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Published: 2023-06-26 21:33:09 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 June 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	22
Item 4.	Controls and Procedures	36
	Part II - OTHER INFORMATION
Item 1A.	Risk Factors	37
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 six months ended June 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)


		June 30,		December 31,
		2022		2021
	Notes	(restated)
ASSETS
Current Assets
Cash and cash equivalents		$	7,277	$	6,616
Related party receivables	6		576		1,592
Other current assets	4		2,222		3,558
Total current assets			10,075		11,766
Non‑Current Assets
Investment in affiliates	13		342,642		333,447
Other non-current assets			48		35
Total Assets		$	352,765	$	345,248

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and other accrued liabilities	5	$	1,336	$	1,406
Non-Current Liabilities
Credit Facility, net of debt issuance costs	11		12,694		12,620
Shareholders’ Equity
Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,162,223 shares outstanding as of June 30, 2022 and December 31, 2021			117		117
Paid‑in capital			545,615		544,383
Accumulated deficit			(206,997)		(213,278)
Total shareholders’ equity			338,735		331,222
Total Liabilities and Shareholders’ Equity		$	352,765	$	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				Six Months Ended
		June 30,				June 30,
		2022		2021		2022		2021
	Notes	(restated)				(restated)
Expenses
Exploration		$	—	$	694	$	110	$	918
General and administrative			4,257		5,661		11,034		10,514
Amortization			44		7		88		14
Total expenses			4,301		6,362		11,232		11,446

Other income
Equity income in affiliates	13		8,762		18,291		15,597		20,992
Other income	6		1,110		1,562		2,256		2,325
Net other income			9,872		19,853		17,853		23,317
Income before taxes			5,571		13,491		6,621		11,871
Income tax expense			340		—		340		—
Net income		$	5,231	$	13,491	$	6,281	$	11,871
Net income per share:	8
Basic		$	0.08	$	0.23	$	0.09	$	0.20
Diluted		$	0.08	$	0.22	$	0.09	$	0.20
Weighted average shares outstanding:
Basic			69,162,223		59,534,627		69,162,223		59,427,320
Diluted			69,162,223		60,623,496		69,309,019		60,420,811

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


	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

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)


		Six Months Ended
		June 30,
		2022		2021
	Notes	(restated)
OPERATING ACTIVITIES
Net income		$	6,281	$	11,871
Adjustments to reconcile net income to net cash used by operating activities:
Amortization			88		14
Stock‑based compensation expense	7		1,360		3,426
Other	7		127		44
Equity income in affiliates	13		(15,257)		(20,992)
Dividends from affiliates, net of withholding taxes	13		5,935		—

Changes in operating assets and liabilities:
Receivables from related‑parties			1,016		(3,375)
Accounts payable and other accrued liabilities			(198)		(572)
Other current assets			1,336		1,689
Net cash provided by (used by) operating activities			688		(7,895)

INVESTING ACTIVITIES
Purchase of property, plant and equipment			(27)		—
Investment in affiliates	13		—		(116,595)
Net cash used by investing activities			(27)		(116,595)

FINANCING ACTIVITIES
Financing costs			—		(269)
Issuance of common stock			—		4,221
Other			—		(1)
Net cash provided by financing activities			—		3,951
Net increase (decrease) in cash and cash equivalents			661		(120,539)
Cash and cash equivalents, beginning of period			6,616		150,146
Cash and cash equivalents, end of period			7,277		29,607

Interest paid		$	227	$	—

Supplemental disclosure of noncash transactions:
Deferred financing costs included in accounts payable and accrued liabilities		$	—	$	284

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 six months ended June 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 six months ended June 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 June 30, 2022, and the three and six months period then ended, respectively. The Company identified that its affiliate, the LGJV, did not recognize certain current and deferred tax assets and 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.

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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 $7,267, and (ii) an increase in the income tax receivable of $20,981, (iii) a decrease in VAT receivable of $7,124, at June 30, 2022, (iv) an increase in income tax expense of $110 and $9,612 for the three and six months ended June 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 $7,666 at June 30, 2022, and (ii) a decrease of $77 and $7,666 in equity income in affiliates for the three and six months ended June 30, 2022, respectively.

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 June 30, 2022 (ii) an increase in equity income in affiliates of $6,790 for the three months ended June 30, 2022, (iii) a decrease in equity income in affiliates of $4,631 for the six months ended June 30, 2022.

Investment in affiliates – Prior period restatement

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 financial statements for year ended December 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 $2,515 in the basis amortization of the investment in affiliates for the six months ended June 30, 2022, resulting from the above-noted changes and other previously uncorrected immaterial misstatement to income tax expense ($340) and paid-in capital ($554), are included in the adjustments described in the tables below. The cumulative impact of these items was (i) a decrease in investment in affiliates of $31,985, (ii) an increase in accumulated deficit of $32,539, (iii) a decrease in shareholders’ equity of $31,985 at June 30, 2022 (iv) a decrease in equity income in affiliates of $9,782, and (v) a decrease in net income of $10,122 for the six months ended June 30, 2022. For the three months ended June 30, 2022, the aggregate impact of the above-noted changes along with the decrease of $1,284 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 ($340) resulted in (i) an increase in equity income in affiliates of $7,997 and (ii) an increase in net income of $7,657. 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 six months ended June 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.

