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, 2022

or

☐ 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.)

925 W Georgia Street, Suite 910

Vancouver, British Columbia, Canada V6C 3L2

(Address of principal executive offices) (Zip Code)

(604) 424-0984

(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 69,162,223 were issued and outstanding as of March 24, 2023.

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	30
Item 4.	Controls and Procedures	31
	Part II - OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33

2

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

GATOS SILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands of United States dollars, except for share and per share amounts)

		September 30,		December 31,
	Notes	2022		2021
ASSETS
Current Assets
Cash and cash equivalents		$	15,269	$	6,616
Related party receivables	5		586		1,592
Other current assets	3		1,077		3,558
Total current assets			16,932		11,766
Non‑Current Assets
Investment in affiliates	12		371,452		355,310
Other non-current assets			39		35
Total Assets		$	388,423	$	367,111
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and other accrued liabilities	4	$	2,334	$	1,406
Non-Current Liabilities
Credit Facility, net of debt issuance costs	10		12,730		12,620
Shareholders’ Equity
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,162,223 shares outstanding as of September 30, 2022 and December 31, 2021			117		117
Paid‑in capital			545,800		543,829
Accumulated deficit			(172,558)		(190,861)
Total shareholders’ equity			373,359		353,085
Total Liabilities and Shareholders’ Equity		$	388,423	$	367,111

See accompanying notes to the condensed consolidated financial statements.

3

GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands of United States dollars, except for share and per share amounts)

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
	Notes	2022		2021		2022		2021
Expenses
Exploration		$	—	$	479	$	110	$	1,397
General and administrative			5,933		7,244		16,967		17,758
Amortization			44		31		132		45
Total expenses			5,977		7,754		17,209		19,200
Other income (expense)
Equity income in affiliates	12		6,801		1,600		32,180		22,592
Other income (expense)	5,9		1,076		(8,845)		3,332		(6,520)
Net other income (expense)			7,877		(7,245)		35,512		16,072
Net income (loss)		$	1,900	$	(14,999)	$	18,303	$	(3,128)
Net income (loss) per share:	7
Basic		$	0.03	$	(0.22)	$	0.26	$	(0.05)
Diluted		$	0.03	$	(0.22)	$	0.26	$	(0.05)
Weighted average shares outstanding:
Basic			69,162,223		67,133,205		69,162,223		62,024,175
Diluted			69,309,019		67,133,205		69,309,019		62,024,175

See accompanying notes to the condensed consolidated financial statements.

4

GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands of United States dollars, except for share amounts)

	Number		Amount
	Common	Treasury	Common		Treasury		Paid‑in		Accumulated
	Stock	Stock	Stock		Stock		Capital		Deficit		Total
Balance at December 31, 2021	69,162,223	—	$	117	$	—	$	543,829	$	(190,861)	$	353,085
Stock‑based compensation	—	—		—		—		1,482		—		1,482
Net income	—	—		—		—		—		18,829		18,829
Balance at March 31, 2022	69,162,223	—	$	117	$	—	$	545,311	$	(172,032)	$	373,396
Stock‑based compensation	—	—		—		—		(250)		—		(250)
Net loss	—	—		—		—		—		(2,426)		(2,426)
Balance at June 30, 2022	69,162,223	—	$	117	$	—	$	545,061	$	(174,458)	$	370,720
Stock‑based compensation	—	—		—		—		739		—		739
Net income	—	—		—		—		—		1,900		1,900
Balance at September 30, 2022	69,162,223	—	$	117	$	—	$	545,800	$	(172,558)	$	373,359

	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.

5

GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands of United States dollars)

