of sustaining versus expansionary (i.e. non-sustaining) capital expenditures based upon each company’s internal policies. Current GAAP measures used in the mining industry, such as cost of sales, do not capture all of the expenditures incurred to discover, develop and sustain production. Therefore, we believe that cash costs and AISC are non-GAAP measures that provide additional information to management, investors and analysts that aid in the understanding of the economics of the Company’s operations and performance compared to other producers and provides investors visibility by better defining the total costs associated with production.

Cash costs include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, treatment and refining costs, general and administrative costs, royalties and mining production taxes. AISC includes total production cash costs incurred at the LGJV’s mining operations plus sustaining capital expenditures. The Company believes this measure represents the total sustainable costs of producing silver from current operations and provides additional information of the LGJV’s operational performance and ability to generate cash flows. As the measure seeks to reflect the full cost of silver production from current operations, new project and expansionary capital at current operations are not included. Certain cash expenditures such as new project spending, tax payments, dividends, and financing costs are not included.

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Reconciliation of expenses (GAAP) to non-GAAP measures

The table below presents a reconciliation between the most comparable GAAP measure of the LGJV’s expenses to the non-GAAP measures of (i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product all-in sustaining costs and (iv) by-product all-in sustaining costs for our operations.


	Three Months Ended		Nine Months Ended
(in thousands, except unit costs)	September 30, 2021		September 30, 2021
Expenses	$	45,298	$	123,141
Depreciation, depletion and amortization		(12,734)		(36,388)
Exploration¹		(1,595)		(3,505)
Treatment and refining costs²		3,596		16,372
Cash costs	$	34,565	$	99,620
Sustaining capital		21,180		51,864
All-in sustaining costs	$	55,745	$	151,484
By-product credits³		(28,780)		(73,402)
All-in sustaining costs, net of by-product credits	$	26,965	$	78,082
Cash costs, net of by-product credits	$	5,785	$	26,218

Payable ounces of silver equivalent⁴		2,849		7,837
Co-product cash cost per ounce of payable silver equivalent	$	12.13	$	12.71
Co-product all-in sustaining cost per ounce of payable silver equivalent	$	19.57	$	19.33

Payable ounces of silver		1,614		4,782
By-product cash cost per ounce of payable silver	$	3.58	$	5.48
By-product all-in sustaining cost per ounce of payable silver	$	16.71	$	16.33

1 Exploration costs are not related to current operations.

2 Represent reductions on customer invoices and included in Sales of the LGJV combined statement of income (loss).

3 By-product credits reflect realized metal prices of zinc, lead and gold for the applicable period.

4 Silver equivalents utilize the average realized prices during the nine months ended September 30, 2021 of $24.03/oz silver, $1.29/lb zinc, $0.97/lb lead and $1,799/oz gold and the average realized prices during the three months ended September 30, 2021 of $23.31/oz silver, $1.40/lb zinc, $0.99/lb lead and $1,776/oz gold.

Off-balance sheet arrangements

During the periods presented, we did not, and we currently do not, have any significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our shareholders.

Critical Accounting Policies

Please refer to Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements included in this Report and the 2020 10-K for discussion of our critical accounting policies and estimates.

Jumpstart Our Business Startups Act of 2012

The Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) permits us, as an “emerging growth company,” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for public companies that are not emerging growth companies. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Commodity Price Risk

We engage in the production of silver and concentrates containing silver, lead, zinc and gold at the CLG and commenced production on September 1, 2019. Accordingly, we expect the principal source of future revenue to be the sale of silver, and to a lesser extent, lead and zinc. A significant and sustained decrease in the price of these metals from current levels could have a material and negative impact on our business, financial condition and results of operations.

Foreign Currency Risk

Although most of our expenditures are in U.S. dollars, certain purchases of labor, operating supplies and capital assets are denominated in other currencies, primarily the Mexican peso. As a result, currency exchange fluctuations may impact the costs of our operations.

Concentration of Risk

We have placed nearly all of our cash investments with a single, high-quality financial institution. All cash equivalents are invested in high-quality, short-term money market instruments, including certificates of deposit. At no time have we had funds invested in asset-backed commercial paper. We have not experienced any losses on our cash investments.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the third quarter of 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect resource constraints, which require management to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control.

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The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are, from time to time, involved in legal proceedings of a nature considered normal to our business. We believe that none of the litigation in which we are currently involved, or have been involved since the beginning of our most recently completed financial year, individually or in the aggregate, is material to our consolidated financial condition, cash flows or results of operations. See Note 9 – Commitments, Contingencies and Guarantees in our consolidated financial statements included in this Report for additional information regarding our assessment of contingencies related to legal matters.

Item 1A. Risk Factors

Factors that could cause our actual results to differ materially from those in this Report include, but are not limited to, any of the risks described in the 2020 10-K. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not currently known to us or that we currently deem immaterial may also adversely affect us. As of the date of this Report, there have been no material changes to the risk factors disclosed in the 2020 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

During the quarter ended September 30, 2021, the Company did not issue any shares of its common stock or other equity securities that were not registered under the Securities Act of 1933, as amended.

Use of Proceeds

On October 27, 2020, the SEC declared effective the Company’s registration statement on Form S-1 (No. 333-249224), as amended, filed in connection with the Company’s IPO. There has been no material change in the planned use of proceeds from the IPO as described in the Company’s final prospectus, filed with the SEC on October 29, 2020, pursuant to Rule 424(b) under the Securities Act.

As of September 30, 2021, the Company has used approximately $131,972 thousand of the net proceeds from the IPO, including (i) $71,550 thousand for the repurchase of the 18.5% interest in the LGJV from Dowa; (ii) $42,000 thousand for the capital contribution to the LGJV to extinguish the Company’s 70% share of the WCF; and (iii) $16,742 thousand for working capital and general corporate purposes.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

During the quarter ended September 30, 2021, there were no purchases made by or on behalf of the Company or any affiliated purchaser of the Company’s common stock.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


3.1		Amended and Restated Certificate of Incorporation of Gatos Silver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed October 30, 2020)

3.2		Amended and Restated By-Laws of Gatos Silver, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed October 30, 2020)

10.1		Confirmation Agreement, dated July 12, 2021, among Minera Plata Real, S. de R.L. de C.V., Operaciones San Jose de Plata, S. de R.L. de C.V., Servicios San Jose de Plata, S. de R.L. de C.V., Gatos Silver, Inc. and Dowa Metals & Mining Co., Ltd. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed July 12, 2021)

10.2		Revolving Credit Facility, dated July 12, 2021, between Gatos Silver, Inc. and Bank of Montreal, Chicago Branch (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed July 12, 2021)

10.3		Separation Agreement, dated as of September 1, 2021, between Gatos Silver, Inc. and John Kinyon (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed September 2, 2021)

31.1*		Section 302 Certification of Chief Executive Officer

31.2*		Section 302 Certification of Chief Financial Officer

32.1**		Section 1350 Certification

101.INS*		Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH*		Inline XBRL Taxonomy Extension Schema Document

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104*		Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

*	Filed herewith

**	Furnished herewith

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	GATOS SILVER, INC.
	(Registrant)
November 8, 2021
	By:	/s/ Stephen Orr
		Stephen Orr
		Chief Executive Officer
November 8, 2021
	By:	/s/ Roger Johnson
		Roger Johnson
		Chief Financial Officer

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Gatos Silver (GATO) 10-Q2021 Q3 Quarterly report

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