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 six months ended June 30, 2022, is presented below. The errors had no impact on net cash flows from operating, investing or financing activities.


	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Consolidated Balance Sheet
Investment in affiliates	374,627	(31,985)	342,642
Total Assets	384,750	(31,985)	352,765
Paid-in capital	545,061	554	545,615
Accumulated deficit	(174,458)	(32,539)	(206,997)
Total shareholders’ equity	370,720	(31,985)	338,735
Total liabilities and shareholders’ equity	384,750	(31,985)	352,765

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	Three Months Ended		Three Months Ended
	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Consolidated Statement of Operations
Equity income in affiliates	765	7,997	8,762
Net other income	1,875	7,997	9,872
Income before income taxes	(2,426)	7,997	5,571
Income tax expense	—	340	340
Net income	(2,426)	7,657	5,231
Net loss per share (basic & diluted)	(0.04)	0.12	0.08


	Six Months Ended		Six Months Ended
	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Consolidated Statement of Operations
Equity income in affiliates	25,379	(9,782)	15,597
Net other income	27,635	(9,782)	17,853
Income before income taxes	16,403	(9,782)	6,621
Income tax expense	—	340	340
Net Income	16,403	(10,122)	6,281
Net loss per share (basic & diluted)	0.24	(0.15)	0.09


	Six Months Ended		Six Months Ended
	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Consolidated Statement of Shareholders’ Equity (Deficit)
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


	Three Months Ended		Three Months Ended
	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Consolidated Statement of Cash Flows
Net income	(2,426)	7,657	5,231
Equity income in affiliates	765	7,657	8,422


	Six Months Ended		Six Months Ended
	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Consolidated Statement of Cash Flows
Net income	16,403	(10,122)	6,281
Equity income in affiliates	25,379	(10,122)	15,257

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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.


	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Combined Balance Sheet
VAT receivable	25,384	(7,124)	18,260
Income tax receivable	—	20,981	20,981
Other current assets	14,038	(3,044)	10,994
Total current assets	100,536	10,813	111,349
Deferred tax assets	16,110	(7,267)	8,843
Total non-current assets	440,824	(7,267)	433,557
Total assets	541,360	3,546	544,906
Accumulated deficit	(79,651)	3,546	(76,105)
Total owners’ capital	479,175	3,546	482,721
Total liabilities and owners’ capital	541,360	3,546	544,906


	Three Months Ended		Three Months Ended
	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Combined Statement of Operations
Income tax (expense) recovery	(1,688)	(110)	(1,798)
Net income	3,464	(110)	3,354


	Six Months Ended		Six Months Ended
	June 30, 2022		June 30, 2022
	As previously reported	Adjustment	As restated
Combined Statement of Operations
Other (income) expense	(1,339)	1,339	—
Total other (income) expense	(257)	1,339	1,082
Income before income tax (expense) recovery	46,558	(1,339)	45,219
Income tax (expense) recovery	(6,174)	(9,612)	(15,786)
Net income	40,384	(10,951)	29,433

4. Other Current Assets


	June 30,		December 31,
	2022		2021
Value added tax receivable	$	655	$	575
Prepaid expenses		1,347		2,976
Other		220		7
Total other current assets	$	2,222	$	3,558

5. Accounts Payable and Other Accrued Liabilities


	June 30,		December 31,
	2022		2021
Accounts payable	$	198	$	196
Accrued expenses		618		623
Accrued compensation		520		587
Total accounts payable and other current liabilities	$	1,336	$	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 and $1,250 under this agreement for the three months ended June 30, 2022 and 2021, respectively, and during the six months ended June 30, 2022 and 2021, the Company earned $2,500 and $2,500, respectively. The income from these services has been recorded on the statements of operations under other income. In the June 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 $2,917 and nil in cash from the LGJV under this agreement for the six months ended June 30, 2022 and 2021, respectively. The Company had receivables under this agreement of $417 and $833 as of June 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 and expenses paid by the Company. 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 (gain) as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Stock Options	$	(194)	$	2,287	$	1,254	$	3,426
Performance share units		(34)		—		106		—
	$	(228)	$	2,287	$	1,360	$	3,426

Stock Option Transactions

The Company granted 100,000 stock options during the six months ended June 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 $4,221 for the six months ended June 30, 2022 and 2021, respectively.

Total unrecognized stock-based compensation expense as of June 30, 2022, was $4,264 which is expected to be recognized over a weighted average period of 1.9 years.

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Stock option activity for the six months ended June 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	(3,574,391)	$	13.50
Outstanding at June 30, 2022	2,399,577	$	12.41
Vested at June 30, 2022	1,608,536	$	12.75


		Weighted‑
		Average
LGJV Personnel Options	Shares	Exercise Price
Outstanding at December 31, 2021	32,393	$	7.31
Outstanding and vested at June 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. For the six months ended June 30, 2022, 69,860 PSUs were forfeited. At June 30, 2022, there were 49,930 PSUs outstanding. On June 30, 2022, unrecognized compensation expense related to the PSUs was $584 which is expected to be recognized over a weighted-average period of 2.5 years.

Deferred Stock Unit (“DSU”) Transactions

The following table summarizes the DSU activity for the six months ended June 30, 2022:


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

8. Net Income (Loss) per Share (restated)

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

For the three months ended June 30, 2022, the Company experienced a net loss, therefore all stock awards have been excluded from the diluted earnings per share calculation as they are anti-dilutive. For the six months ended June 30, 2022, stock options outstanding 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 the six months ended June 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 six months ended June 30, 2021, the computation of diluted earnings per common share excludes the effect of the assumed exercise of 1,391,236 stock options 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.

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
	(restated)				(restated)
Net income	$	5,231	$	13,491	$	6,281	$	11,871

Weighted average shares:
Basic		69,162,223		59,534,627		69,162,223		59,427,320
Effect of dilutive stock options		—		876,448		—		809,749
Effect of dilutive DSUs		—		212,421		146,796		183,742
Diluted		69,162,223		60,623,496		69,309,019		60,420,811

Net income per share:
Basic		0.08		0.23		0.09		0.20
Diluted		0.08		0.22		0.09		0.20

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 incurred 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.

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Dowa Debt Agreements

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

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

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 June 30, 2022, the LGJV had $2,611 outstanding under the LGJV equipment loan agreements, net of unamortized debt discount of $5, with maturity dates through August 2023.

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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 June 30, 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 six months ended June 30, 2022, the Company recognized interest expense of $123 and $226, respectively, with an effective interest rate of 3.5% and 3.8%, respectively, which has been recorded on the statements of operations under other income, and $37 and $74, respectively, for amortization of debt issuance costs. The Company paid interest of $125 and $227 for the three and six months ended June 30, 2022.

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

●

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

●

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

●

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

●

requirement to provide updated financial projections for the CLG by September 30, 2022. The financial projections were provided by the required date and it was 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 Revolver 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.

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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 June 30, 2022 (restated)						Three Months Ended June 30, 2021
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	—	$	—	$	—	$	694	$	—	$	694
General and administrative		780		3,477		4,257		178		5,483		5,661
Amortization		1		43		44		—		7		7
Equity income in affiliates		(8,762)		—		(8,762)		(18,291)		—		(18,291)
Net other (income) expense		12		(1,122)		(1,110)		5		(1,567)		(1,562)
Income tax expense		340		—		340		—		—		—
Total assets	$	91,804	$	260,961	$	352,765	$	59,679	$	224,879	$	284,558


	Six Months Ended June 30, 2022 (restated)						Six Months Ended June 30, 2021
	Mexico		Corporate		Total		Mexico		Corporate		Total
Exploration	$	110	$	—	$	110	$	918	$	—	$	918
General and administrative		1,389		9,645		11,034		332		10,182		10,514
Amortization		1		87		88		—		14		14
Equity income in affiliates		(15,597)		—		(15,597)		(20,992)		—		(20,992)
Net other (income) expense		14		(2,270)		(2,256)		19		(2,344)		(2,325)
Income tax expense		340		—		340		—		—		—
Total assets	$	91,804	$	260,961	$	352,765	$	59,679	$	224,879	$	284,558

13. Investment in Affiliate (restated)

During the three months ended June 30, 2022 and June 30, 2021, the Company recognized $7,716 and $18,291 of income, respectively, and during the six months ended June 30, 2022 and 2021, the Company recognized $14,039 and $20,992 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 (“NPV”) 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 (restated) 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.

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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.

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

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LOS GATOS JOINT VENTURE

COMBINED BALANCE SHEETS (UNAUDITED)

(in thousands)


	June 30,		December 31,
	2022		2021
	(restated)
ASSETS
Current Assets
Cash and cash equivalents	$	40,324	$	20,280
Receivables		9,297		11,263
Inventories		11,493		11,062
VAT receivable		18,260		46,242
Income tax receivable		20,981		—
Other current assets		10,994		4,515
Total current assets		111,349		93,362
Non‑Current Assets
Mine development, net		232,754		229,076
Property, plant and equipment, net		191,960		190,896
Deferred tax assets		8,843		17,407
Total non‑current assets		433,557		437,379
Total Assets	$	544,906	$	530,741

LIABILITIES AND OWNERS’ CAPITAL
Current Liabilities
Accounts payable and accrued liabilities	$	43,403	$	33,179
Related party payable		594		1,609
Accrued interest		21		51
Equipment loans		2,584		5,534
Unearned Revenue		—		1,714
Total current liabilities		46,602		42,087

Non‑Current Liabilities
Equipment loans		27		478
Lease liability		299		—
Reclamation obligations		15,257		14,706
Total non‑current liabilities		15,583		15,184

Owners’ Capital
Capital contributions		540,638		540,638
Paid‑in capital		18,188		18,370
Accumulated deficit		(76,105)		(85,538)
Total owners’ capital		482,721		473,470
Total Liabilities and Owners’ Capital	$	544,906	$	530,741

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LOS GATOS JOINT VENTURE

COMBINED STATEMENTS OF INCOME (UNAUDITED)

(in thousands)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
	(restated)				(restated)
Revenue	$	57,196	$	75,005	$	144,804	$	121,335

Expenses
Cost of sales		27,837		24,096		52,925		43,901
Royalties		918		1,415		2,412		2,299
Exploration		2,233		1,261		4,354		1,910
General and administrative		3,595		2,833		6,415		6,079
Depreciation, depletion and amortization		16,055		12,705		32,397		23,654
Total operating expenses		50,638		42,310		98,503		77,843

Other (income) expense
Interest expense		174		2,356		265		4,473
Arrangement fee		—		2,090		—		2,090
Accretion expense		275		228		551		456
Other (income) expense		—		11		—		(19)
Foreign exchange (gain) loss		957		(1,335)		266		295
Total other (income) expense		1,406		3,350		1,082		7,295

Income before income tax expense		5,152		29,345		45,219		36,197

Income tax expense		1,798		—		15,786		—

Net income	$	3,354	$	29,345	$	29,433	$	36,197

14. Subsequent Events

In July 2022 and November 2022, the LGJV paid additional dividends in the amount of $15,000 and $20,000, respectively, to its partners. The Company’s share, after withholding taxes of $525 and $700, respectively, was $9,975 and $13,300, respectively, for the July 2022 and November 2022 dividend payments.