		Nine Months Ended
		September 30,
	Notes	2022		2021
OPERATING ACTIVITIES
Net income (loss)		$	18,303	$	(3,128)
Adjustments to reconcile net income to net cash used by operating activities:
Amortization			132		45
Stock‑based compensation expense	6		2,099		5,755
Other	6		180		65
Equity income in affiliates	12		(32,180)		(22,592)
Dividends from affiliates, net of withholding taxes	12		23,275		—
Changes in operating assets and liabilities:
Receivables from related-parties			1,006		446
Accounts payable and other accrued liabilities			748		1,094
Other current assets			2,481		2,821
Net cash provided by (used by) operating activities			16,045		(15,494)
INVESTING ACTIVITIES
Purchase of property, plant and equipment			(27)		—
Investment in affiliates	12		(7,365)		(261,439)
Net cash used by investing activities			(7,392)		(261,439)
FINANCING ACTIVITIES
Credit Facility			—		13,000
Financing costs			—		(7,274)
Issuance of common stock			—		132,873
Issuance of treasury stock			—		1,027
Other			—		(441)
Net cash provided by financing activities			—		139,185
Net increase (decrease) in cash and cash equivalents			8,653		(137,748)
Cash and cash equivalents, beginning of period			6,616		150,146
Cash and cash equivalents, end of period			15,269		12,398
Interest paid		$	385	$	67
Supplemental disclosure of noncash transactions:
Director fees in accrued liabilities converted to deferred share units		$	—	$	1,141

See accompanying notes to the condensed consolidated financial statements.

6

GATOS SILVER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands of United States dollars, except share, per share, option, and stock unit amounts)

1.Basis of Presentation

Basis of Consolidation and Presentation

The financial statements represent the condensed consolidated financial position and results of operations of Gatos Silver, Inc. and its subsidiaries, Gatos Silver Canada Corporation and Minera Luz del Sol S. de R.L. de C.V. Unless the context otherwise requires, references to Gatos Silver or the Company mean Gatos Silver, Inc. and its consolidated subsidiaries.

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, 2021 (the “2021 10-K”).

2. Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

The consolidated financial statements for the year ended December 31, 2021, 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 2021 10-K.

Recent Accounting Pronouncements

There have been no accounting pronouncements issued or adopted during the nine months ended September 30, 2022, which are expected to have a material impact on the financial statements.

3.Other Current Assets

	September 30, 2022		December 31, 2021
Value added tax receivable	$	683	$	575
Prepaid expenses		387		2,976
Other		7		7
Total other current assets	$	1,077	$	3,558

4.Accounts Payable and Other Accrued Liabilities

	September 30, 2022		December 31, 2021
Accounts payable	$	887	$	196
Accrued expenses		361		623
Accrued compensation		1,086		587
Total accounts payable and other current liabilities	$	2,334	$	1,406

7

5.Related-Party Transactions

LGJV

Under the Unanimous Omnibus Partner Agreement, the Company provides certain management and administrative services to the LGJV. The Company earned $1,250 under this agreement for both the three months ended September 30, 2022 and 2021 and during both the nine months ended September 30, 2022 and 2021, the Company earned $3,750. The income from these services has been recorded on the statements of operations under other income. In the September 30, 2021 unaudited financial statements filed on Form 10-Q, the management fee was presented as a reduction to general and administrative expense and is now presented in other income to be consistent with the 2021 10-K. The Company also incurs certain LGJV costs that are subsequently reimbursed by the LGJV. The Company received $4,167 and $4,117 in cash from the LGJV under this agreement for the nine months ended September 30, 2022 and 2021, respectively. The Company had receivables under this agreement of $417 and $833 as of September 30, 2022 and December 31, 2021, respectively.

6.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.

Common Stock Transactions

On July 19, 2021, the Company completed a follow-on 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. Additionally, the Company incurred an additional $1,700 in other costs related to the offering.

Stock-Based Compensation

The Company recognized stock-based compensation expense as follows:

	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Stock Options	$	682	$	2,329	$	1,936	$	5,755
Performance share units		57		—		163		—
	$	739	$	2,329	$	2,099	$	5,755

Stock Option Transactions

The Company granted 100,000 stock options during the nine months ended September 30, 2022, with a weighted-average grant-date fair value per share of $5.83. The Company received cash from the exercise of stock options of nil and $4,862 for the nine months ended September 30, 2022 and 2021, respectively.

Total unrecognized stock-based compensation expense as of September 30, 2022, was $3,543 which is expected to be recognized over a weighted average period of 1.7 years.

