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Published: 2023-06-26 21:35:39 ET

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q/A

(Amendment No. 1)

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

For the quarterly period ended September 30, 2022

☐ 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 June 26, 2023.

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TABLE OF CONTENTS

		Page
	Part I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets (Restated)	4
	Condensed Consolidated Statements of Operations (Restated)	5
	Condensed Consolidated Statements of Shareholders’ Equity (Deficit) (Restated)	6
	Condensed Consolidated Statements of Cash Flows (Restated)	7
	Notes to Restated Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 4.	Controls and Procedures	37
	Part II - OTHER INFORMATION
Item 1A.	Risk Factors	38
Item 6.	Exhibits	38

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EXPLANATORY NOTE

References throughout this Amendment No. 1 to the Quarterly Report on Form 10-Q to “we,” “us,” “Gatos Silver,” “Company” or “our Company” are to Gatos Silver Inc., unless the context otherwise indicates.

This Amendment No. 1 (“Amendment No. 1”) amends the Quarterly Report on Form 10-Q of Gatos Silver, Inc. for the three and nine months ended September 30, 2022 (“Affected Period”), as filed with the Securities and Exchange Commission (“SEC”) on March 30, 2023 (the “Original Filing”).

This Amendment No. 1 contains the restated financial statements for us and the combined balance sheets and combined statements of income for the Los Gatos Joint Venture (“LGJV”) for the Affected Period to correct (i) the timing and recognition of net deferred tax assets and current income taxes at the 70%-owned LGJV and (ii) the accounting for the priority distribution due to our LGJV partner to exclude the priority distribution payment from the net income of the LGJV in calculating the equity income in affiliate for the Affected Period.

This Amendment No. 1 contains the following sections:

●

Item 1. Financial Statements

●

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

●

Item 4. Controls and Procedures

●

Item 1A. Risk Factors; and

●

Exhibits 31, 32, 101 and 104 of Item 6. Exhibits.

Except as described above, this Amendment No. 1 does not amend, update or change any other items or disclosures contained in the Original Filing, and accordingly, this Amendment No. 1 does not reflect or purport to reflect any information or events occurring after the original filing date or modify or update those disclosures affected by subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction with the Original Filing and the Company’s other filings with the SEC. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Original Filing.

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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,
		2022		2021
	Notes	(restated)
ASSETS
Current Assets
Cash and cash equivalents		$	15,269	$	6,616
Related party receivables	6		586		1,592
Other current assets	4		1,077		3,558
Total current assets			16,932		11,766
Non‑Current Assets
Investment in affiliates	13		341,071		333,447
Other non-current assets			39		35
Total Assets		$	358,042	$	345,248
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable and other accrued liabilities	5	$	2,334	$	1,406
Non-Current Liabilities
Credit Facility, net of debt issuance costs	11		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			546,354		544,383
Accumulated deficit			(203,493)		(213,278)
Total shareholders’ equity			342,978		331,222
Total Liabilities and Shareholders’ Equity		$	358,042	$	345,248

See accompanying notes to the condensed consolidated financial statements.

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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,
		2022		2021		2022		2021
	Notes	(restated)				(restated)

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	13		8,930		1,600		24,527		22,592
Other income (expense)	6,10		1,076		(8,845)		3,332		(6,520)
Net other income (expense)			10,006		(7,245)		27,859		16,072
Income (loss) before taxes			4,029		(14,999)		10,650		(3,128)
Income tax expense			525		—		865		—
Net income (loss)		$	3,504	$	(14,999)	$	9,785	$	(3,128)
Net income (loss) per share:	8
Basic		$	0.05	$	(0.22)	$	0.14	$	(0.05)
Diluted		$	0.05	$	(0.22)	$	0.14	$	(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.

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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 (restated)	69,162,223	—	$	117	$	—	$	544,383	$	(213,278)	$	331,222
Stock‑based compensation	—	—		—		—		1,482		—		1,482
Net income (restated)	—	—		—		—		—		1,050		1,050
Balance at March 31, 2022 (restated)	69,162,223	—	$	117	$	—	$	545,865	$	(212,228)	$	333,754
Stock‑based compensation	—	—		—		—		(250)		—		(250)
Net income (restated)	—	—		—		—		—		5,231		5,231
Balance at June 30, 2022 (restated)	69,162,223	—	$	117	$	—	$	545,615	$	(206,997)	$	338,735
Stock‑based compensation	—	—		—		—		739		—		739
Net income (restated)	—	—		—		—		—		3,504		3,504
Balance at September 30, 2022 (restated)	69,162,223	—	$	117	$	—	$	546,354	$	(203,493)	$	342,978


	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 CASH FLOWS (UNAUDITED)

(In thousands of United States dollars)


		Nine Months Ended
		September 30,
		2022		2021
	Notes	(restated)
OPERATING ACTIVITIES
Net income (loss)		$	9,785	$	(3,128)
Adjustments to reconcile net income to net cash used by operating activities:
Amortization			132		45
Stock‑based compensation expense	7		2,099		5,755
Other	7		180		65
Equity income in affiliates	13		(23,662)		(22,592)
Dividends from affiliates, net of withholding taxes	13		15,911		—

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			8,680		(15,494)

INVESTING ACTIVITIES
Purchase of property, plant and equipment			(27)		—
Investment in affiliates	13		—		(261,439)
Net cash used by investing activities			(27)		(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.

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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 (restated)

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/A for the year ended December 31, 2021 (the “2021 10-K/A”).

As described in Note 3 – Restatement of Previously Issued Financial Statements, the Company’s financial statements for the three and nine months ended September 30, 2022 (“Affected Period”), are restated in this Quarterly Report on Form 10-Q/A (Amendment No. 1) (this “Quarterly Report”) to correct the recording of income taxes of the Company’s investment in affiliate and recognition of the priority distribution payment, and the resulting adjustments to the Company’s financial statements. The restated financial statements are indicated as “Restated” in the unaudited interim financial statements and accompanying notes, as applicable. See Note 3—Restatement of Previously Issued Financial Statements for further discussion.

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/A.

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.Restatement of Previously Issued Financial Statements

In accordance with ASC 250, Accounting Changes and Error Corrections (“ASC 250”), the following items are treated as errors and are material to the 2022 interim consolidated financial statements, and, therefore, require that the consolidated financial statements be restated.

Investment in affiliates – Income Taxes recorded by affiliates

During the preparation of the 2022 annual financial statements the Company identified that the investment in affiliates and equity income in affiliates were not correctly recorded as of September 30, 2022, and for the three and nine months period then ended, respectively. The Company identified that its affiliate, the LGJV, did not recognize certain current and deferred tax assets and deferred tax liabilities in accordance with ASC 740, Income Taxes. As a result, the Company determined that there were errors in the calculation of the deferred tax assets related to property plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated in accordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets and overstated the value of current taxes payable at December 31, 2021 and recognized in deferred tax assets in the quarters ended March 31, 2022, June 30, 2022 and September 30, 2022.

