NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. Business
and Significant Accounting Policies
Business and company formation
Solitario Zinc Corp. (“Solitario,”
or the “Company”) is an exploration stage company as defined in Industry Guide 7, as issued by the United States Securities
and Exchange Commission (“SEC”). Solitario was incorporated in the state of Colorado on November 15, 1984 as a wholly-owned
subsidiary of Crown Resources Corporation ("Crown"). In July 1994, Solitario became a publicly traded company on the
Toronto Stock Exchange (the "TSX") through its initial public offering. Solitario has been actively involved in mineral
exploration since 1993. Solitario’s primary business is to acquire exploration mineral properties or royalties and/or discover
economic deposits on its mineral properties and advance these deposits, either on its own or through joint ventures, up to the
development stage. At that point, or sometime prior to that point, Solitario would likely attempt to sell its mineral properties,
pursue their development either on its own, or through a joint venture with a partner that has expertise in mining operations,
or create a royalty with a third party that continues to advance the property. As a result of the Acquisition (defined below),
Solitario is now primarily focused on the acquisition and exploration of zinc-related exploration mineral properties. In addition
to focusing on its mineral exploration properties and the evaluation of mineral properties for acquisition or purchase of royalty
interests, Solitario also evaluates potential strategic transactions for the acquisition of new precious and base metal properties
and assets with exploration potential or business combinations that Solitario determines to be favorable to Solitario.
Solitario has recorded revenue in
the past from the sale of mineral property, including the sale in 2015 of its former interest in Mount Hamilton LLC (“MH-LLC”)
the owner of its former Mt. Hamilton project (the “Mt. Hamilton Transaction”), and joint venture property payments
and the sale of a royalty on its former Mt. Hamilton project. Revenues from the sale or joint venture of properties or assets,
although significant when they occur, have not been a consistent annual source of revenue and would only occur in the future, if
at all, on an infrequent basis.
Solitario currently considers its
carried interest in the Florida Canyon project and its interest in the Lik project to be its core mineral property assets. Solitario’s
joint venture partner is expected to continue the development and furtherance of the Florida Canyon project and Solitario will
monitor progress at Florida Canyon. Solitario is working with its 50% joint venture partner, Teck American Incorporated, a wholly-owned
subsidiary of Teck Resources Limited ( both companies referred to as “Teck”), in the Lik deposit to further the exploration
and evaluate potential development plans for the Lik project.
As
of March 31, 2018, Solitario has significant balances of cash and short-term investments that Solitario anticipates using, in part,
to further the development of the Florida Canyon and Lik projects and to potentially acquire additional mineral property assets.
The
fluctuations in precious metal and other commodity prices contribute to a challenging environment for mineral exploration
and development, which has created opportunities as well as challenges for the potential acquisition of early-stage and advanced
mineral exploration projects or other related assets at potentially attractive terms.
The accompanying interim condensed
consolidated financial statements of Solitario for the three months ended March 31, 2018 are unaudited and are prepared in accordance
with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”).
They do not include all disclosures required by generally accepted accounting principles for annual financial statements, but in
the opinion of management, include all adjustments, consisting only of normal recurring items, necessary for a fair presentation.
Interim results are not necessarily indicative of results, which may be achieved in the future or for the full year ending December
31, 2018.
These financial statements should
be read in conjunction with the financial statements and notes thereto which are included in Solitario’s Annual Report on
Form 10-K for the year ended December 31, 2017. The accounting policies set forth in those annual financial statements are the
same as the accounting policies utilized in the preparation of these financial statements, except as modified for appropriate interim
financial statement presentation.
Recent Developments
Purchase of Zazu
On July 12, 2017, Solitario completed
the acquisition of Zazu Metals Corp. (“Zazu”) pursuant to a definitive arrangement agreement between Solitario and
Zazu whereby Solitario agreed to acquire all of the issued and outstanding common shares of Zazu (the "Zazu Shares")
by way of a statutory plan of arrangement (the "Arrangement") under the
Canada Business Corporations Act
(the
“Acquisition”). The Arrangement was approved by the Ontario (Canada) Superior Court of Justice on July 7, 2017. Per
the Arrangement, Solitario issued 19,788,177 shares of its common stock on July 12, 2017 in exchange for all of the issued and
outstanding Zazu Shares, which represented 0.3572 shares of Solitario common stock for each outstanding Zazu Share. Zazu had one
primary asset, its interest in the Lik project, and the Acquisition was treated as an asset purchase in accordance with ASU 2017-01
“Business Combinations.” Solitario granted stock options to acquire an aggregate of 1,782,428 shares of Solitario common
stock to Zazu option holders the (“Replacement Options”) in connection with the Acquisition. The total purchase price
of $16,110,000 was recorded during the year ended December 31, 2017.
Financial reporting
The consolidated financial statements
include the accounts of Solitario and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. The consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America ("generally accepted accounting principles") and are expressed in U.S. dollars.
Revenue recognition
Solitario records delay rental payments
as revenue in the period received. Any payments received for the sale of property interests are recorded as a reduction of the
related property's capitalized cost. Proceeds which exceed the capitalized cost of the property without reserves are recognized
as revenue. Payments received on the sale of properties with reserves are recognized as revenue to the extent the proceeds exceed
the proportionate basis in the assets sold. There were no delay rentals in the periods presented.
