10-Q 1 gato-20210930x10q.htm FORM 10-Q
0001517006--12-312021Q3false0.50.5P1Y6M0001517006us-gaap:TreasuryStockMember2021-07-012021-09-3000015170062020-10-012020-10-310001517006us-gaap:RetainedEarningsMember2021-09-300001517006us-gaap:AdditionalPaidInCapitalMember2021-09-300001517006us-gaap:RetainedEarningsMember2021-06-300001517006us-gaap:AdditionalPaidInCapitalMember2021-06-3000015170062021-06-300001517006us-gaap:RetainedEarningsMember2021-03-310001517006us-gaap:AdditionalPaidInCapitalMember2021-03-3100015170062021-03-310001517006us-gaap:RetainedEarningsMember2020-12-310001517006us-gaap:AdditionalPaidInCapitalMember2020-12-310001517006us-gaap:RetainedEarningsMember2020-09-300001517006us-gaap:AdditionalPaidInCapitalMember2020-09-300001517006us-gaap:RetainedEarningsMember2020-06-300001517006us-gaap:AdditionalPaidInCapitalMember2020-06-3000015170062020-06-300001517006us-gaap:RetainedEarningsMember2020-03-310001517006us-gaap:AdditionalPaidInCapitalMember2020-03-3100015170062020-03-310001517006us-gaap:RetainedEarningsMember2019-12-310001517006us-gaap:AdditionalPaidInCapitalMember2019-12-310001517006us-gaap:CommonStockMember2021-09-300001517006us-gaap:TreasuryStockMember2021-06-300001517006us-gaap:CommonStockMember2021-06-300001517006us-gaap:TreasuryStockMember2021-03-310001517006us-gaap:CommonStockMember2021-03-310001517006us-gaap:TreasuryStockMember2020-12-310001517006us-gaap:CommonStockMember2020-12-310001517006us-gaap:TreasuryStockMember2020-09-300001517006us-gaap:CommonStockMember2020-09-300001517006us-gaap:TreasuryStockMember2020-06-300001517006us-gaap:CommonStockMember2020-06-300001517006us-gaap:TreasuryStockMember2020-03-310001517006us-gaap:CommonStockMember2020-03-310001517006us-gaap:TreasuryStockMember2019-12-310001517006us-gaap:CommonStockMember2019-12-310001517006us-gaap:OverAllotmentOptionMember2021-08-180001517006gato:FollowOnPublicOfferingMember2021-07-190001517006us-gaap:EmployeeStockOptionMembersrt:AffiliatedEntityMember2021-09-300001517006gato:DirectorAndEmployeeMemberus-gaap:EmployeeStockOptionMember2021-09-300001517006us-gaap:EmployeeStockOptionMembersrt:AffiliatedEntityMember2020-12-310001517006gato:DirectorAndEmployeeMemberus-gaap:EmployeeStockOptionMember2020-12-310001517006us-gaap:EmployeeStockOptionMember2020-01-012020-09-300001517006gato:DirectorAndEmployeeMemberus-gaap:EmployeeStockOptionMember2021-01-012021-09-300001517006gato:DeferredStockUnitMember2021-09-300001517006gato:DeferredStockUnitMember2020-01-012020-09-300001517006gato:AwardsGrantedPriorTo2020Memberus-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementNonemployeeMember2021-01-012021-09-300001517006gato:AwardsGrantedInJune2020Memberus-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementNonemployeeMember2021-01-012021-09-300001517006gato:AwardsGrantedInJanuary2020Memberus-gaap:EmployeeStockOptionMemberus-gaap:ShareBasedPaymentArrangementNonemployeeMember2021-01-012021-09-300001517006gato:EmployeesAndJointVenturePersonnelMemberus-gaap:EmployeeStockOptionMember2021-01-012021-09-300001517006gato:ManagementServicesAgreementMembergato:SunshineSilverMiningAndRefiningCorporationMember2021-07-012021-09-300001517006gato:ConsultingAndAdministrativeServicesAgreementMembergato:LosGatosJointVentureMember2021-07-012021-09-300001517006gato:ManagementServicesAgreementMembergato:SunshineSilverMiningAndRefiningCorporationMember2021-01-012021-09-300001517006gato:ConsultingAndAdministrativeServicesAgreementMembergato:LosGatosJointVentureMember2021-01-012021-09-300001517006gato:LosGatosJointVentureMember2021-01-012021-09-300001517006gato:ManagementServicesAgreementMembergato:SunshineSilverMiningAndRefiningCorporationMember2020-07-012020-09-300001517006gato:ConsultingAndAdministrativeServicesAgreementMembergato:LosGatosJointVentureMember2020-07-012020-09-300001517006gato:ManagementServicesAgreementMembergato:SunshineSilverMiningAndRefiningCorporationMember2020-01-012020-09-300001517006gato:ConsultingAndAdministrativeServicesAgreementMembergato:LosGatosJointVentureMember2020-01-012020-09-300001517006gato:LosGatosJointVentureMember2020-01-012020-09-300001517006gato:LosGatosJointVentureMembergato:DowaMprLoanMember2019-05-012019-05-3100015170062021-07-192021-07-190001517006us-gaap:OverAllotmentOptionMember2021-08-182021-08-180001517006gato:FollowOnPublicOfferingMember2021-07-192021-07-190001517006us-gaap:RetainedEarningsMember2021-07-012021-09-300001517006us-gaap:RetainedEarningsMember2021-04-012021-06-300001517006us-gaap:RetainedEarningsMember2021-01-012021-03-310001517006us-gaap:RetainedEarningsMember2020-07-012020-09-300001517006us-gaap:RetainedEarningsMember2020-04-012020-06-300001517006us-gaap:RetainedEarningsMember2020-01-012020-03-310001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:TermLoanMember2017-07-310001517006gato:MexicoSegmentMember2021-07-012021-09-300001517006gato:MexicoSegmentMember2021-01-012021-09-300001517006gato:MexicoSegmentMember2020-07-012020-09-300001517006gato:MexicoSegmentMember2020-01-012020-09-300001517006gato:DowaMetalsAndMiningCo.LtdMember2021-09-300001517006gato:LosGatosJointVentureMember2021-07-260001517006gato:DowaMetalsAndMiningCo.LtdMember2021-07-260001517006gato:LosGatosJointVentureMember2021-03-110001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMember2019-05-310001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMember2016-04-010001517006us-gaap:EmployeeStockOptionMember2021-09-300001517006us-gaap:EmployeeStockOptionMember2021-01-012021-09-300001517006gato:LosGatosJointVentureMember2021-09-300001517006gato:LosGatosJointVentureMember2020-12-310001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:EquipmentLoanAgreementsMember2021-09-300001517006us-gaap:LondonInterbankOfferedRateLIBORMember2021-07-192021-07-190001517006srt:MinimumMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-07-122021-07-120001517006srt:MinimumMemberus-gaap:BaseRateMember2021-07-122021-07-120001517006srt:MaximumMemberus-gaap:LondonInterbankOfferedRateLIBORMember2021-07-122021-07-120001517006srt:MaximumMemberus-gaap:BaseRateMember2021-07-122021-07-120001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:WorkingCapitalFacilityAgreementMemberus-gaap:LondonInterbankOfferedRateLIBORMember2019-05-302019-05-300001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:DowaMprLoanMemberus-gaap:LondonInterbankOfferedRateLIBORMember2018-01-232018-01-230001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:TermLoanMemberus-gaap:LondonInterbankOfferedRateLIBORMember2017-07-012017-07-310001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:DowaMprLoanMember2019-05-012019-05-3100015170062019-12-310001517006us-gaap:CorporateMember2021-09-300001517006gato:MexicoSegmentMember2021-09-300001517006us-gaap:CorporateMember2020-09-300001517006gato:MexicoSegmentMember2020-09-300001517006us-gaap:AdditionalPaidInCapitalMember2021-07-012021-09-300001517006us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-300001517006us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-3000015170062020-04-012020-06-300001517006us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-3100015170062020-01-012020-03-310001517006us-gaap:AdditionalPaidInCapitalMember2021-04-012021-06-3000015170062021-04-012021-06-300001517006us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-3100015170062021-01-012021-03-310001517006us-gaap:CorporateMember2020-07-012020-09-300001517006us-gaap:CorporateMember2020-01-012020-09-3000015170062020-12-310001517006us-gaap:CommonStockMember2021-07-012021-09-300001517006us-gaap:CommonStockMember2021-04-012021-06-300001517006gato:DeferredStockUnitMember2021-01-012021-09-300001517006us-gaap:CommonStockMember2021-01-012021-03-310001517006gato:LosGatosJointVentureMember2021-07-012021-09-300001517006gato:LosGatosJointVentureMember2021-01-012021-09-300001517006gato:LosGatosJointVentureMember2020-07-012020-09-300001517006gato:LosGatosJointVentureMember2020-01-012020-09-300001517006gato:LosGatosJointVentureMember2021-03-112021-03-110001517006us-gaap:MiningPropertiesAndMineralRightsMember2021-01-012021-09-300001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:TermLoanMember2021-07-262021-07-260001517006gato:LosGatosJointVentureMembergato:TermLoanMember2021-07-262021-07-260001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMember2021-03-112021-03-110001517006gato:SilverOpportunityPartnersCorporationMember2020-10-012020-10-310001517006gato:MineraLuzDelSolS.DeR.l.DeC.v.Member2021-03-012021-03-310001517006gato:LosGatosJointVentureMember2019-09-012019-09-0100015170062020-07-012020-09-3000015170062021-07-120001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:WorkingCapitalFacilityAgreementMember2021-03-110001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMember2019-05-012019-05-310001517006us-gaap:DiscontinuedOperationsDisposedOfByMeansOtherThanSaleSpinoffMembergato:SilverOpportunityPartnersCorporationMember2020-07-012020-09-300001517006us-gaap:DiscontinuedOperationsDisposedOfByMeansOtherThanSaleSpinoffMembergato:SilverOpportunityPartnersCorporationMember2020-01-012020-09-300001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:DowaMprLoanMember2018-01-230001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:TermLoanMember2018-01-012018-12-310001517006us-gaap:CorporateMember2021-07-012021-09-3000015170062021-07-012021-09-300001517006us-gaap:CorporateMember2021-01-012021-09-300001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:TermLoanMember2018-07-310001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:WorkingCapitalFacilityAgreementMember2019-05-300001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:TermLoanMember2018-07-310001517006gato:DowaMetalsAndMiningCo.LtdMembergato:LosGatosJointVentureMembergato:TermLoanMember2018-07-012018-07-3100015170062020-01-012020-09-300001517006gato:LosGatosJointVentureMember2021-03-112021-03-1100015170062021-09-3000015170062020-09-300001517006gato:LosGatosJointVentureMember2021-09-300001517006gato:LosGatosJointVentureMember2020-12-3100015170062021-11-0100015170062021-01-012021-09-30xbrli:sharesiso4217:USDgato:Dxbrli:puregato:paymentgato:productutr:miso4217:USDxbrli:shares