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The impact of the error on the financial statements of the LGJV was (i) a decrease in deferred tax assets of $12,221, (ii) an increase in income tax receivable of $25,455, (iii) a decrease in VAT receivable of $7,107 at September 30, 2022, and (iv) an increase in income tax expense of $123 and $9,735 for the three and nine months ended September 30, 2022, respectively.

The impact of the LGJV tax errors on the Company’s financial statements was (i) a decrease in the investment in affiliates of $7,425 at September 30, 2022, (ii) an increase of $241 in equity income in affiliates for the three months ended September 30, 2022, and (iii) a decrease of $7,425 in equity income in affiliates for the nine months ended September 30, 2022.

Investment in affiliates – Priority distribution payment

The Company also identified that the accounting for the priority distribution payment to our partner in the LGJV was not recorded in accordance with ASC 970 –323-35, Equity Method and Joint Ventures. The priority distribution payment was required to be excluded from the initial equity income in affiliates and equity income should have been recognized after the priority distribution payment was accounted for.

The impact of the error described above on the Company’s financial statements was (i) a decrease of $4,631 in the investment in affiliates at September 30, 2022, and (ii) a decrease in equity income in affiliates of $4,631 for the nine months ended September 30, 2022. There was no impact on the equity income in affiliates for the three months ended September 30, 2022.

Investment in affiliates – Prior period restatements

The impact on the financial statements for year December 31, 2021, is discussed in the Amendment No. 1 to the Annual Report on Form 10-K. The impact of the restatements recorded in the three months ended December 31, 2021, as described in Form 10-K/A for the year ended December 31, 2021, resulted in a decrease in the investment in affiliates of $21,863.

Impact of the Restatement

The aggregate impact of the above-noted changes, along with the decrease of $4,403 in the basis amortization of the investment in affiliates for the nine months ended September 30, 2022 resulting from the above-noted changes on the basis amortization of the investment in affiliates and other previously uncorrected immaterial misstatement to income tax expense ($865) and paid-in capital account, are included in the adjustments described in the tables below. The cumulative impact of these items was (i) a decrease in investment in affiliate of $30,381 at September 30, 2022, (ii) a decrease in equity income in affiliates of $7,653, and (iii) a decrease in net income of $8,518 for nine months ended September 30, 2022. For the three months ended September 30, 2022, the aggregate impact of the above-noted changes along with the decrease of $1,888 in the basis amortization of the investment in affiliates resulting from the above-noted changes and other previously uncorrected immaterial misstatement to income tax expense ($525) resulted in (i) an increase of $2,129 in equity income in affiliates, (ii) an increase of $525 in income tax expense, and (iii) an increase of $1,604 in net income.

These are considered errors in accordance with ASC 250 and are material to the consolidated financial statements for September 31, 2022, and require that the consolidated financial statements be restated.

The impact of the restatement on the Consolidated Balance Sheets, Consolidated Statement of Operations, Consolidated Statements of Shareholders’ Equity (Deficit) and Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2022, is presented below. These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, cash flows from investing activities or cash flows from financing activities for the nine months ended September 30, 2022.


	September 30, 2022		September 30, 2022
Consolidated Balance Sheet	As previously reported	Adjustment	As restated
Investment in affiliates	371,452	(30,381)	341,071
Total Assets	388,423	(30,381)	358,042
Paid-in capital	545,800	554	546,354
Accumulated deficit	(172,558)	(30,935)	(203,493)
Total shareholders’ equity	373,359	(30,381)	342,978
Total liabilities and shareholders’ equity	388,423	(30,381)	358,042

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	Three Months Ended		Three Months Ended
	September 30, 2022		September 30, 2022
Consolidated Statement of Operations	As previously reported	Adjustment	As restated
Equity income in affiliates	6,801	2,129	8,930
Net other income (loss)	7,877	2,129	10,006
Income (loss) before income taxes	1,900	2,129	4,029
Income tax expense	—	525	525
Net income (loss)	1,900	1,604	3,504
Net income (loss) per share
Basic	0.03	0.02	0.05
Diluted	0.03	0.02	0.05


	Nine Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2022
Consolidated Statement of Operations	As previously reported	Adjustment	As restated
Equity income in affiliates	32,180	(7,653)	24,527
Net other income (loss)	35,512	(7,653)	27,859
Income (loss) before income taxes	18,303	(7,653)	10,650
Income tax expense	—	865	865
Net income (loss)	18,303	(8,518)	9,785
Net income (loss) per share
Basic	0.26	(0.12)	0.14
Diluted	0.26	(0.12)	0.14


	Nine Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2022
Consolidated Statement of Shareholders’ Equity (Deficit)	As previously reported	Adjustment	As restated
Paid-in capital at March 31, 2022	545,311	554	545,865
Accumulated Deficit Balance at March 31, 2022	(172,032)	(40,196)	(212,228)
Total shareholders’ equity at March 31, 2022	373,396	(39,642)	333,754
Paid-in capital at June 30, 2022	545,061	554	545,615
Accumulated Deficit Balance at June 30, 2022	(174,458)	(32,539)	(206,997)
Total shareholders’ equity at June 30, 2022	370,720	(31,985)	338,735
Paid-in capital at September 30, 2022	545,800	554	546,354
Accumulated Deficit Balance at September 30, 2022	(172,558)	(30,935)	(203,493)
Total shareholders’ equity at September 30, 2022	373,359	(30,381)	342,978


	Nine Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2022
Consolidated Statement of Cash Flows	As previously reported	Adjustment	As restated
Net income (loss)	18,303	(8,518)	9,785
Equity income in affiliates	(32,180)	8,518	(23,662)

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The impact of the restatement on the Combined Balance Sheets and Combined Statements of Operations of the LGJV is presented below.


	September 30, 2022		September 30, 2022
Combined Balance Sheet	As previously reported	Adjustment	As restated
VAT receivable	20,749	(7,107)	13,642
Income tax receivable	—	25,455	25,455
Other current assets	4,727	(24)	4,703
Total current assets	87,329	18,324	105,653
Deferred tax assets	17,896	(12,221)	5,675
Total non-current assets	446,095	(12,221)	433,874
Total assets	533,424	6,103	539,527
Accounts payable and accrued liabilities	34,715	6,505	41,220
Income taxes	4,291	(4,291)	—
Total current liabilities	40,815	2,214	43,029
Accumulated deficit	(82,033)	(3,889)	(78,144)
Total owners' capital	476,793	(3,889)	480,682
Total liabilities and owners' capital	533,424	6,103	539,527


	Three Months Ended		Three Months Ended
	September 30, 2022		September 30, 2022
Combined Statement of Operations	As previously reported	Adjustment	As restated
Foreign exchange (loss) gain	(144)	467	323
Total other expense	(523)	467	(56)
Income tax (expense) recovery	(6,579)	(123)	(6,702)
Net income	12,617	344	12,961


	Nine Months Ended		Nine Months Ended
	September 30, 2022		September 30, 2022
	As previously reported	Adjustment	As restated
Other (income) expense	(1,339)	1,339	—
Foreign exchange loss (gain)	410	(467)	(57)
Total other (income) expense	266	872	1,138
Income before income tax (expense) recovery	65,754	(872)	64,882
Income tax (expense) recovery	(12,753)	(9,735)	(22,488)
Net income	53,001	(10,607)	42,394

4.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

5.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

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6.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/A. 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.