8

Stock option activity for the nine months ended September 30, 2022, is summarized in the following tables:

		Weighted‑
		Average
Employee & Director Options	Shares	Exercise Price
Outstanding at December 31, 2021	5,873,968	$	13.11
Granted	100,000	$	10.28
Forfeited	(3,641,568)	$	13.45
Outstanding at September 30, 2022	2,332,400	$	12.46
Vested at September 30, 2022	1,548,981	$	12.81

		Weighted‑
		Average
LGJV Personnel Options	Shares	Exercise Price
Outstanding at December 31, 2021	32,393	$	7.31
Outstanding and vested at September 30, 2022	32,393	$	7.31

Performance Share Unit (“PSU”) Transactions

On December 17, 2021, 119,790 PSUs were granted to the Company’s employees with a weighted average grant date fair value per share of $14.22. During the nine months ended September 30, 2022, 71,480 PSUs were forfeited. At September 30, 2022, there were 48,310 PSUs outstanding. On September 30, 2022, unrecognized compensation expense related to the PSUs was $507 which is expected to be recognized over a weighted-average period of 2.2 years.

Deferred Stock Unit (“DSU”) Transactions

The following table summarizes the DSU activity for the nine months ended September 30, 2022:

		Weighted-Average
		Grant Date Fair
Employee and Director DSUs	Shares	Value
Outstanding at December 31, 2021	146,796	$	10.88
Outstanding at September 30, 2022	146,796	$	10.88

7.Net Income (Loss) per Share

Basic net income 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 per share is computed similarly, except that weighted-average common shares is increased to reflect the potential dilution that would occur if stock options were exercised or PSUs and DSUs were converted into common stock. The dilutive effects are calculated using the treasury stock method.

For both the three and nine months ended September 30, 2022, all stock options have been excluded from the dilutive earnings per common share calculation 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. Additionally, for both the three and nine months ended September 30, 2022, all PSUs were excluded from the diluted earnings per common share calculation as the PSUs do not currently meet the criteria for issuance. For both the three and nine months ended September 30, 2021, the Company experienced a net loss, thus all stock options and DSUs outstanding have been excluded as they are anti-dilutive.

9

A reconciliation of basic and diluted earnings per common share for the three and nine months ended September 30, 2022 and 2021, are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income (loss)	$	1,900	$	(14,999)	$	18,303	$	(3,128)
Weighted average shares:
Basic		69,162,223		67,133,205		69,162,223		62,024,175
Effect of dilutive DSUs		146,796		—		146,796		—
Diluted		69,309,019		67,133,205		69,309,019		62,024,175
Net income (loss) per share:
Basic	$	0.03	$	(0.22)	$	0.26	$	(0.05)
Diluted	$	0.03	$	(0.22)	$	0.26	$	(0.05)

8.Fair Value Measurements

The Company establishes a framework for measuring the fair value of assets and liabilities 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.

Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis

The Company discloses and recognizes its non-financial assets and liabilities at fair value on a non-recurring basis and makes adjustments to fair value, as needed (for example, when there is evidence of impairment).

The Company recorded its initial investment in affiliates at fair value within 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. For the year ended December 31, 2021, the Company recorded impairment charges associated with the investment in the LGJV and reduced the carrying amount of such the investment in affiliate to its estimated fair value.

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.

10

Environmental Contingencies

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.

Legal

On February 22, 2022, a purported Gatos stockholder filed a putative class action lawsuit in the United States District Court for the District of Colorado against the Company, certain of our former officers, and several directors. An amended complaint was filed on August 15, 2022. The amended complaint, allegedly brought on behalf of certain purchasers of Gatos common stock and certain traders of call and put options on Gatos common stock from December 9, 2020 through January 25, 2022, seeks, among other things, damages, costs, and expenses, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Sections 11 and 15 of the Securities Act of 1933. The amended complaint alleges that certain individual defendants and Gatos, pursuant to the control and authority of the individual defendants, made false and misleading statements and/or omitted certain material information regarding the mineral resources and reserves at the Cerro Los Gatos mine. Gatos and all defendants filed a motion to dismiss this action on October 14, 2022. That motion was fully briefed as of December 23, 2022.

By Notice of Action issued February 9, 2022 and subsequent Statement of Claim dated March 11, 2022 Izabela Przybylska commenced a putative class action against Gatos Silver, Inc. (“Gatos”), certain of its former officers and directors, and others in the Ontario Superior Court of Justice on behalf of a purported class of all persons or entities, wherever they may reside or be domiciled, who acquired securities of Gatos in both the primary and secondary markets during the period from October 28, 2020 until January 25, 2022. The action asserts claims under Canadian securities legislation and at common law and seeks unspecified monetary damages and other relief in respect of allegations the defendants made false and misleading statements and omitted material information regarding the mineral resources and reserves of Gatos. The plaintiff filed motion materials for leave to proceed in respect of her statutory claims and for class certification on March 3, 2023. The court has tentatively set dates in late March of 2024 for the hearing of the plaintiff’s motions.