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 regarding the outcome of any legal, regulatory or judicial proceeding;

●

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;

●

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;

●

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.

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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 June 30, 2022, and the three and six 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.

The impact of the error on the financial statements of the LGJV was (i) a decrease in deferred tax assets of $7.3 million, (ii) an increase in the income tax receivable of $21.0 million, (iii) a decrease in VAT receivable of $7.1 million, at June 30, 2022 and (iv) an increase in income tax expense of $0.1 million and $9.6 million for the three and six months ended June 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 $7.7 million at June 30, 2022, and (ii) a decrease of nil and $7.7 million in equity income in affiliates for the three and six months ended June 30, 2022, respectively.

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 June 30, 2022, (ii) an increase in equity income in affiliates of $6.8 million for the three months ended June 30, 2022 and (iii) a decrease in equity income in affiliates of $4.6 million for the six months ended June 30, 2022.

Investment in affiliates – Prior period restatement

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 financial statements for year ended December 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 $2.5 million in the basis amortization of the investment in affiliates for the six months ended June 30, 2022, resulting impact from above-mentioned and other previously uncorrected immaterial misstatement to income tax expense ($0.3 million) and paid-in capital ($0.6 million), was (i) a decrease in investment in affiliates of $32.0 million, (ii) an increase in accumulated deficit of $32.5 million, and (iii) a decrease in shareholders’ equity of $32.0 million at June 30, 2022, and (iv) a decrease in equity income in affiliates of $9.8 million, and (v) a decrease in net income of $10.1 million for the six months ended June 30, 2022. For the three months ended June 30, 2022 the aggregate impact of the above-noted changes along with the decrease of $1.3 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 ($0.3 million) resulted in (i) and increase in equity income in affiliates of $8.0 million, and (ii) an increase in net income of $7.7 million. 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 six months ended June 30, 2022.

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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.

Second Quarter and First Half 2022 Highlights

Gatos Silver

Second Quarter and First Half 2022

●

The Company recorded a net income of $5.2 million (restated) for the three months ended June 30, 2022, compared to $13.5 million of net income in the same period of the prior year as a result of lower equity income from affiliates earned during the second quarter of 2022;

●

The Company recorded net income of $6.3 million (restated) for the six months ended June 30, 2022 compared to net income of $11.9 million for the six months ended June 30, 2021 primarily due to $5.4 million decrease in equity income from the LGJV; and

●

The cash balance at June 30, 2022 was $7.3 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 full $50.0 million availability under the Credit Facility has been restored of which $9.0 million is currently drawn.

LGJV

Operational highlights

Second Quarter 2022

●

Silver production was 2.3 million ounces for the three months ended June 30, 2022, an 10% increase over the 2.1 million ounces of silver produced for the three months ended June 30, 2021 primarily as a result of higher ore grades. The majority of production for the quarter was sourced from the Central Zone with the remainder from the Northwest Zone and the initial development into the Southeast Upper Zone;

●

The processing plant processed 211,350 tonnes, a decrease of 8% compared to the second quarter of 2021, as a result of a temporary blasting suspension in the mine that impacted ore production for over two weeks starting in late April. Milling operations were suspended for 11 operating days due to the blasting suspension. The mill averaged 2,323 tonnes per day during the quarter. Excluding the suspension time, the mill averaged 2,642 tonnes per day during the quarter;

●

Metal recoveries exceeded design rates for payable metals with silver recovery averaging 90.4%, zinc recovery averaging 66.4% and lead recovery averaging 90.5%; and

●

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 and the paste plant were subsequently completed in the fourth quarter of 2022.

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First Half 2022

●

CLG achieved record production of 4.7 million ounces of silver, 22.0 million pounds of lead and 29.3 million pounds of zinc for the six months ended June 30, 2022;

●

The processing plant processed 446,335 tonnes, an increase of 3% compared to the first half of 2021, as a result of a increased throughput rates partially offset by the temporary blasting suspension in the mine that impacted ore production for over two weeks starting in late April; and

●

Metal recoveries exceeded design rates for payable metals with silver recovery averaging 90.1%, zinc recovery averaging 65.4% and lead recovery averaging 89.9%.