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.

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.

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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

8.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.

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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
	(restated)				(restated)
Net income (loss)	$	3,504	$	(14,999)	$	9,785	$	(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	$	0.05	$	(0.22)	$	0.14	$	(0.05)
Diluted	$	0.05	$	(0.22)	$	0.14	$	(0.05)

9.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.

10.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.

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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 (the “U.S. Class Action”). 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. On April 26, 2023, following a joint motion, the Court ordered that it will postpone a ruling on defendants’ motion to dismiss until on or after June 16, 2023.

On June 13, 2023, we entered into an agreement in principle to settle the U.S. Class Action. Subject to certain conditions, including class certification by the District Court, the execution of a definitive stipulation of settlement and approval of the settlement by the District Court, the settling parties have agreed to resolve the U.S. Class Action for a payment by us and our insurers of $21,000 to a settlement fund. We are in the process of finalizing the amount of defense expenses that are covered under the directors’ and officers’ insurance policy which will be deducted from the $10,000 retention held by the Company. We expect to fund no more than $7,900 of the settlement, with the balance of the settlement payment to be paid by insurance. We and the other defendants will not admit any liability as part of the settlement. Since the settlement of the U.S. Class Action is subject to conditions, there can be no assurance that the U.S. Class Action will be finally resolved pursuant to the agreement in principle that has been reached.

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. Which materials were amended and filed on May 1, 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).

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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.

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.

11.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;

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●

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.

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. A waiver was subsequently extended for the afore-mentioned financial statements and the unaudited financial statements for the three months ended March 31, 2023, to be provided no later than July 15, 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.

12.Segment Information (restated)

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 (restated)						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		(8,930)		—		(8,930)		(1,600)		—		(1,600)
Income tax expense		—		525		525		—		—		—
Net other (income) expense		23		(1,099)		(1,076)		15		8,830		8,845
Total assets	$	103,870	$	254,172	$	358,042	$	61,373	$	347,012	$	408,385


	Nine Months Ended September 30, 2022 (restated)						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		(24,527)		—		(24,527)		(22,592)		—		(22,592)
Income tax expense		—		865		865		—		—		—
Net other (income) expense		37		(3,369)		(3,332)		34		6,486		6,520
Total assets	$	103,870	$	254,172	$	358,042	$	61,373	$	347,012	$	408,385

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13.Investment in Affiliate (restated)

During the three months ended September 30, 2022 and 2021, the Company recognized $8,930 (restated) and $1,600 of income, respectively, and during the nine months ended September 30, 2022 and 2021, the Company recognized $22,125 (restated) and $24,527 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.

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 $333,447 (restated) and the carrying value at December 31, 2021 was $413,795. Since the carrying value exceeded the fair value, an impairment charge of $80,348 was recorded during the fourth quarter of 2021. See Note 9 - 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’ restated combined balance sheets as of September 30, 2022, and December 31, 2021, and the restated 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
	(restated)
ASSETS
Current Assets
Cash and cash equivalents	$	38,665	$	20,280
Receivables		12,412		11,263
Inventories		10,776		11,062
VAT receivable		13,642		46,242
Income tax receivable		25,455
Other current assets		4,703		4,515
Total current assets		105,653		93,362
Non‑Current Assets
Mine development, net		229,800		229,076
Property, plant and equipment, net		198,399		190,896
Deferred tax assets		5,675		17,407
Total non‑current assets		433,874		437,379
Total Assets	$	539,527	$	530,741

LIABILITIES AND OWNERS’ CAPITAL
Current Liabilities
Accounts payable and accrued liabilities	$	41,220	$	33,179
Related party payable		593		1,609
Accrued interest		21		51
Equipment loans		1,195		5,534
Unearned Revenue		—		1,714
Total current liabilities		43,029		42,087

Non‑Current Liabilities
Equipment loans		—		478
Lease liability		283		—
Reclamation obligations		15,533		14,706
Total non‑current liabilities		15,816		15,184

Owners’ Capital
Capital contributions		540,638		540,638
Paid‑in capital		18,188		18,370
Accumulated deficit		(78,144)		(85,538)
Total owners’ capital		480,682		473,470
Total Liabilities and Owners’ Capital	$	539,527	$	530,741

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LOS GATOS JOINT VENTURE

COMBINED STATEMENTS OF INCOME (UNAUDITED)

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(restated)				(restated)
Revenue	$	73,926	$	56,991	$	218,730	$	178,326

Expenses
Cost of sales		28,625		26,374		81,550		70,275
Royalties		327		1,181		2,739		3,480
Exploration		1,881		1,595		6,235		3,505
General and administrative		3,431		3,414		9,846		9,493
Depreciation, depletion and amortization		19,943		12,734		52,340		36,388
Total operating expenses		54,207		45,298		152,710		123,141

Other (income) expense
Interest expense		103		847		368		5,320
Loss on Term Loan extinguishment		—		4,359		—		4,359
Arrangement fee		—		—		—		2,090
Accretion expense		276		228		827		684
Other income		—		(61)		—		(80)
Foreign exchange loss		(323)		47		(57)		342
Total other expense		56		5,420		1,138		12,715

Income before income tax expense		19,663		6,273		64,882		42,470

Income tax expense		6,702		750		22,488		750

Net income	$	12,961	$	5,523	$	42,394	$	41,720

14. Subsequent Events

In November 2022, the LGJV paid an additional dividend in the amount of $20,000, to its partners. The Company’s share, after withholding taxes of $700, was $13,300.

On December 19, 2022, the Company entered into 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, as further described above.

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

The following discussion provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of the Company and 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, 2021 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on March 20, 2023 (as amended by Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on June 26, 2023, the “2021 10-K”).

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, including the Private Securities Litigation Reform Act of 1995. 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, the following:

●

estimates of future mineral production and sales;

●

estimates of future production costs, other expenses and taxes for specific operations and on a consolidated basis;

●

estimates of future cash flows and the sensitivity of cash flows to gold, copper, silver, lead, zinc and other metal prices;

●

estimates of future capital expenditures, construction, production or closure activities and other cash needs, for specific operations and on a consolidated basis, and expectations as to the funding or timing thereof;

●

estimates as to the projected development of certain ore deposits, including the timing of such development, the costs of such development and other capital costs, financing plans for these deposits and expected production commencement dates;

●

estimates of mineral reserves and mineral resources statements regarding future exploration results and mineral reserve and mineral resource replacement and the sensitivity of mineral reserves to metal price changes;

●

statements regarding the availability of, and terms and costs related to, future borrowing or financing and expectations regarding future debt repayments;

●

statements regarding future dividends and returns to shareholders;

●

estimates regarding future exploration expenditures, programs and discoveries;

●

statements regarding fluctuations in financial and currency markets;

●

estimates regarding potential cost savings, productivity, operating performance and ownership and cost structures;

