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 June 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

Toronto 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 68,704,201 were issued and outstanding as of August 2, 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	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
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)


	June 30,		December 31,
	2021		2020
ASSETS
Current Assets
Cash and cash equivalents	$	29,607	$	150,146
Deferred financing costs		285		—
Related party receivables		5,102		1,727
Other current assets		2,190		3,879
Total current assets		37,184		155,752
Non‑Current Assets
Investment in affiliates		247,326		109,597
Other non-current assets		48		61
Total Assets	$	284,558	$	265,410
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and other accrued liabilities	$	3,781	$	4,024
Shareholders' Equity
Common Stock, $0.001 par value; 700,000,000 shares authorized; 59,774,201 and 59,183,076 shares outstanding as of June 30, 2021 and December 31, 2020		108		108
Paid‑in capital		417,248		409,728
Accumulated deficit		(135,552)		(147,423)
Treasury stock, at cost, 144,589 shares as of June 30, 2021 and December 31, 2020		(1,027)		(1,027)
Total shareholders' equity		280,777		261,386
Total Liabilities and Shareholders' Equity	$	284,558	$	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				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Expenses
Exploration	$	694	$	211	$	918	$	382
General and administrative		4,411		1,543		8,014		2,380
Amortization		7		9		14		17
Total expenses		5,112		1,763		8,946		2,779
Other income (expense)
Equity income (loss) in affiliates		18,291		(8,071)		20,992		(21,516)
Other income (loss)		312		(765)		(175)		(2,345)
Net other income (expense)		18,603		(8,836)		20,817		(23,861)
Net income (loss) from continuing operations	$	13,491	$	(10,599)	$	11,871	$	(26,640)
Net loss from discontinued operations		—		(1,545)		—		(3,325)
Net income (loss)	$	13,491	$	(12,144)	$	11,871	$	(29,965)
Net income (loss) per share:
Basic⁽¹⁾
Continuing operations	$	0.23	$	(0.26)	$	0.20	$	(0.66)
Discontinued operations	$	—	$	(0.04)	$	—	$	(0.08)
	$	0.23	$	(0.30)	$	0.20	$	(0.74)
Diluted⁽¹⁾
Continuing operations	$	0.22	$	(0.26)	$	0.20	$	(0.66)
Discontinued operations	$	—	$	(0.04)	$	—	$	(0.08)
	$	0.22	$	(0.30)	$	0.20	$	(0.74)
Weighted average shares outstanding:
Basic⁽¹⁾		59,747,048		40,506,144		59,611,062		40,505,611
Diluted⁽¹⁾		60,623,496		40,506,144		60,420,811		40,505,611

(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


	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

(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)


	Six Months Ended
	June 30,
	2021		2020
OPERATING ACTIVITIES
Net income (loss)	$	11,871	$	(29,965)
Plus net loss from discontinued operations		—		3,325
Adjustments to reconcile net income (loss) to net cash used by operating activities:
Amortization		14		17
Stock‑based compensation expense		3,426		2,001
Equity (income) loss in affiliates		(20,992)		21,516

Changes in operating assets and liabilities:
Receivables from related‑parties		(3,375)		(3,333)
Accounts payable and other accrued liabilities		(528)		(766)
Other current assets		1,689		(70)
Operating cash flows from discontinued operations		—		(2,262)
Net cash used by operating activities		(7,895)		(9,537)

INVESTING ACTIVITIES
Investment in affiliates		(116,595)		(7,573)
Net cash used by investing activities		(116,595)		(7,573)

FINANCING ACTIVITIES
Related‑party convertible debt		—		10,000
Financing costs		(269)		(588)
Issuance of common stock		4,221		—
Other		(1)		260
Financing cash flows from discontinued operations		—		307
Net cash provided by financing activities		3,951		9,979
Net decrease in cash and cash equivalents		(120,539)		(7,131)
Cash and cash equivalents, beginning of period		150,146		9,085
Cash and cash equivalents, end of period		29,607		1,954
Less cash of discontinued operations		—		380
Cash of continuing operations, end of period	$	29,607	$	1,574

Supplemental disclosure of noncash transactions:
Deferred financing costs included in accrued liabilities	$	284	$	149
Director compensation	$	—	$	61

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”). The LGJV operating entities consist 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 with MPR.