Financial highlights

Second Quarter 2022

●

Revenue of $57.2 million decreased 24% for the three months ended June 30, 2022 compared to the same period in 2021, primarily due to the mark-to-market adjustment of provisional revenue as a result of the decrease in commodity prices during the second quarter of 2022;

●

Cost of sales totaled $27.8 million for the three months ended June 30, 2022, 16% higher compared to the same period in 2021, primarily as a result of increased operational costs primarily as a result of increased production, and increased equipment maintenance costs, cost of materials & supplies and higher power cost. Compared to the three months ended June 30, 2021, co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 19% and 104% respectively, to $9.48 and ($0.10), respectively, for the three months ended June 30, 2022;

●

Compared to the three months ended June 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 16% and 16% respectively, to $15.13 and $10.54, respectively, for the three months ended June 30, 2022;

●

LGJV net income totaled $3.4 million (restated) the three months ended June 30, 2022 compared to $29.3 million in the same period in 2021. The 89% decrease in net income is primarily due to mark-to-market provisional revenue adjustments and higher costs of sales and depreciation, depletion and amortization incurred for the three months ended June 30, 2022; and

●

The LGJV declared and paid its first dividend of $20 million in April 2022. This dividend paid the initial priority dividend due to Dowa. The dividend was paid to each partner on a pro rata basis net of withholding taxes.

First Half 2022

●

Revenue of $144.8 million increased 19% for the six months ended June 30, 2022 compared to the same period in 2021 primarily due the increase in metal grades and higher realized metal prices;

●

Cost of sales totaled $52.9 million for the six months ended June 30, 2022, 21% higher compared to the same period in 2021, primarily due to increased production and sales volumes. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 29% and 103% respectively, to $9.48 and ($0.15), respectively, for the six months ended June 30, 2022;

●

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 25% and 41% respectively, to $14.77 and $9.17, respectively, for the six months ended June 30, 2022; and

●

LGJV net income totaled $29.4 million (restated) the six months ended June 30, 2022 compared to $36.2 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 six months ended June 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				Six Months Ended
	June 30,				June 30,
		2022		2021		2022		2021
	(restated)				(restated)
Expenses
Exploration	$	—	$	694	$	110	$	918
General and administrative		4,257		5,661		11,034		10,514
Amortization		44		7		88		14
Total expenses		4,301		6,362		11,232		11,446

Other income
Equity income in affiliates		8,762		18,291		15,597		20,992
Other income		1,110		1,562		2,256		2,325
Net other income		9,872		19,853		17,853		23,317
Income before taxes		5,571		13,491		6,621		11,871
Income tax expense		340		—		340		—
Net income	$	5,231	$	13,491	$	6,281	$	11,871
Net income per share:
Basic	$	0.08	$	0.23	$	0.09	$	0.20
Diluted	$	0.08	$	0.22	$	0.09	$	0.20

Gatos Silver

Three Months Ended June 30, 2022 Compared to Three Months Ended June 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 June 30, 2022, we incurred general and administration expense of $4.3 million compared to $5.7 million for the three months ended June 30, 2021. The $1.4 million decrease is primarily due to lower share-based compensation expense.

Equity income in affiliates (restated)

The decrease in equity income resulted primarily from the LGJV recording lower net income of $3.4 million for the three months ended June 30, 2022 compared to $29.3 million for the three months ended June 30, 2021 partially offset by the $6.8 million equity income recognized as a result of the priority distribution payment recovery recorded during the three months ended June 30, 2022. The decrease in net income at the LGJV was primarily due to mark-to-market provisional revenue adjustments and also higher costs of sales and depreciation, depletion and amortization incurred for the three months ended June 30, 2022. See “Results of operations LGJV” below.

Other Income

Other income for the three months ended June 30, 2022 and 2021, consists primarily of management fees of $1.3 million the Company received from the LGJV.

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Net income (restated)

For the quarter ended June 30, 2022, we recorded a net income of $5.2 million (restated), or $0.08 per diluted share (restated), compared to a net income of $13.5 million, or $0.22 per diluted share, for the quarter ended June 30, 2021, mainly due to the decrease in equity income in affiliates as described above.

Six Months Ended June 30, 2022, Compared to Six Months Ended June 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 six months ended June 30, 2022, we incurred general and administration expenses of $11.0 million, compared to $10.5 million for the six months ended June 30, 2021, primarily due to higher legal fees 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 decrease in equity income resulted primarily from the impact of priority distribution payment which reduced the equity income from the LGJV by $4.6 million in the six months ended June 30, 2022, as discussed in Note 3. The LGJV recorded net income of $29.4 million for the six months ended June 30, 2022, compared to $36.2 million for the six months ended June 30, 2021. The decrease in net income at the LGJV was primarily due to an increase in income tax expense, partly offset by the increase in concentrate sold, higher grade and higher realized metals prices for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. See "Results of operations LGJV" below.

Other Income

Other income for the six months ended June 30, 2022 and 2021, consists primarily of management fees the Company received of $2.5 million in the first half of 2022 and 2021 from the LGJV.

Net income (restated)

For the six months ended June 30, 2022, we recorded net income of $6.3 million (restated), or $0.09 per diluted share (restated), compared to net income of $11.9 million, or $0.20 per diluted share, for the six months ended June 30, 2021, mainly due to the decrease in equity income in affiliates as described above.