●

expectations regarding statements regarding future transactions, including, without limitation, statements related to future acquisitions and projected benefits, synergies and costs associated with acquisitions and related matters;

●

expectations of future equity and enterprise value;

●

expectations regarding the start-up time, design, mine life, production and costs applicable to sales and exploration potential of our projects;

●

statements regarding future hedge and derivative positions or modifications thereto;

●

statements regarding local, community, political, economic or governmental conditions and environments;

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statements and expectations regarding the impacts of COVID-19 and variants thereof and other health and safety conditions;

●

statements regarding the impacts of changes in the legal and regulatory environment in which we operate, including, without limitation, relating to regional, national, domestic and foreign laws;

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statements regarding climate strategy and expectations regarding greenhouse gas emission targets and related operating costs and capital expenditures;

●

statements regarding expected changes in the tax regimes in which we operate, including, without limitation, estimates of future tax rates and estimates of the impacts to income tax expense, valuation of deferred tax assets and liabilities, and other financial impacts;

●

estimates of income taxes and expectations relating to tax contingencies or tax audits;

●

estimates of future costs, accruals for reclamation costs and other liabilities for certain environmental matters, including without limitation, in connection with water treatment and tailings management;

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statements relating to potential impairments, revisions or write-offs, including without limitation, the result of fluctuation in metal prices, unexpected production or capital costs, or unrealized mineral reserve potential;

●

estimates of pension and other post-retirement costs;

●

statements regarding estimates of timing of adoption of recent accounting pronouncements and expectations regarding future impacts to the financial statements resulting from accounting pronouncements;

●

estimates of future cost reductions, synergies, savings and efficiencies in connection with full potential programs and initiatives; and

●

expectations regarding future exploration and the development, growth and potential of operations, projects and investments, including in respect of the CLG and the LGD.

Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed, projected or implied by those forward-looking statements.

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. Such factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements included in this Report and those described from time to time in our filings with the U.S. Securities and Exchange Commission (“SEC”), including, but not limited to, our 2021 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 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.

Restatement of previously issued Consolidated Financial Statements for the correction of an understatement of Investment in affiliate and an understatement of deferred taxes assets in the combined financial statements of the LGJV

Investment in affiliates – Income taxes recorded by affiliates

During the preparation of the 2022 annual financial statements the Company identified that the investment in affiliates and equity income in affiliates were not correctly recorded as of September 30, 2022, and for the three and nine months period then ended, respectively. The Company identified that its affiliate, the LGJV, did not recognize certain current and deferred tax assets and deferred tax liabilities in accordance with ASC 740, Income Taxes. As a result, the Company determined that there were errors in the calculation of the deferred tax assets related to property plant and equipment, mine development and historical net operating losses. In certain cases, the tax basis was not calculated in accordance with the Mexican tax regulations. The LGJV understated the value of the deferred tax assets and overstated the value of current taxes payable at December 31, 2021, and recognized in deferred tax assets in the quarter ended March 31, 2022, instead. As a result, the investment in affiliates at March 31, 2022 and June 30, 2022 and September 30, 2022, was overstated.

The impact of the error on the financial statements of the LGJV was (i) an decrease in deferred tax assets of $12.2 million, (ii) an increase in the income tax receivable of $25.5 million, (iii) a decrease in VAT receivable of $7.1 million, and (iv) an increase in income tax expense of $0.1 million and $9.7 million for the three and nine months ended September 30, 2022, respectively.

The impact of the LGJV tax errors on the Company’s financial statements was (i) a decrease in the investment in affiliates of $7.4 million at September 30, 2022, (ii) an increase of $0.2 million in equity income in affiliates for the three months ended September 30, 2022 and (iii) a decrease of $7.4 million in equity income in affiliates for the nine months ended September 30, 2022.

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Investment in affiliates – Priority distribution payment

The impact of the error described above on the Company’s financial statements was (i) a decrease of $4.6 million in the investment in affiliates at September 30, 2022, and (ii) a decrease in equity income in affiliates of $4.6 million for the nine months ended September 30, 2022. There was no impact on the equity income in affiliates for the three months ended September 30, 2022.

Investment in affiliates – Prior period restatements

The impact on the financial statements for year December 31, 2021, is discussed in the Amendment No. 1 to the Annual Report on Form 10-K. The impact of the restatements recorded in the three months ended 2021 as described in Form 10-K/A for the year ended December 31, 2021, resulted in a decrease in the investment in affiliates of $21.9 million.

Impact of the Restatement

The aggregate impact of the above-noted changes, along with the decrease of $4.4 million in the basis amortization of the investment in affiliates for the nine months ended September 30, 2022 resulting from the above-noted changes on the basis amortization of the investment in affiliates and other previously uncorrected immaterial misstatement to income tax expense ($0.9 million) and paid-in capital account, was (i) a decrease in investment in affiliates of $30.4 million, (ii) a decrease in equity income in affiliates of $7.7 million, and (iii) a decrease in net income of $8.5 million for nine months ended September 30, 2022. For the three months ended September 30, 2022, the aggregate impact of the above-noted changes along with the decrease of $1.9 million in the basis amortization of the investment in affiliates resulting from the above-noted changes and other previously uncorrected immaterial misstatement to income tax expense ($0.5 million) resulted in (i) an increase of $2.1 million in equity income in affiliates, (ii) an increase of $0.5 million in income tax expense, and (iii) an increase of $1.6 million in net income.

These adjustments related to non-cash items, accordingly there were not changes to cash flows from operations, cash flows from investing activities or cash flows from financing activities for the nine months ended September 30, 2022.

These are considered errors in accordance with ASC 250 and are material to the consolidated financial statements for 2021 and require that the consolidated financial statements be restated.

Overview

We are a Canadian headquartered, Delaware incorporated precious metals exploration, development and production company with the objective of becoming a leading silver producer. Our primary efforts are focused on the operation of the LGJV in Chihuahua, Mexico. The LGJV was formed on January 1, 2015, when we entered into the Unanimous Omnibus Partner Agreement with Dowa to further explore, and potentially develop and operate mining properties within the LGD. The LGJV Entities own certain surface and mineral rights associated with the LGD. The LGJV ownership is currently 70% Gatos Silver and 30% Dowa. On September 1, 2019, the LGJV commenced commercial production at CLG, which produces a silver containing lead concentrate and zinc concentrate. We are currently focused on the production and continued development of the CLG and the further exploration and development of the LGD.

Third Quarter 2022 Highlights

Gatos Silver

Third Quarter and Year to date

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The Company recorded net income of $3.5 million (restated) for the three months ended September 30, 2022, compared to a net loss of $15.0 million in the same period of the prior year as a result of higher equity income from affiliates earned during the third quarter of 2021 and a $10.0 million fee paid to Dowa in 2021;

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The Company recorded net income of $9.8 million (restated) for the nine months ended September 30, 2022 compared to a net loss of $3.1 million for the nine months ended September 30, 2021 primarily due to $1.9 million decrease in equity income from the LGJV and a $9.9 million change in other income (expense) primarily due to a $10.0 million fee paid to Dowa in 2021; and

●

The cash balance at September 30, 2022 was $15.3 million compared to $6.6 million at December 31, 2021, and access to the Credit Facility was maintained albeit at a reduced level. On December 19, 2022, the Credit Facility was extended and the availability under the Credit Facility has been restored.