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

or

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

For the transition period from _______________ to _______________

Commission File Number: 001-39649

Graphic

GATOS SILVER, INC.

(Exact name of registrant as specified in its charter)

Delaware

27-2654848

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

8400 E. Crescent Parkway, Suite 600

Greenwood Village, CO 80111

(Address of principal executive offices) (Zip Code)

(303) 784-5350

(Registrant’s telephone number, including area code)

N/A

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

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

GATO

New York Stock Exchange

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

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

TABLE OF CONTENTS

    

    

 

Page

Part I - FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Statements of Shareholders’ Equity (Deficit)

5

Condensed Consolidated Statements of Cash Flows

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

29

Part II - OTHER INFORMATION

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

31

2

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

GATOS SILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

September 30, 

December 31, 

    

2021

    

2020

ASSETS

 

  

 

  

Current Assets

 

  

 

  

Cash and cash equivalents

$

12,398

$

150,146

Related party receivables

 

1,280

 

1,727

Other current assets

 

1,058

 

3,879

Total current assets

 

14,736

 

155,752

NonCurrent Assets

 

 

Investment in affiliates

 

393,608

 

109,597

Other non-current assets

 

41

 

61

Total Assets

$

408,385

$

265,410

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

Current Liabilities

 

 

Accounts payable and other accrued liabilities

$

4,043

$

4,024

Non-Current Liabilities

Credit Facility, net of debt issuance costs

12,583

Shareholders' Equity

 

Common Stock, $0.001 par value; 700,000,000 shares authorized; 69,134,494 and 59,183,076 shares outstanding as of September 30, 2021 and December 31, 2020

 

117

 

108

Paid‑in capital

 

542,193

 

409,728

Accumulated deficit

 

(150,551)

 

(147,423)

Treasury stock, at cost, nil and 144,589 shares as of September 30, 2021 and December 31, 2020, respectively

 

 

(1,027)

Total shareholders' equity

 

391,759

 

261,386

Total Liabilities and Shareholders' Equity

$

408,385

$

265,410

See accompanying notes to the condensed consolidated financial statements.