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Results of operations LGJV

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


	Three Months Ended June 30,				Six Months Ended June 30,
Financial	2022		2021		2022		2021
Amounts in thousands
Revenue	$	57,196	$	75,005	$	144,804	$	121,335
Cost of sales		27,837		24,096		52,925		43,901
Royalties		918		1,415		2,412		2,299
Exploration		2,223		1,261		4,354		1,910
General and administrative		3,595		2,833		6,415		6,079
Depreciation, depletion and amortization		16,055		12,705		32,397		23,654
Other (income) expense		1,406		3,350		1,082		7,295
Income tax expense (restated)		1,798		—		15,786		—
Net income (restated)		3,354		29,345		29,433		36,197
Sustaining capital	$	22,177	$	18,431	$	39,950	$	30,647


	Three Months Ended June 30,						Six Months Ended June 30,
Operating Results	2022			2021			2022			2021
Tonnes milled (dmt)		211,350			230,656			446,335			434,135
Tonnes milled per day (dmt)		2,323			2,535			2,466			2,408
Average Grades
Silver (g/t)		374			322			363			296
Zinc (%)		5.03			4.41			4.56			3.87
Lead (%)		2.79			2.51			2.49			2.28
Gold (g/t)		0.38			0.35			0.34			0.33
Contained Metal
Silver ounces (millions)		2.30			2.1			4.7			3.6
Zinc pounds - in zinc conc. (millions)		15.6			14.5			29.3			23.2
Lead pounds - in lead conc. (millions)		11.8			11.2			22.0			18.9
Gold ounces - in lead conc. (thousands)		1.3			1.5			2.6			2.6
Recoveries¹
Silver – in both lead and zinc concentrates		90.4	%		88.6	%		90.1	%		87.3	%
Zinc - in zinc concentrate		66.4	%		64.4	%		65.4	%		62.4	%
Lead - in lead concentrate		90.5	%		87.6	%		89.9	%		86.3	%
Gold - in lead concentrate		48.9	%		57.5	%		52.7	%		56.1	%
Average realized price per silver ounce²	$	20.31		$	27.04		$	22.13		$	27.31
Average realized price per zinc pound²	$	1.97		$	1.36		$	2.03		$	1.30
Average realized price per lead pound²	$	0.92		$	1.02		$	0.96		$	0.98
Average realized price per gold ounce²	$	1,599		$	1,922		$	1,722		$	1,854
Co-product cash cost per ounce of payable silver equivalent³	$	9.48		$	11.68		$	9.48		$	13.32
By-product cash cost per ounce of payable silver³	$	(0.10)		$	2.68		$	(0.15)		$	5.78
Co-product AISC per ounce of payable silver equivalent³	$	15.13		$	17.92		$	14.77		$	19.60
By-product AISC per ounce of payable silver³	$	10.54		$	12.58		$	9.17		$	15.45

(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.

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

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LGJV

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

Revenue

The LGJV’s concentrate sales for the three months ended June 30, 2022 and 2021 are summarized below:


	Three Months Ended June 30,
	2022		2021
Lead concentrate revenue	$	51,005	$	59,378
Zinc concentrate revenue		28,750		20,476
Treatment and refining charges		(4,880)		(4,473)
Subtotal		74,875		75,381
Provisional revenue adjustments		(17,679)		(376)
Total Revenue	$	57,196	$	75,005

Revenue decreased by 24% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The decrease in revenue is primarily due to provisional revenue reductions and decreased realized silver prices, partially offset by slightly higher concentrate production.

Lead revenue decreased by 14% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to a 25% decrease in the realized silver price and 10% decrease in the realized lead prices partially offset by a 5% increase in lead concentrate production and higher silver and lead ore grades.

Zinc revenue increased by 40% for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to a 45% increase in the realized zinc price, an 8% increase in zinc concentrate production and higher silver and zinc ore grades, partially offset by a 25% 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 actual and forward metals prices at the end of June 2022 as compared to the end of June 2021.

Cost of sales

Cost of sales increased by 16% primarily as a result of increased production, and increased equipment maintenance, materials & supplies and power costs. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver for the three months ended June 30, 2022, decreased by 19% and 104% respectively, to $9.48 and ($0.10), respectively, primarily due to higher metal production for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.

Royalties

Royalty expense decreased by $0.5 million for the three months ended June 30, 2022, compared to the same period in 2021 due to lower revenue and the reduction of the royalty percentage for the three months ended June 30, 2022 based on the terms of the royalty agreement.

General and administrative

General and administrative expense for the three months ended June 30, 2022, was $0.8 million higher as compared to the three months ended June 30, 2021, primarily due to consulting and severance costs.

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Depreciation, depletion and amortization

Depreciation, depletion, and amortization expense increased by approximately 26% 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. The lower mineral reserve tonnes and shorter life-of-mine reduced the basis for the depreciation and as a result increased the depreciation, depletion, and amortization expense incurred for the three months ended June 30, 2022.

Exploration

Exploration expense for the three months ended June 30, 2022, was $1.0 million higher as compared to the three months ended June 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 was lower primarily due to a 93% decrease in interest expense due to lower interest rates, lower borrowings and lower arrangement fees incurred during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, as a result of the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively.

Income tax (expense) recovery (restated)

Income tax expense for the three months ended June 30, 2022, was $1.8 million higher as compared to the three months ended June 30, 2021, as a result of increased taxable income and less available losses carried forward.

Net income (restated)

For the three months ended June 30, 2022, the LGJV had net income of $3.4 million (restated) compared to $29.3 million for the three months ended June 30, 2021. The change in net income was primarily due to income taxes payable and the decrease in revenue driven by the mark-to-market adjustment of provisional revenue as a result of the decrease in commodity prices during the quarter, as well as an increase in cost of sales, depreciation depletion and amortization, and income taxes.