There can be no assurance that any of the foregoing matters individually or in aggregate will not result in outcomes that are materially adverse for us.

Dowa Debt Agreements

In July 2017, the LGJV operating entities consisting of Minera Plata Real S. de R.L. de C.V (“MPR”) and Operaciones San Jose del Plata S. de R.L. de C.V. (collectively, the “LGJV Entities”) entered into a loan agreement (the “Term Loan”) with Dowa whereby the LGJV Entities could borrow up to $210,000 for Los Gatos District (“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 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).

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 a fee to Dowa of $10,000, which is recorded on the statements of operations under other income (expense).

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.

11

In connection with entering into the WCF (as defined below), the Company contributed $18,200 to the LGJV in May 2019 to provide funding for 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 as the LGJV Entities’ proven and probable reserves are processed.

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 $60,000 outstanding under the WCF was extinguished using funds contributed to the LGJV. 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, 2022, the LGJV had $1,195 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $3, with 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 at the time allowed for an increase in the total line of credit up to $100,000, subject to certain conditions. Borrowings 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 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 amended, as of March 31, 2022.

On July 19, 2021, the Company borrowed $13,000 under the Credit Facility at a rate of LIBOR plus 3%. Debt issuance costs of $442 were to be amortized through July 31, 2024, prior to the amended and restated Credit Facility (see terms below). The current balance outstanding on the Credit Facility is $9,000, following a $4,000 principal repayment in December 2022.

For the three and nine months ended September 30, 2022, the Company recognized interest expense of $142 and $368, respectively, with an effective interest rate of 4.4% and 3.8%, respectively, which has been recorded on the statements of operations under other income (expense), and $36 and $110, respectively, for amortization of debt issuance costs. The Company paid interest of $158 and $385 for the three and nine months ended September 30, 2022.

On March 7, 2022, the Company amended the Credit Facility with the lender, Bank of Montreal (“BMO”), to address potential loan covenant deficiencies. The amendment included the following revisions:

● audited financial statements were to be provided prior to November 15, 2022;

● the credit limit was reduced to $30,000, until the Company delivered a new LOM CLG financial model with updated mineral reserves;

● upon assessment of the new CLG financial model, BMO, in its sole discretion, could increase the credit limit up to the original $50,000;

● requirement to provide updated financial projections for the CLG by September 30, 2022. The financial projections were provided by the required date and were used as the basis for the amendment entered into on December 19, 2022 discussed below; and

● waivers of certain defaults, events of default, representations and warranties and covenants arising out of the facts that led to the potential reduction in metal content of the Company’s previously stated mineral reserve figures.

12

On December 19, 2022, the Company entered an amended and restated Credit Facility with BMO extending the maturity date and re-establishing a credit limit of $50,000, with an accordion feature providing up to an additional $25,000. Key terms of the amended Credit Facility include:

● audited financial statements for fiscal year 2021 are to be provided no later than April 15, 2023, and audited financial statements for fiscal year 2022 and unaudited financial statements for the first three fiscal quarters in fiscal year 2022 are to be provided no later than April 30, 2023;

● the maturity date is extended from July 31, 2024 to December 31, 2025;

● a change in the benchmark interest rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”); and

● loans under the Credit Facility bear interest at a rate equal to either a term SOFR rate plus a margin ranging from 3.00% to 4.00% or a U.S. base rate plus a margin ranging from 2.00% to 3.00%, as selected by the Company.