3

GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Expenses

  

  

  

  

Exploration

$

479

$

134

$

1,397

$

516

General and administrative

 

5,994

 

1,965

 

14,008

 

4,345

Amortization

 

31

 

7

 

45

 

24

Total expenses

 

6,504

 

2,106

 

15,450

 

4,885

Other income (expense)

 

 

Equity income (loss) in affiliates

 

1,600

 

3,447

 

22,592

 

(18,069)

Term Loan closing fee

(10,000)

(10,000)

Other loss

(95)

(908)

(270)

(3,253)

Net other income (expense)

 

(8,495)

 

2,539

 

12,322

 

(21,322)

Net income (loss) from continuing operations

$

(14,999)

$

433

$

(3,128)

$

(26,207)

Net loss from discontinued operations

(1,618)

(4,943)

Net loss

$

(14,999)

$

(1,185)

$

(3,128)

$

(31,150)

Net income (loss) per share:

 

  

 

  

 

  

 

  

Basic(1)

Continuing operations

$

(0.22)

$

0.01

$

(0.05)

$

(0.65)

Discontinued operations

$

$

(0.04)

$

$

(0.12)

$

(0.22)

$

(0.03)

$

(0.05)

$

(0.77)

Diluted(1)

Continuing operations

$

(0.22)

$

0.01

$

(0.05)

$

(0.65)

Discontinued operations

$

$

(0.04)

$

$

(0.12)

$

(0.22)

$

(0.03)

$

(0.05)

$

(0.77)

Weighted average shares outstanding:

 

  

 

  

 

  

 

  

Basic(1)

67,325,644

40,506,144

62,210,848

40,505,790

Diluted(1)

 

67,325,644

 

40,506,144

 

62,210,848

 

40,505,790

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

See accompanying notes to the condensed consolidated financial statements.

4

GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except for share amounts)

Number

Amount

Common

Treasury

Common

Treasury

Paidin

Accumulated

    

Stock

    

Stock

    

Stock

    

Stock

    

Capital

    

Deficit

    

Total

Balance at December 31, 2020

59,183,076

144,589

$

108

$

(1,027)

$

409,728

$

(147,423)

$

261,386

Stock‑based compensation

 

 

 

 

 

1,078

 

 

1,078

Issuance of common stock

182,453

1,559

1,559

DSUs converted to common stock

43,523

Other

(262)

(262)

Net loss

 

 

 

 

 

 

(1,620)

 

(1,620)

Balance at March 31, 2021

 

59,409,052

 

144,589

$

108

$

(1,027)

$

412,103

$

(149,043)

$

262,141

Stock‑based compensation

 

 

 

 

 

2,490

 

 

2,490

Issuance of common stock

331,497

2,662

2,662

DSUs converted to common stock

33,652

Other

(7)

(7)

Net income

 

 

 

 

 

 

13,491

13,491

Balance at June 30, 2021

 

59,774,201

 

144,589

$

108

$

(1,027)

$

417,248

$

(135,552)

$

280,777

Stock‑based compensation

 

 

 

 

 

2,167

 

 

2,167

Issuance of common stock, net

9,288,747

(144,589)

9

1,027

121,637

122,673

DSU compensation

1,141

1,141

DSUs converted to common stock

71,546

Net loss

 

 

 

 

 

 

(14,999)

(14,999)

Balance at September 30, 2021

 

69,134,494

 

$

117

$

$

542,193

$

(150,551)

$

391,759

See accompanying notes to the condensed consolidated financial statements.

5

GATOS SILVER, INC.

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

(In thousands, except for share amounts)

Number(1)

Amount

    

    

    

Common 

Treasury 

Common 

Treasury 

Paid-in

Accumulated 

    

Stock

    

Stock

    

Stock

    

Stock

    

Capital

    

Deficit

    

Total

Balance at December 31, 2019

 

40,323,430

 

144,589

$

80

$

(1,027)

$

375,921

$

(225,583)

149,391

Stock-based compensation

 

 

 

 

 

1,031

 

1,031

DSU compensation

61

61

Net loss

 

 

 

 

 

 

(17,821)

(17,821)

Balance at March 31, 2020

 

40,323,430

 

144,589

$

80

$

(1,027)

$

377,013

$

(243,404)

$

132,662

Stock-based compensation

 

 

 

 

 

1,086

 

1,086

Net loss

 

 

 

 

 

 

(12,144)

(12,144)

Balance at June 30, 2020

 

40,323,430

 

144,589

$

80

$

(1,027)

$

378,099

$

(255,548)

$

121,604

Stock-based compensation

 

 

 

 

 

1,105

 

1,105

Net loss

 

 

 

 

 

 

(1,185)

(1,185)

Balance at September 30, 2020

 

40,323,430

 

144,589

$

80

$

(1,027)

$

379,204

$

(256,733)

$

121,524

(1)

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

See accompanying notes to the condensed consolidated financial statements.