Sustaining capital

For the three months ended June 30, 2022, sustaining capital expenditures primarily consisted of $7.3 million of mine development, $8.3 million on the construction of the paste-fill plant, $2.5 million on the construction of the raise of the tailings storage facility, $0.5 million on underground power distribution infrastructure and $0.8 million on the construction of a ventilation raise. During the three months ended June 30, 2021, major sustaining capital expenditures included $8.0 million of mine development, $2.4 million on the processing plant and tailings storage facility, $0.7 million for the construction of a ventilation raise, $0.8 million for the purchase of mining equipment, and $2.6 million on the construction of dewatering wells.

Six Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021

Revenue

The LGJV’s concentrate sales for the six months ended June 30, 2022 and 2021, are summarized below, in thousands:


	Six Months Ended June 30,
	2022		2021
Lead concentrate revenue	$	111,087	$	100,927
Zinc concentrate revenue		55,978		32,410
Treatment and refining charges		(9,844)		(11,195)
Subtotal		157,221		122,142
Provisional revenue adjustments		(12,417)		(807)
Total Revenue	$	144,804	$	121,335

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Revenue increased by 19% for the six months ended June 30 2022, compared to the six months ended June 30 2021, as a result of increased concentrate sales and realized zinc price in the first half of 2022 partially offset by provisional revenue reductions.

Lead concentrate revenue increased by 10% for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to 16% increase in lead concentrate production, higher silver and lead ore grades, partially offset by 19% and 2% decrease in the realized price of silver and lead, respectively.

Zinc concentrate revenue increased by 73% for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due to 26% increase in zinc concentrate production and 56% increase in realized zinc price, partially offset by a lower silver and zinc recoveries and a decrease in realized silver price of 19%.

Cost of sales

Cost of sales increased by 21% primarily as a result of increased production, increased equipment maintenance, materials & supplies and power costs during 2022. Co-product cash cost per ounce of payable silver equivalent and by-product cash cost per ounce of payable silver decreased by 29% and 103% respectively, to $9.48 and ($0.15), respectively, for the six months ended June 30, 2022 primarily due to higher metal production.

Royalties

Royalty expense increased by $0.1 million for the six months ended June 30, 2022, due to higher revenue partially offset by the reduction of the royalty percentage for the six months ended June 30, 2022 based on the terms of the royalty agreement.

General and administrative

General and administrative expense for the six months ended June 30, 2022, was 6% higher as compared to the six months ended June 30, 2021, primarily due to inflation.

Depreciation, depletion and amortization

Depreciation, depletion, and amortization expense increased by 37% for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, 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. The lower mineral reserve tonnes and shorter life-of-mine reduced the basis for the depreciation and as a result increased the depreciation, depletion, and amortization expense for the six months ended June 30, 2022.

Exploration

Exploration expense for the six months ended June 30, 2022, was $2.4 million higher as compared to the six months ended June 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 was lower primarily due to a 94% decrease in interest expense due to lower interest rates, lower borrowings and lower arrangement fees incurred during the six months ended June 30, 2022, compared to the six months ended June 30 2021 as a result of the retirement of the WCF and the Term Loan in March 2021 and July 2021, respectively.

Income tax (expense) recovery (restated)

Income tax expense for the six months ended June 30, 2022, was $15.8 million higher as compared to the six months ended June 30, 2021, as a result of increased taxable income and less available losses carried forward.

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Net income (restated)

For the six months ended June 30, 2022, the LGJV had net income of $29.4 million (restated) compared to $36.2 million for the six months ended June 30, 2021. The change in net income was primarily due to the increase in income taxes payable, cost of sales, royalties, exploration and depreciation, depletion and amortization, partly offset by increase in revenue driven by the strong improvement in production during 2022.

Sustaining capital

During the six months ended June 30, 2022, sustaining capital expenditures primarily consisted of $14.5 million on mine development, $13.6 million on the construction of the paste-fill plant, $5.8 million on the construction of the raise of the tailings storage facility, $1.6 million on underground power distribution infrastructure and $1.5 million on the construction of a ventilation raise. During the six months ended June 30, 2021, major sustaining capital expenditures included $14.4 million on mine development, $4.4 million on the processing plant and tailings storage facility, $1.3 million for the construction of a ventilation raise, $2.0 million for the purchase of mining equipment and $3.4 million on the construction of dewatering wells.

Cash Flows

Gatos Silver

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


	Six Months Ended
	June 30,
	2022		2021

	(in thousands)
Net cash provided by (used by)
Operating activities	$	688	$	(7,895)
Investing activities		(27)		(116,595)
Financing activities		—		3,951
Total change in cash	$	661	$	(120,539)
Cash and cash equivalents, beginning of period	$	6,616	$	150,146
Cash and cash equivalents, end of period	$	7,277	$	29,607

The cash balance at June 30, 2022, decreased to $7.3 million compared to $29.6 million at June 30, 2021.

Six months ended June 30, 2022, compared to June 30, 2021

Cash provided by (used by) operating activities was $0.7 million and ($7.9) million for the six months ended June 30, 2022 and 2021, respectively. The $8.6 million increase in cash was primarily due to receipt of a $5.9 million dividend from the LGJV and working capital changes from operations.

Cash used by investing activities was ($0.03) million and ($116.6) million for the six months ended June 30, 2022 and 2021, respectively. Cash used by investing activities for the six months ended June 30, 2022 was primarily due to the priority distribution payment made to Dowa. Cash used for the six months ended June 30, 2021, was primarily due to the $71.6 million acquisition of the 18.5% interest in the LGJV from Dowa and the $42.0 million pro-rata capital contribution to the LGJV for the extinguishment of the WCF in March 2021.