LGJV

Operational highlights

Third Quarter 2022

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Silver production was 2.7 million ounces for the three months ended September 30, 2022, a 59% increase compared to the three months ended September 30,2021. The majority of production for the quarter was sourced from the Central Zone, with the remainder sourced from Northwest and Southeast Upper Zone;

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The processing plant processed a record 263,331 tonnes (averaging 2,862 tonnes per day), an increase of 13% compared to the third quarter of 2021 as a result of continued debottlenecking efforts;

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Metal recoveries exceeded design rates for payable metals with silver recovery averaging 89.6%, zinc recovery averaging 65.4% and lead recovery averaging 88.5%;

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Construction progress on key infrastructure projects continued, including the installation of underground dewatering equipment, the paste plant and a tailings dam raise. These projects are expected to support increased productivity and to help reduce unit operating costs. The tailings dam raise fill placement was completed during the third quarter and the paste plant was subsequently completed in the fourth quarter of 2022; and

●

The transition to a new 100% renewable power supply contract was completed in September, which helped to reduce operating costs and greenhouse gas emissions.

Year to date

●

Silver production increased 39% to 7.4 million ounces for the nine months ended September 30, 2022 primarily due to higher throughput, higher grades and higher recovery;

●

The processing plant processed 709,666 tonnes (averaging 2,600 tonnes per day), an increase of 6% compared to the nine months ended September 30, 2021 as a result of continued debottlenecking efforts; and

●

Metal recoveries exceeded design rates for payable metals with silver recovery averaging 89.9%, zinc recovery averaging 65.4% and lead recovery averaging 89.4%.

Financial highlights

Third Quarter 2022

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Revenues of $73.9 million increased 30% for the three months ended September 30, 2022 compared to the same period in 2021, primarily due the higher concentrate sales and a positive mark-to-market adjustment of provisional revenue as a result of the change in commodity prices during the third quarter 2022;

●

Cost of sales totaled $28.6 million for the three months ended September 30, 2022, 9% higher compared to the same period in 2021, primarily due to increased production. Compared to the three months ended September 30, 2021, co-product cash

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cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 24% and 4% respectively, to $9.10 and $3.28, respectively, for the three months ended September 30, 2022;

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Compared to the three months ended September 30, 2021, co-product all-in sustaining cost per ounce of payable silver equivalent and by-product all-in sustaining cost per ounce of payable silver decreased by 32% and 39% respectively, to $13.13 and $10.04, respectively, for the three months ended September 30, 2022;

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LGJV net income totaled $13.0 million (restated) for the three months ended September 30, 2022 compared to $5.5 million in the same period in 2021 primarily due to increased revenue and lower other expenses partially offset by increased income tax expense for the three months ended September 30, 2022; and

●

The LGJV declared and paid its second dividend of $15 million in July 2022 to its partners.

Year to date

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Revenues of $218.7 million increased 23% for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to higher concentrate sales as a result of the increase in metal grades and increased processed tonnes;

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Cost of sales totaled $81.6 million for the nine months ended September 30, 2022, 16% higher compared to the same period in 2021, primarily due to increased production. Compared to the nine months ended September 30, 2021 co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 28% and 77% respectively, to $9.32 and $1.13, respectively, for the nine months ended September 30, 2022;

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Compared to the nine months ended September 30, 2021 co-product all-in sustaining cost per ounce of payable silver equivalent and by-product all-in sustaining cost per ounce of payable silver decreased by 28% and 40% respectively, to $14.15 and $9.49, respectively, for the nine months ended September 30, 2022; and

●

LGJV net income totaled $42.4 million (restated) the nine months ended September 30, 2022 compared to $41.7 million in the same period in 2021.

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Results of Operations

Results of operations Gatos Silver

The following table presents certain selected financial information for the three and nine months ended September 30, 2022 and 2021. In accordance with generally accepted accounting principles in the United States (‘‘U.S. GAAP’’), these financial results represent the restated consolidated results of operations of our Company and its subsidiaries (in thousands).


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(restated)				(restated)
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		8,930		1,600		24,527		22,592
Other income (expense)		1,076		(8,845)		3,332		(6,520)
Net other income (expense)		10,006		(7,245)		27,859		16,072
Income (loss) before taxes		4,029		(14,999)		10,650		(3,128)
Income tax expense		525		—		865		—
Net income (loss)	$	3,504	$	(14,999)	$	9,785	$	(3,128)
Net income (loss) per share:
Basic	$	0.05	$	(0.22)	$	0.14	$	(0.05)
Diluted	$	0.05	$	(0.22)	$	0.14	$	(0.05)

Gatos Silver

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Exploration expenses

During 2022, our exploration activities were focused on the LGJV and no exploration costs were incurred for our wholly owned properties outside of the first quarter of 2022.

General and administrative expenses

During the three months ended September 30, 2022, we incurred general and administration expense of $5.9 million compared to $7.2 million for the three months ended September 30, 2021. The $1.3 million decrease is primarily due to a $1.6 million decrease in shared-based compensation expense during the three months ended September 30, 2022, compared to the same period in 2021.

Equity income in affiliates (restated)

The increase in equity income resulted primarily from the LGJV recording net income of $13.0 million (restated) during the three months ended September 30, 2022, compared to $5.5 million for the same period in 2021. The increase in net income at the LGJV was primarily due to the increase in concentrate sold reflecting increased production and higher zinc prices.

Other income (expense)

The $9.9 million change in other income (expense) for the quarter ended September 30, 2022, compared to the quarter ended September 30, 2021, was mainly due to a $10.0 million fee paid to Dowa in conjunction with the Term Loan repayment in 2021.

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Net income (loss) (restated)

For the quarter ended September 30, 2022, we recorded net income of $3.5 million (restated), or $0.05 per diluted share (restated), compared to a net loss of $15.0 million, or $0.22 per diluted share, for the quarter ended September 30, 2021. The change was mainly due to the increase in equity income in affiliates and the 2021 payment of a $10.0 million fee to Dowa as described above.

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Exploration expenses

During 2022, our exploration activities were focused on the LGJV and no exploration costs were incurred for our wholly owned properties outside of the first quarter of 2022.

General and administrative expenses

During the nine months ended September 30, 2022, we incurred general and administration expense of $17.0 million compared to $17.8 million for the nine months ended September 30, 2021, primarily due to lower share-based compensation expense of $3.7 million and $0.7 million of separation costs for a departing executive officer partially offset by increased legal fees of $3.3 million attributable to legal consultation regarding the mineral resource and mineral reserve errors in the July 2020 technical report for CLG.

Equity income in affiliates (restated)

The increase in equity income resulted primarily from the increase in net income at the LGJV due to the increase in concentrates sold, higher grades, and higher realized metals prices for the nine months ended September 30, 2022, offset by the impact of priority distribution payment which reduced the equity income from the LGJV by $4.6 million compared to the nine months ended September 30, 2021.