6

GATOS SILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

Nine Months Ended

September 30, 

    

2021

    

2020

OPERATING ACTIVITIES

  

  

Net loss

$

(3,128)

$

(31,150)

Plus net loss from discontinued operations

4,943

Adjustments to reconcile net income (loss) to net cash used by operating activities:

 

  

 

  

Amortization

 

45

 

24

Stock‑based compensation expense

 

5,755

 

3,043

Equity (income) loss in affiliates

 

(22,592)

 

18,069

Changes in operating assets and liabilities:

 

  

 

  

Receivables from related‑parties

 

446

 

(3,788)

Accounts payable and other accrued liabilities

 

1,159

 

146

Other current assets

2,821

(4)

Operating cash flows from discontinued operations

(3,181)

Net cash used by operating activities

 

(15,494)

 

(11,898)

INVESTING ACTIVITIES

 

  

 

  

Investment in affiliates

 

(261,439)

 

(8,383)

Investing cash flows from discontinued operations

(22)

Net cash used by investing activities

 

(261,439)

 

(8,405)

FINANCING ACTIVITIES

 

  

 

  

Related‑party convertible debt

 

 

15,000

Credit Facility

13,000

Financing costs

 

(7,274)

 

(722)

Issuance of common stock

 

132,873

 

Issuance of treasury stock

1,027

Other

(441)

260

Financing cash flows from discontinued operations

307

Net cash provided by financing activities

 

139,185

 

14,845

Net decrease in cash and cash equivalents

(137,748)

 

(5,458)

Cash and cash equivalents, beginning of period

 

150,146

 

9,085

Cash and cash equivalents, end of period

12,398

3,627

Less cash of discontinued operations

619

Cash of continuing operations, end of period

$

12,398

$

3,008

Interest paid

$

67

$

Supplemental disclosure of noncash transactions:

 

 

  

Deferred financing costs included in accounts payable and accrued liabilities

$

$

882

Director fees in accrued liabilities converted to deferred share units

$

1,141

$

61

Conversion of related party accounts receivable into LGJV capital contributions

$

$

9,448

See accompanying notes to the condensed consolidated financial statements.

6

GATOS SILVER, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

1.           Description of Business

Organization and Nature of Business

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

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

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

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

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

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

Discontinued Operations

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

2.           Summary of Significant Accounting Policies

Basis of Consolidation and Presentation

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

7

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

Summary of Significant Accounting Policies

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

Recent Accounting Pronouncements

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

3.           Property, Plant and Equipment, net

Mineral Properties

Mining Concessions

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

Santa Valeria Concession

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

4.           Accounts Payable and Other Accrued Liabilities

September 30, 

December 31, 

    

2021

    

2020

Accounts payable

$

263

$

560

Accrued expenses

 

955

 

1,240

Accrued compensation

 

2,565

 

1,964

Other

260

260

Total accounts payable and other current liabilities

$

4,043

$

4,024

8

5.           Related-Party Transactions

LGJV

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

SSMRC

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

6.           Net Income (Loss) per Share

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

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

7.           Stockholders’ Equity

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

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

Stock Option Transactions

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

9

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

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

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

Weighted

Average

Director and Employee Options

    

Shares

    

Exercise Price

Outstanding at December 31, 2020

5,411,930

$

12.52

Granted

 

489,719

$

16.72

Exercised

 

585,735

$

8.30

Forfeited

 

15,000

$

7.00

Outstanding at September 30, 2021

 

5,300,914

$

13.39

Vested at September 30, 2021

 

3,366,804

$

15.11

Weighted

Average

LGJV Personnel Options

    

Shares

    

Exercise Price

Outstanding at December 31, 2020

43,676

$

7.23

Outstanding and vested at September 30, 2021

 

43,676

$

7.23

Deferred Stock Unit Transactions

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

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

8.         Fair Value Measurements

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

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

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

10

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

Financial Assets and Liabilities

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

Non-Financial Assets and Liabilities

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

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

9.         Commitments, Contingencies and Guarantees

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

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

In July 2017, the LGJV Entities entered into a loan agreement (the “Term Loan”) with Dowa whereby the LGJV Entities could borrow up to $210,000 for LGD development, with a maturity date of December 29, 2027. Interest on the Term Loan accrued daily at LIBOR plus 2.35% per annum, with the interest added to the amount borrowed until commencement of production. During 2018, the LGJV paid Dowa a $4,200 closing fee. Commencing June 30, 2021, repayment of the Term Loan in 14 consecutive semi-annual equal payments of the aggregate principal and capitalized interest began. The Company was required to pay an arrangement fee on the borrowing, calculated as 2% per annum of 70% of the outstanding principal balance, payable in semi-annual installments, on that date which was 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 and the LGJV paid closing fees to Dowa of $10,000 and $1,585, respectively.