Cash provided by financing activities was nil and $4.0 million for the six months ended June 30, 2022 and 2021, respectively. Cash provided for the six months ended June 30, 2021, primarily related to the $4.2 million in proceeds from the issuance of common stock from the exercise of stock options.

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LGJV

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


	Six Months Ended
	June 30,
	2022		2021
Net cash provided by (used by)
Operating activities	$	80,523	$	56,225
Investing activities		(38,149)		(38,613)
Financing activities		(22,330)		(17,046)
Total change in cash	$	20,044	$	566
Cash and cash equivalents, beginning of period	$	20,280	$	1,676
Cash and cash equivalents, end of period	$	40,324	$	2,242

The LGJV cash balance at June 30, 2022 was $40.3 million compared to $2.2 million at June 30, 2021.

Six months ended June 30, 2022, compared to June 30, 2021

Cash provided by operating activities was $80.5 million and $56.2 million for the six months ended June 30, 2022 and 2021, respectively. The $24.3 million increase in cash provided by operating activities was primarily due to the increase in revenue due to higher metals prices and higher ore grades for the six months ended June 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 $38.1 million and $38.6 million for the six months ended June 30, 2022 and 2021, respectively. The $0.5 million decrease in cash used was primarily due to $5.6 million of lower mine development expenditures largely related to ventilation and pumping wells, partially offset by $5.1 million of higher expenditures for property, plant and equipment largely related to construction of the paste plant. 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 $22.3 million and $17.0 million for the six months ended June 30, 2022 and 2021, respectively. The $5.3 million increase in cash used was primarily due to $19 million of dividends paid to partners in 2022. For the six months ended June 30, 2021, financing activities consisted of capital contributions of $62.4 million received, $15.9 million paid for Term Loan payment in June 2021 and the $60.0 million paid to extinguish the Working Capital Facility.

Liquidity and Capital Resources

As of June 30, 2022, and December 31, 2021, the Company had cash and cash equivalents of $7.3 million and $6.6 million, respectively. The increase in cash and cash equivalents was primarily due to receipt of the first dividend payment in April 2022 of $5.9 million 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 million (reduced to $75 million per the December 19, 2022 amendment), subject to certain conditions. As of December 31, 2021, $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.

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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.

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.

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Reconciliation of expenses (GAAP) to non-GAAP measures

The table below presents a reconciliation between the most comparable GAAP measure of the LGJV’s expenses to the non-GAAP measures of (i) cash costs, (ii) cash costs, net of by-product credits, (iii) co-product AISC 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.


	Three Months Ended				Six Months Ended
(in thousands, except unit costs)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Cost of sales	$	27,837	$	24,096	$	52,925	$	43,901
Royalties		918		1,415		2,412		2,299
Exploration		2,233		1,261		4,354		1,910
General and administrative		3,595		2,833		6,415		6,079
Depreciation, depletion and amortization		16,055		12,705		32,397		23,654
Expenses	$	50,638	$	42,310	$	98,503	$	77,843
Depreciation, depletion and amortization		(16,055)		(12,705)		(32,397)		(23,654)
Exploration¹		(2,233)		(1,261)		(4,354)		(1,910)
Treatment and refining charges²		4,880		6,142		9,844		12,777
Cash costs (A)	$	37,230	$	34,486	$	71,596	$	65,056
Sustaining capital		22,177		18,431		39,950		30,647
AISC (B)	$	59,407	$	52,917	$	111,546	$	95,703
By-product credits³		(37,444)		(29,497)		(72,235)		(46,709)
AISC, net of by-product credits (C)	$	21,963	$	23,420	$	39,311	$	48,994
Cash costs, net of by-product credits (D)	$	(214)	$	4,989	$	(639)	$	18,347

Payable ounces of silver equivalent⁴ (E)		3,927		2,953		7,550		4,882
Co-product cash cost per ounce of payable silver equivalent (A/E)	$	9.48	$	11.68	$	9.48	$	13.32
Co-product AISC per ounce of payable silver equivalent (B/E)	$	15.13	$	17.92	$	14.77	$	19.60

Payable ounces of silver (F)		2,083		1,862		4,286		3,172
By-product cash cost per ounce of payable silver (D/F)	$	(0.10)	$	2.68	$	(0.15)	$	5.78
By-product AISC per ounce of payable silver (C/F)	$	10.54	$	12.58	$	9.17	$	15.45

(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 six months ended June 30, 2022 of $22.13/oz silver, $2.03/lb zinc, $0.96/lb lead and $1,722/oz gold and the average realized prices during the three months ended June 30, 2022 of $20.31/oz silver, $1.97/lb zinc, $0.92/lb lead and $1,599/oz gold. Silver equivalents utilize the average realized prices during the six months ended June 30, 2021, of $27.31/oz silver, $1.30/lb zinc, $0.98/lb lead and $1,854/oz gold and the average realized prices during the three months ended June 30, 2021, of $27.04/oz silver, $1.36/lb zinc,$1.02/lb lead and $1,922/oz gold. Realized prices include the impact of final settlement adjustments from sales.

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

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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 June 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 June 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 June 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.

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.

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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