Other income (expense)

The $9.9 million change in other income (expense) for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was mainly due to a $10.0 million fee paid to Dowa in conjunction with the Term Loan repayment in 2021.

Net income (loss) (restated)

For the nine months ended September 30, 2022, we recorded net income of $9.8 million (restated), or $0.14 per diluted share (restated), compared to net loss of $3.1 million, or $0.05 per diluted share, for the nine months ended September 30, 2021. The change was mainly due to the increase in equity income in affiliates and fee paid to Dowa as described above.

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Results of operations LGJV

The following table presents operational information of the LGJV for the three and nine months ended September 30, 2022 and 2021, and select restated financial information of the LGJV for the three and nine months ended September 30, 2022 and 2021. The financial and operational information of the LGJV and CLG is shown on a 100% basis.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Financial	2022		2021		2022		2021
Amounts in thousands
Revenue	$	73,926	$	56,991	$	218,730	$	178,326
Cost of sales		28,625		26,374		81,550		70,275
Royalties		327		1,181		2,739		3,480
Exploration		1,881		1,595		6,235		3,505
General and administrative		3,431		3,414		9,846		9,493
Depreciation, depletion and amortization		19,943		12,734		52,340		36,388
Other expense		56		5,420		1,138		12,715
Income tax expense (restated)		6,702		750		22,488		750
Net income (restated)		12,961		5,523		42,394		41,720
Sustaining capital expenditures	$	17,086	$	21,180	$	57,036	$	51,864


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Operating Results	2022			2021			2022			2021
Tonnes milled (dmt)		263,331			234,054			709,666			668,189
Tonnes milled per day (dmt)		2,862			2,544			2,600			2,454
Average Grades
Silver (g/t)		356			256			361			282
Zinc (%)		4.70			4.10			4.61			3.95
Lead (%)		2.38			2.35			2.45			2.30
Gold (g/t)		0.34			0.30			0.34			0.32
Contained Metal
Silver ounces (millions)		2.70			1.70			7.40			5.33
Zinc pounds - in zinc conc. (millions)		17.8			13.5			47.1			36.7
Lead pounds - in lead conc. (millions)		12.2			10.8			34.2			29.7
Gold ounces - in lead conc. (thousands)		1.40			1.30			3.98			3.92
Recoveries¹
Silver – in both lead and zinc concentrates		89.6	%		88.6	%		89.9	%		87.7	%
Zinc - in zinc concentrate		65.4	%		63.9	%		65.4	%		62.9	%
Lead - in lead concentrate		88.5	%		89.1	%		89.4	%		87.3	%
Gold - in lead concentrate		48.9	%		56.5	%		51.3	%		56.2	%
Average realized price per silver ounce²	$	17.69		$	22.55		$	20.48		$	25.71
Average realized price per zinc pound²	$	1.25		$	1.41		$	1.73		$	1.34
Average realized price per lead pound²	$	0.79		$	1.06		$	0.90		$	1.01
Average realized price per gold ounce²	$	1,682		$	1,727		$	1,708		$	1,812
Co-product cash cost per ounce of payable silver equivalent³	$	9.10		$	11.92		$	9.32		$	12.89
By-product cash cost per ounce of payable silver³	$	3.28		$	3.41		$	1.13		$	4.98
Co-product AISC per ounce of payable silver equivalent³	$	13.13		$	19.23		$	14.15		$	19.59
By-product AISC per ounce of payable silver³	$	10.04		$	16.57		$	9.49		$	15.82

(1)	Recoveries are reported for payable metals in the identified concentrate. Recoveries reported previously were based on total metal in both concentrates.

(2)	Realized prices include the impact of final settlement adjustments from sales of previous periods.

(3)	See “Non-GAAP Financial Measures” below.

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LGJV

Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

Revenue

The LGJV’s concentrate sales for the three months ended September 30, 2022 and 2021 are summarized below (in thousands):


	Three Months Ended September 30,
	2022		2021
Lead concentrate revenue	$	53,619	$	45,400
Zinc concentrate revenue		21,426		19,964
Treatment and refining charges		(6,230)		(5,234)
Subtotal		68,815		60,130
Provisional revenue adjustments		5,111		(3,139)
Total Revenue	$	73,926	$	56,991

Revenue increased by 30% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, as a result of increased concentrate sales and positive market-to-market adjustments included in provisional revenue adjustments in the three months ended September 30, 2022 partially offset by lower realized lead, zinc and silver prices.

Lead concentrate revenue increased by 18% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to an 13% increase in lead concentrate production and higher silver and lead recoveries, partially offset by an 25% decrease in the realized lead prices and a 22% decrease in the realized silver price.

Zinc concentrate revenue increased by 7% for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily due to a 32% increase in zinc concentrate production, partially offset by a lower silver and zinc recoveries and a 22% and 11% decrease in the realized silver price and zinc price, respectively.

Provisional revenue adjustments account for commodity price fluctuations in concentrate sales still subject to final settlement. Provisional revenue adjustments increased period over period primarily due to increases in metals prices at the end of Q3 2022 as compared to the beginning of the period, compared to the end of Q3 2021 due to a decrease in volume subject to final settlement and lower silver prices, partially offset by a slight increase in zinc and lead prices over this period.

Cost of sales

Cost of sales increased by 9% primarily as a result of an increase in processed tonnes, and increased equipment maintenance costs, cost of materials & supplies and higher power costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 24% and 4%, to $9.10 and $3.28, respectively, for the three months ended September 30, 2022.

Royalties

Royalty expense decreased by $0.9 million for the three months ended September 30, 2022 due to a reduction of the royalty percentage on revenue based on the contractual terms.

General and administrative

The amount of general and administrative expense for Q3 2022 was consistent with the expenditure incurred during Q3 2021.

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Depreciation, depletion and amortization

Depreciation, depletion, and amortization expense increased by approximately 57% quarter over quarter primarily as a result of an increase in tonnes mined and also due to the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Report dated November 10, 2022 which reduced the basis for depreciation.

Exploration

Exploration expense for the three months ended September 30, 2022 was $0.3 million higher as compared to the three months ended September 30, 2021 primarily as a result of increased surface drilling around CLG exploration targets. The dominant focus for drilling was at CLG aiming to convert Inferred Resources to Indicated and also to expand the Inferred Resource base, particularly in the South-East Deeps area.

Other expense

Other expense was lower primarily due to an 88% decrease in interest expense as a result of lower interest rates, lower borrowings and lower arrangement fees incurred during Q3 2022 compared to Q3 2021 which was impacted by the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively, and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment.

Income tax (expense) recovery (restated)

Income tax expense for the three months ended September 30, 2022 was $6.0 million higher as compared to the three months ended September 30, 2021 as a result of increased taxable income and reduced losses carried forward.