The LGJV completed an advanced definition drilling and decline development program in 2016, a feasibility study in January 2017 and a technical update to the feasibility study in July 2020. Dowa completed its $50,000 funding requirement on April 1, 2016, thereby acquiring a 30% interest in the LGJV and the right to purchase future zinc-concentrate production at market rates. In May 2019, Dowa increased its ownership interest by 18.5% to 48.5% through the conversion of the 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 June 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 two 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 the 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 10 – 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

On January 1, 2021, the Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) and ASU No. 2019-12, Income Taxes (Topic 740). These provisions did not have a material impact on the financial statements. There have been no additional accounting pronouncements issued or adopted during the six months ended June 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


	June 30,		December 31,
	2021		2020
Accounts payable	$	369	$	560
Accrued expenses		2,059		1,240
Accrued compensation		1,093		1,964
Other		260		260
Total accounts payable and other current liabilities	$	3,781	$	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 $2,500 and $2,100 under this agreement for the six months ended June 30, 2021 and 2020, respectively. The Company did not receive any cash from the LGJV under this agreement for the six months ended June 30, 2021 and 2020. The Company had receivables under this agreement of $3,700 and $6,850 as of June 30, 2021 and 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 $16 and nil from SSMRC under this agreement for the six months ended June 30, 2021 and 2020, 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.

The computation of diluted earnings per common share excludes the effect of the assumed exercise of 1,391,236 stock options for the three and six months ended June 30, 2021, as the exercise price of these stock options was greater than the average market value of our common stock for those periods, resulting in an anti-dilutive effect. For the three and six months ended June 30, 2020, all stock options outstanding have been excluded from the dilutive earnings per share calculation as their effect would be anti-dilutive.

A reconciliation of basic and diluted earnings per common share for the three and six months ended June 30, 2021 and 2020, are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income (loss)
Continuing operations	$	13,491	$	(10,599)	$	11,871	$	(26,640)
Discontinued operations		—		(1,545)		—		(3,325)
	$	13,491	$	(12,144)	$	11,871	$	(29,965)

Weighted average shares:
Basic		59,747,048		40,506,144		59,611,062		40,505,611
Effect of dilutive stock options		876,448		—		809,749		—
Diluted		60,623,496		40,506,144		60,420,811		40,505,611

Net income (loss) per share:
Basic:
Continuing operations	$	0.23	$	(0.26)	$	0.20	$	(0.66)
Discontinued operations		—		(0.04)		—		(0.08)
	$	0.23	$	(0.30)	$	0.20	$	(0.74)
Diluted:
Continuing operations	$	0.22	$	(0.26)	$	0.20	$	(0.66)
Discontinued operations		—		(0.04)		—		(0.08)
	$	0.22	$	(0.30)	$	0.20	$	(0.74)

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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.

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 have a requisite service period of three years. 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.

The Company granted 489,719 and 798,333 stock options during the six months ended June 30, 2021 and 2020, respectively. The weighted-average grant-date fair value per share was $9.53 and $6.76 for the six months ended June 30, 2021 and 2020, respectively. The Company received $4,221 from stock options exercised during the six months ended June 30, 2021.

Total unrecognized stock-based compensation expense as of June 30, 2021, was $10,483 which is expected to be recognized over a weighted average period of 2.0 years.

Stock option activity for the six months ended June 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	513,950	$	8.21
Forfeited	15,000	$	7.00
Outstanding at June 30, 2021	5,372,699	$	13.33
Vested at June 30, 2021	3,070,896	$	15.63


		Weighted‑
		Average
LGJV Personnel Options	Shares	Exercise Price
Outstanding at December 31, 2020	43,676	$	7.23
Outstanding and vested at June 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 one share of the Company’s common stock upon the director’s cessation of continuous service. The fair value of the DSUs are equal to the fair value of the Company’s common stock on the grant date.

At June 30, 2021, there were 214,855 DSUs outstanding. The Company granted 109,316 and 5,103 DSUs during the six months ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2021, 77,175 DSUs were converted to common stock.

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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.

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 June 30, 2021, and December 31, 2020, the Company’s financial instruments consist 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 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.

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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 is two 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). As of June 30, 2021, the LGJV had $206,870 outstanding under the Term Loan.

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 paid to Dowa a closing fee of $10,000 and the LGJV paid to Dowa a $1,585 fee.

On January 23, 2018, the LGJV entered into a loan agreement (the “Dowa MPR Loan”) with Dowa 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 LGD’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.