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

11

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

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

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

10.Debt

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

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

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

11.          Discontinued Operations

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

12

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

Three Months Ended

Nine Months Ended

    

September 30, 2020

    

September 30, 2020

Operating Expenses of Discontinued Operations

Exploration

 

$

102

 

$

318

Pre-development

506

1,554

General and administrative

423

1,300

Amortization

588

1,774

Total expenses

 

1,619

 

4,946

Other Income of Discontinued Operations

Other income

(1)

(3)

Net loss of discontinued operations

$

1,618

$

4,943

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

September 30, 

    

2020

Operating Activities of Discontinued Operations

Net loss

 

$

(4,943)

Adjustments to reconcile net loss to net cash used by operating activities:

Amortization

1,774

Stock compensation expense

179

Accretion expense

 

82

Changes in operating assets and liabilities:

Accounts payable and other accrued liabilities

(226)

Other current assets

(47)

Net cash used by operating activities of discontinued operations

(3,181)

Investing Activities of Discontinued Operations

Purchase of property, plant and equipment

(22)

Net cash used by investing activities of discontinued operations

(22)

Financing Activities of Discontinued Operations

PPP Loan proceeds

307

Net cash provided by financing activities of discontinued operations

307

13

12.          Segment Information

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

Three Months Ended September 30, 2021

Three Months Ended September 30, 2020

    

Mexico

    

Corporate

    

Total

    

Mexico

    

Corporate

    

Total

Exploration

$

479

$

$

479

$

134

$

$

134

General and administrative

 

577

 

5,417

 

5,994

 

195

 

1,770

 

1,965

Amortization

 

 

31

 

31

 

 

7

 

7

Equity income in affiliates

 

1,600

 

 

1,600

 

3,447

 

 

3,447

Term Loan closing fee

10,000

10,000

Net other loss (income)

 

15

 

80

 

95

 

(2)

 

910

 

908

Total assets

 

61,373

 

347,012

 

408,385

 

37,359

 

75,574

 

112,933

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

    

Mexico

    

Corporate

    

Total

    

Mexico

    

Corporate

    

Total

Exploration

$

1,397

$

$

1,397

$

516

$

$

516

General and administrative

 

909

 

13,099

 

14,008

 

447

 

3,898

 

4,345

Amortization

 

 

45

 

45

 

 

24

 

24

Equity income (loss) in affiliates

 

22,592

 

 

22,592

 

(18,069)

 

 

(18,069)

Term Loan closing fee

10,000

10,000

Net other loss

 

34

 

236

 

270

 

22

 

3,231

 

3,253

Total assets

 

$

61,373

 

$

347,012

 

$

408,385

 

$

37,359

 

$

75,574

 

$

112,933

13.         Investment in Affiliate

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

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

14

LOS GATOS JOINT VENTURE

COMBINED BALANCE SHEETS (UNAUDITED)

(in thousands)

September 30, 

December 31, 

    

2021

    

2020

ASSETS

 

  

 

  

Current Assets

 

  

 

  

Cash and cash equivalents

$

9,941

$

1,676

Receivables

 

6,961

 

3,988

Inventories

 

10,027

 

10,315

VAT receivable

 

47,096

 

50,732

Other current assets

 

2,543

 

2,891

Total current assets

 

76,568

 

69,602

NonCurrent Assets

 

 

  

Mine development, net

 

222,128

 

202,874

Property, plant and equipment, net

 

192,675

 

196,942

Total non‑current assets

 

414,803

 

399,816

Total Assets

$

491,371

$

469,418

LIABILITIES AND OWNERS' CAPITAL

 

  

 

  

Current Liabilities

 

  

 

  

Accounts payable and accrued liabilities

$

32,951

$

35,767

Related party payable

 

1,299

 

1,703

Accrued interest

 

45

 

101

Unearned revenue