Net Income (restated)

For the three months ended September 30, 2022, the LGJV had net income of $13.0 million compared to $5.5 million for the three months ended September 30, 2021. The change in net income was primarily due to increased production and higher zinc prices for the three months ended September 30, 2022, partially offset by lower realized silver and lead prices, as well as an increase in cost of sales and depreciation, depletion and amortization costs and increased income tax expense. In addition, interest expense decreased 88% due to lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment.

Sustaining capital expenditures

During the three months ended September 30, 2022, sustaining capital expenditures primarily consisted of $7.1 million on mine development, $4.3 million on the construction of the paste-fill plant, $2.3 million on the construction of the raise of the tailings storage facility, $0.4 million on underground power distribution infrastructure and $0.3 million on the construction of a ventilation raise. During the three months ended September 30, 2021, major sustaining capital expenditures included $7.1 million on mine development, $3.8 million on the processing plant and tailings storage facility, $1.1 million for the construction of a ventilation raise, $0.8 million for the purchase of mining equipment, $2.2 million on underground power distribution infrastructure and $2.9 million on the construction of dewatering wells.

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Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Revenue

The LGJV’s concentrate sales for the nine months ended September 30, 2022 and 2021, are summarized below (in thousands):


	Nine Months Ended September 30,
	2022		2021
Lead concentrate revenue	$	164,706	$	146,327
Zinc concentrate revenue		77,404		52,374
Treatment and refining charges		(16,074)		(16,429)
Subtotal		226,036		182,272
Provisional revenue adjustments		(7,306)		(3,946)
Total Revenue	$	218,730	$	178,326

Revenue increased by 23% for the nine months ended September 30, 2022 compared to the nine months ended September 30 2021. The increase in revenue is primarily due to an increase in lead and zinc concentrate sales as a result of higher production partially offset by a negative market-to-market adjustment included in provisional revenue.

Lead concentrate revenue increased by 13% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to an 15% increase in lead concentrate production and higher silver recoveries, partially offset by a 11% decrease in the realized lead prices, a 20% decrease in the realized silver price and slightly lower lead recoveries.

Zinc concentrate revenue increased by 48% for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to a 28% increase in zinc concentrate production and 29% increase in the realized zinc price, partially offset by a lower silver and zinc recoveries and a 20% decrease in the realized silver price.

Provisional revenue adjustments account for commodity price fluctuations in concentrate sales still subject to final settlement. Provisional revenue adjustments were lower period over period primarily due to decreases in metals prices at the end of Q3 2022 as compared to the beginning of the period, compared to the end of Q3 2021 due to a decrease in silver prices over that period partially offset by price increases in lead and zinc over this period.

Cost of sales

Cost of sales increased by 16% primarily as a result of an increase in production and increased equipment maintenance, materials and supplies and power costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 28% and 77%, to $9.32 and $1.13, respectively, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Royalties

Royalty expense decreased by $0.7 million for the nine months ended September 30, 2022, primarily due to a reduction of the royalty percentage on revenue based on the contractual terms in 2022 partially offset by increased revenue resulting primarily from increased production and higher zinc and lead prices.

General and administrative

General and administrative expense for the nine months ended September 30, 2022 was 4% higher as compared to the nine months ended September 30, 2021 primarily due to inflation.

Depreciation, depletion and amortization

Depreciation, depletion, and amortization expense increased by approximately 44% for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily as a result of an increase in tonnes mined and also due to

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the decrease in the mineral reserve and the shorter mine life based on the Los Gatos Technical Report dated November 10, 2022 which reduced the basis for the depreciation.

Exploration

Exploration expense for the nine months ended September 30, 2022 was $2.7 million higher as compared to the nine months ended September 30, 2021 primarily as a result of increased surface drilling around CLG, Esther and greenfield exploration targets. The dominant focus for drilling was at CLG aiming to convert Inferred Resources to Indicated and also to expand the Inferred Resource base, particularly in the South-East Deeps area.

Other (income) expense

Other (income) expense were lower primarily due to a 93% decrease in interest expense due to lower interest rates, lower borrowings and lower arrangement fees incurred during nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 as a result of the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively, and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment.

Income tax (expense) recovery (restated)

Income tax expense for the nine months ended September 30, 2022 was $22.5 million higher as compared to the nine months ended September 30, 2021 as a result of increased taxable income and reduced losses carried forward.

Net income (restated)

For the nine months ended September 30, 2022, the LGJV had net income of $42.4 million compared to $41.7 million for the nine months ended September 30, 2021. The change in net income was primarily due to the increase in revenue driven by the strong improvement in production during 2022, partially offset by an increase in cost of sales, exploration and depreciation, depletion and amortization and increased income tax expense. In addition, interest expense decreased 93% due to lower borrowings and lower arrangement fees resulting from the retirement of the WCF and Term Loan and the $4.4 million loss incurred in Q3 2021 on the Term Loan extinguishment.

Sustaining capital expenditures

During the nine months ended September 30, 2022, sustaining capital expenditures primarily consisted of $21.7 million of mine development, $17.9 million on the construction of the paste-fill plant, $8.1 million on the construction of the raise of the tailings storage facility, $2.0 million on underground power distribution infrastructure and $1.7 million on the construction of a ventilation raise. During the nine months ended September 30, 2021, major sustaining capital expenditures included $21.6 million of mine development, $8.2 million on the processing plant and tailings storage facility, $2.4 million for the construction of a ventilation raise, $3.0 million for the purchase of mining equipment, $4.3 million on underground power distribution infrastructure and $6.3 million on the construction of dewatering wells.

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Cash Flows

Gatos Silver

The following table presents our cash flows for the nine months ended September 30, 2022 and 2021.


	Nine Months Ended September 30,
	2022		2021

	(in thousands)
Net cash provided by (used by)
Operating activities	$	8,680	$	(15,494)
Investing activities		(27)		(261,439)
Financing activities		—		139,185
Total change in cash	$	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

The cash balance at September 30, 2022 increased to $15.3 million compared to $12.4 million at September 30, 2021.

Nine months ended September 30, 2022 compared to September 30, 2021

Cash provided by (used by) operating activities was $8.7 million and ($15.5) million for the nine months ended September 30, 2022 and 2021, respectively. The $24.1 million increase in cash was primarily due to receipt of $22.7 million of dividends from the LGJV and the 2021 payment of a $10.0 million fee to Dowa, partially offset by working capital changes.

Cash used by investing activities was ($7.4) million and ($261.4) million for the nine months ended September 30, 2022 and 2021, respectively. Cash used by investing activities for the for the nine months ended September 30, 2022 was primarily due to the priority distribution payment made to Dowa. Cash used for the nine months ended September 30, 2021, was primarily due to the $71.6 million acquisition of the 18.5% interest in the LGJV from Dowa, the $42.0 million pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March 2021 and the $144.8 million capital contribution to the LGJV to retire the Dowa Term Loan in July 2021.

Cash provided by financing activities was nil and $139.2 million for the nine months ended September 30, 2022 and 2021, respectively. Cash provided for the nine months ended September 30, 2021, primarily related to the $4.2 million in proceeds from the follow-on offering of stock in July 2021 and the issuance of common stock from the exercise of stock options.