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, including Dowa holding costs of this incremental interest, 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.

As of June 30, 2021, the Company had guaranteed 70% of the outstanding principal and accrued interest of the Term Loan in the event of default by the LGJV. The Company guarantees the payment of all obligations, including accrued interest, under the LGJV equipment loan agreements. As of June 30, 2021, the LGJV had $9,617 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $23, with varying maturity dates through August 2023.

10. 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 six months ended June 30, 2020, and consist of the following:


	Three Months Ended		Six Months Ended
	June 30, 2020		June 30, 2020
Operating Expenses of Discontinued Operations
Exploration	$	105	$	216
Pre-development		532		1,048
General and administrative		316		877
Amortization		593		1,186
Total expenses		1,546		3,327

Other Income of Discontinued Operations
Other income		(1)		(2)
Net loss of discontinued operations	$	1,545	$	3,325

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


	June 30,
	2020
Discontinued Operating Activities
Net loss	$	(3,325)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization		1,186
Stock compensation expense		117
Accretion expense		55
Changes in operating assets and liabilities:
Accounts payable and other accrued liabilities		(304)
Other current assets		9
Net cash used by operating activities of discontinued operations		(2,262)
Financing Activities of Discontinued Operations
PPP Loan proceeds		307
Net cash provided by financing activities of discontinued operations		307

11. 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 June 30, 2021						Three Months Ended June 30, 2020
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	694	$	—	$	694	$	211	$	—	$	211
General and administrative		178		4,233		4,411		190		1,353		1,543
Amortization		—		7		7		—		9		9
Equity income (loss) in affiliates		18,291		—		18,291		(8,071)		—		(8,071)
Net other income (loss)		(5)		317		312		(13)		(752)		(765)
Total assets		59,679		224,879		284,558		34,346		71,646		105,991

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	Six Months Ended June 30, 2021						Six Months Ended June 30, 2020
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	918	$	—	$	918	$	382	$	—	$	382
General and administrative		332		7,682		8,014		252		2,128		2,380
Amortization		—		14		14		—		17		17
Equity income (loss) in affiliates		20,992		—		20,992		(21,516)		—		(21,516)
Net other income (loss)		(19)		(156)		(175)		(24)		(2,321)		(2,345)
Total assets	$	59,679	$	224,879	$	284,558	$	34,346	$	71,646	$	105,991

12. Investment in Affiliate

During the six months ended June 30, 2021 and 2020, the Company recognized $20,992 of income and a $21,516 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 LGJV Entities’ proven and probable reserves.

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

LOS GATOS JOINT VENTURE

COMBINED BALANCE SHEETS (UNAUDITED)

(in thousands)


	June 30,		December 31,
	2021		2020
ASSETS
Current Assets
Cash and cash equivalents	$	2,242	$	1,676
Receivables		23,872		3,988
Inventories		10,288		10,315
VAT receivable		46,088		50,732
Other current assets		5,502		2,891
Total current assets		87,992		69,602
Non‑Current Assets
Mine development, net		213,895		202,874
Property, plant and equipment, net		192,206		196,942
Total non‑current assets		406,101		399,816
Total Assets	$	494,093	$	469,418
LIABILITIES AND OWNERS' CAPITAL
Current Liabilities
Accounts payable and accrued liabilities	$	31,995	$	35,767
Related party payable		5,118		1,703
Accrued interest		159		101
Unearned revenue		6,034		3,276
Equipment loans		6,898		7,084
Dowa Term Loan		31,826		31,826
Working Capital Facility		—		60,000
Total current liabilities		82,030		139,757
Non‑Current Liabilities
Dowa Term Loan		172,269		187,767
Equipment loans		2,696		6,120
Reclamation obligations		12,619		12,162
Total non‑current liabilities		187,584		206,049
Owners' Capital
Capital contributions		333,768		271,368
Paid‑in capital		18,636		16,366
Accumulated deficit		(127,925)		(164,122)
Total owners' capital		224,479		123,612
Total Liabilities and Owners' Capital	$	494,093	$	469,418

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LOS GATOS JOINT VENTURE

COMBINED STATEMENTS OF INCOME (LOSS) (UNAUDITED)

(in thousands)

Three Months Ended

Six Months Ended

June 30,

2021

2020

2021

2020

Sales

75,005