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 exploration, development and operation of 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, 2022						Three Months Ended September 30, 2021
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	—	$	—	$	—	$	479	$	—	$	479
General and administrative		108		5,825		5,933		577		6,667		7,244
Amortization		—		44		44		—		31		31
Equity (income) in affiliates		(6,801)		—		(6,801)		(1,600)		—		(1,600)
Net other (income) expense		23		(1,099)		(1,076)		15		8,830		8,845
Total assets	$	12,722	$	375,701	$	388,423	$	61,373	$	347,012	$	408,385

	Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	110	$	—	$	110	$	1,397	$	—	$	1,397
General and administrative		1,497		15,470		16,967		909		16,849		17,758
Amortization		1		131		132		—		45		45
Equity (income) in affiliates		(32,180)		—		(32,180)		(22,592)		—		(22,592)
Net other (income) expense		37		(3,369)		(3,332)		34		6,486		6,520
Total assets	$	12,722	$	375,701	$	388,423	$	61,373	$	347,012	$	408,385

12.Investment in Affiliate

During the three months ended September 30, 2022 and 2021, the Company recognized $6,801 and $1,600 of income, respectively, and during the nine months ended September 30, 2022 and 2021, the Company recognized $32,180 and $22,592 of income, 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 as the LGJV Entities’ proven and probable reserves are processed.

The Company provided an updated technical report compliant with Regulation S-K subpart 1300 (the “Los Gatos Technical Report”) dated November 10, 2022. The Los Gatos Technical Report indicated a significant decrease in the mineral reserve and mineral resource from the previously issued technical report in 2020. The Company considered this reduction in the mineral reserve and mineral resources as an indicator of a possible other-than-temporary impairment and as a result compared the carrying value of the LGJV on December 31, 2021 to the fair value of the LGJV.

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The fair value of the LGJV was estimated based on the net present value of the expected cash flows to be generated by the LGJV on 70% basis. The discount rate used was 5.00%. The fair value of the investment in the LGJV was estimated to be $355,310 and the carrying value at December 31, 2021 was $406,874. Since the carrying value exceeded the fair value, an impairment charge of $51,564 was recorded during the fourth quarter of 2021. See Note 8 - Fair Value Measurements for additional detail of the assumptions used in the determination of the fair value of the long-lived assets tested for impairment.

For the year ended December 31, 2021, the Company contributed $260,039 to the LGJV to repurchase 18.5% of the ownership of the LGJV, to retire the WCF and the Term Loan and in support of exploration activities.

On March 17, 2022, we entered into a definitive agreement with Dowa to build and operate a leaching plant to reduce fluorine levels in zinc concentrates produced at CLG at an expected construction cost of $6,000. As part of the agreement, the initial payment of the $20,000 due to Dowa under the partner’s priority distribution agreement was reduced to $10,300. The reduced priority dividend amount reflects a portion of both the construction and future estimated operating costs of the leaching plant and is dependent on the successful construction and operation of the leaching plant. Should the leaching plant construction not be completed, or the leaching plant not operate according to certain parameters during the first five years, portions of the $9,700 reduction could be reinstated.

In April 2022, the LGJV paid its first dividend of $20,000 to its partners. The Company’s share of the first dividend was $14,000, before withholding taxes of $700. A payment of $7,365 was subsequently made to Dowa to cover the full amount of the reduced initial priority distribution due, for a net dividend received of $5,935. In July 2022 the LGJV paid an additional dividend in the amount of $15,000 to its partners. The Company’s share, after withholding taxes of $525 was $9,975.

The LGJV Entities combined balance sheets as of September 30, 2022, and December 31, 2021, and the combined statements of income for the three and nine months ended September 30, 2022 and 2021, are as follows:

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LOS GATOS JOINT VENTURE

COMBINED BALANCE SHEETS (UNAUDITED)

(in thousands)

	September 30,		December 31,
	2022		2021
ASSETS
Current Assets
Cash and cash equivalents	$	38,665	$	20,280
Receivables		12,412		11,263
Inventories		10,776		11,062
VAT receivable		20,749		46,242
Other current assets		4,727		4,515
Total current assets		87,329		93,362
Non‑Current Assets
Mine development, net		229,800		229,076
Property, plant and equipment, net		198,399		190,896
Net deferred tax assets		17,896		9,226
Total non‑current assets		446,095		429,198
Total Assets	$	533,424	$	522,560
LIABILITIES AND OWNERS’ CAPITAL
Current Liabilities
Accounts payable and accrued liabilities	$	34,715	$	33,179
Related party payable		593		1,609
Accrued interest		21		51
Income taxes		4,291		6,315
Equipment loans		1,195		5,534
Unearned Revenue		—		1,714
Total current liabilities		40,815		48,402
Non‑Current Liabilities