LGJV

The following table presents summarized information relating to the LGJV’s cash flows for the nine months ended September 30, 2022 and 2021.


	Nine Months Ended September 30,
	2022		2021

	(in thousands)
Net cash provided by (used by)
Operating activities	$	118,250	$	84,964
Investing activities		(61,903)		(57,698)
Financing activities		(37,962)		(19,001)
Total change in cash	$	18,385	$	8,265
Cash and cash equivalents, beginning of period	$	20,280	$	1,676
Cash and cash equivalents, end of period	$	38,665	$	9,941

The LGJV cash balance at September 30, 2022 was $38.7 million compared to $9.9 million at September 30, 2021.

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Nine months ended September 30, 2022, compared to September 30, 2021

Cash provided by operating activities was $118.3 million and $85.0 million for the nine months ended September 30, 2022 and 2021, respectively. The $33.3 million increase in cash provided by operating activities was primarily due to the increase in revenue due to increased production and higher zinc and lead prices for the nine months ended September 30, 2022, compared to the prior year period, partially offset by increased income taxes, receivables from customers and other favorable working capital changes.

Cash used by investing activities was $61.9 million and $57.7 million for the nine months ended September 30, 2022 and 2021, respectively. The $4.2 million increase in cash used was primarily due to $13.3 million of higher expenditures for property, plant and equipment, partially offset by $8.8 million of lower mine development expenditures. The majority of property, plant and equipment expenditures in 2022 are related to construction of the paste plant and continued construction of the tailings dam raise.

Cash used by financing activities was $38.0 million and $19.0 million for the nine months ended September 30, 2022 and 2021, respectively. The $19.0 million increase in cash used was primarily due to $33.0 million of dividends paid to partners partially offset by $13.5 million of capital contributions received in 2021 in excess of the $15.9 million paid on the Term Loan in June 2021, the $60.0 million paid to extinguish the Working Capital Facility and the $144.9 million paid to retire the Dowa Term Loan.

Liquidity and Capital Resources

As of September 30, 2022 and December 31, 2021, the Company had cash and cash equivalents of $15.3 million and $6.6 million, respectively. The increase in cash and cash equivalents was primarily due to receipt of the dividend payments in April 2022 and July 2022 of $5.9 million and $10.0 million, respectively, partially offset by operating costs.

On July 12, 2021, the Company entered into the Credit Facility that provides for a $50 million revolving line of credit and has an accordion feature, which allows for an increase in the total line of credit up to $100.0 million (reduced to $75 million per the December 19, 2022 amendment), subject to certain conditions. As of September 30, 2022, $13.0 million was outstanding under the Credit Facility. As of the date of this report the balance outstanding on the Credit Facility is $9.0 million following a $4.0 million principal repayment in December 2022.

On May 31, 2023, the Company’s cash and cash equivalents were $10.5 million and we had $41.0 million available to be drawn under the Credit Facility. The LGJV had cash and cash equivalents of $78.9 million on May 31, 2023. 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 may decide to increase our current financial resources with external financings if our long-term business needs require us to do so however there can be no assurance that the 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.

Contractual Obligations

There have been no changes from the contractual obligations described in our 2021 10-K.

Critical Accounting Policies

Please refer to Note 2 – Summary of Significant Accounting Policies in our consolidated financial statements included in this Report and the 2021 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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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. Please see “Cash Costs and All-In Sustaining Costs” and “Reconciliation of expenses (GAAP) to non-GAAP measures” below.

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.

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.

The calculation for determining silver equivalent ounces was updated to include final settlements in the calculation of the realized metal prices and cash cost and AISC per ounce was updated to include period end accruals (volume and value for payable metals). The prior period comparatives were updated to reflect this change however the cash cost and AISC per ounce calculated on this basis is not materially different from the cash cost and AISC cost per ounce previously reported.

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	Three Months Ended				Nine Months Ended
(in thousands, except unit costs)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Cost of sales	$	28,625	$	26,374	$	81,550	$	70,275
Royalties		327		1,181		2,739		3,480
Exploration		1,881		1,595		6,235		3,505
General and administrative		3,431		3,414		9,846		9,493
Depreciation, depletion and amortization		19,943		12,734		52,340		36,388
Expenses	$	54,207	$	45,298	$	152,710	$	123,141
Depreciation, depletion and amortization		(19,943)		(12,734)		(52,340)		(36,388)
Exploration¹		(1,881)		(1,595)		(6,235)		(3,505)
Treatment and refining charges²		6,230		3,596		16,074		16,373
Cash costs (A)	$	38,613	$	34,565	$	110,209	$	99,621
Sustaining capital		17,086		21,180		57,036		51,827
AISC (B)	$	55,699	$	55,745	$	167,245	$	151,448
By-product credits³		(30,304)		(29,081)		(102,539)		(75,790)
AISC, net of by-product credits (C)	$	25,395	$	26,664	$	64,706	$	75,658
Cash costs, net of by-product credits(D)	$	8,309	$	5,484	$	7,670	$	23,831

Payable ounces of silver equivalent⁴(E)		4,243		2,899		11,822		7,729
Co-product cash cost per ounce of payable silver equivalent (A/E)	$	9.10	$	11.92	$	9.32	$	12.89
Co-product AISC per ounce of payable silver equivalent (B/E)	$	13.13	$	19.23	$	14.15	$	19.59

Payable ounces of silver (F)		2,529		1,609		6,815		4,781
By-product cash cost per ounce of payable silver (D/F)	$	3.28	$	3.41	$	1.13	$	4.98
By-product AISC per ounce of payable silver (C/F)	$	10.04	$	16.57	$	9.49	$	15.82

(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, which includes any final settlement adjustments from prior periods.

(4)

Silver equivalents utilize the average realized prices during the nine months ended September 30, 2022 of $20.48/oz silver, $1.73/lb zinc, $0.90/lb lead and $1,708/oz gold and the average realized prices during the three months ended September 30, 2022 of $17.69/oz silver, $1.25/lb zinc, $0.79/lb lead and $1,682/oz gold. Silver equivalents utilize the average realized prices during the nine months ended September 30, 2021 of $25.71/oz silver, $1.34/lb zinc, $1.01/lb lead and $1,812/oz gold and the average realized prices during the three months ended September 30, 2021 of $22.55/oz silver, $1.41/lb zinc, $1.06/lb lead and $1,727/oz gold. Realized prices include the impact of final settlement adjustments from sales.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company and are not required to provide disclosure pursuant to this Item.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2022, due to the material weaknesses in our internal control over financial reporting described in the 2021 10-K.

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 quarter ended September 30, 2022, 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.

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.

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PART II – OTHER INFORMATION

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 2021 10-K/A. 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 2021 10-K/A.

Item 6. Exhibits


31.1*		Section 302 Certification of Chief Executive Officer

31.2*		Section 302 Certification of Chief Financial Officer

32.1**		Section 1350 Certifications

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

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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)

June 26, 2023	By:	/s/ Dale Andres
		Dale Andres
		Chief Executive Officer

June 26, 2023	By:	/s/ André van Niekerk
		André van Niekerk
		Chief Financial Officer