Use of estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Some of the more significant estimates included in the preparation of Solitario's financial statements pertain to: (i) Solitario’s
carrying value of short-term investments; (ii) the recoverability of mineral properties related to its mineral exploration properties
and their future exploration potential; (iii) the fair value of stock option grants to employees, to officers and directors and
to others; (iv) the ability of Solitario to realize its deferred tax assets; and (v) Solitario's investment in marketable equity
securities.
In performing its activities, Solitario
has incurred certain costs for mineral properties. The recovery of these costs is ultimately dependent upon the sale of mineral
property interests or the development of economically recoverable ore reserves and the ability of Solitario to obtain the necessary
permits and financing to successfully place the properties into production, and upon future profitable operations, none of which
is assured.
Cash equivalents
Cash equivalents include investments
in highly liquid money-market securities with original maturities of three months or less when purchased. As of March 31, 2018,
a portion of Solitario’s cash and cash equivalents are held in brokerage accounts and foreign banks, which are not covered
under the Federal Deposit Insurance Corporation (“FDIC”) rules for the United States. At March 31, 2018, Solitario
holds short-term investments in United States Treasury securities (“USTS”) of $9,976,000.
Short-term investments
As of March 31, 2018, Solitario has
$9,976,000 of its current assets in USTS with maturities of 15 days to 21 months. The USTS are recorded at their fair value, based
upon quoted market prices. As of March 31, 2018, we have $1,247,000 in separate bank certificates of deposit (“CDs”)
each with a maximum value of $250,000, and each of which are covered by FDIC insurance to the full-face value of the CDs. At March
31, 2018, the CDs have maturities of between 4 and 15 months. Solitario’s short-term investments are recorded at their fair
value, based upon quoted market prices. The short-term investments are highly liquid and may be sold in their entirety at any time
at their quoted market price and are classified as a current asset.
Mineral properties
Solitario expenses all exploration
costs incurred on its mineral properties prior to the establishment of proven and probable reserves through the completion of a
feasibility study. Initial acquisition costs of Solitario’s mineral properties are capitalized. Solitario capitalizes all
of its development expenditures on its projects, subsequent to the completion of a feasibility study. Solitario regularly performs
evaluations of its investment in mineral properties to assess the recoverability and/or the residual value of its investments in
these assets. All long-lived assets are reviewed for impairment whenever events or circumstances change which indicate the carrying
amount of an asset may not be recoverable, utilizing established guidelines based upon undiscounted future net cash flows from
the asset or upon the determination that certain exploration properties do not have sufficient potential for economic mineralization.
Derivative instruments
Solitario accounts
for its derivative instruments in accordance with ASC 815, "Accounting for Derivative Instruments and Hedging Activities"
(“ASC 815”). Solitario has entered into covered calls from time to time on its investment in Kinross Gold Corporation
(“Kinross”) marketable equity securities. In addition, during 2017 and 2016, Solitario owned warrants exercisable to
acquire shares of Vendetta Mining Corp. (“Vendetta”) common stock (the “Vendetta Warrants”). Each Vendetta
warrant allowed Solitario to purchase one share of Vendetta common stock at a price of Cdn$0.10 per share for a period of two years.
Solitario has not designated its covered calls as hedging instruments and any changes in the fair value of the covered calls and
its Vendetta Warrants are recognized in the statement of operations in the period of the change as gain or loss on derivative instruments.
Fair value
FASB ASC 820, “Fair Value Measurements
and Disclosures” (“ASC 820”), establishes a framework for measuring fair value and requires enhanced disclosures
about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants. For certain of Solitario's
financial instruments, including cash and cash equivalents and accounts payable, the carrying amounts approximate fair value due
to their short-term maturities. Solitario's short-term investments in USTS and CDs, its marketable equity securities and any covered
call options against those marketable equity securities are carried at their estimated fair value based on quoted market prices.
Marketable equity securities
Solitario's investments in marketable
equity securities are classified as available-for-sale and are carried at fair value, which is based upon quoted prices of the
securities owned. Solitario records investments in marketable equity securities as available-for-sale for investments in publicly
traded marketable equity securities for which it does not exercise significant control and where Solitario has no representation
on the board of directors of those companies and exercises no control over the management of those companies. The cost of marketable
equity securities sold is determined by the specific identification method. During the first three months of 2018 Solitario adopted
ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities (Topic
825)” (“ASU 2016-01”). In accordance with ASU 2016-01, changes in fair value are recorded in the consolidated
statement of operations during the period of the change. During the first three months of 2018 Solitario recorded a cumulative-effect
adjustment to the balance sheet as of the beginning of the fiscal year of adoption of ASU 2016-01. See Note 9, “Shareholders’
Equity and Other Comprehensive Income”, below.
Foreign exchange
The United States dollar is the functional
currency for all of Solitario's foreign subsidiaries. Although Solitario's South American exploration activities during 2017 and
the first quarter of 2018 have been conducted primarily in Peru, a portion of the payments under the land, leasehold and exploration
agreements of Solitario are denominated in United States dollars. Realized foreign currency gains and losses are included in the
results of operations in the period in which they occur.
Income taxes
Solitario accounts for income taxes
in accordance with ASC 740, “Accounting for Income Taxes” (“ASC 740”). Under ASC 740, income taxes are
provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred
taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred
tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses and tax credits
that are available to offset future taxable income and income taxes, respectively. A valuation allowance is provided if it is more
likely than not that some portion or all of the deferred tax assets will not be realized.
Accounting for uncertainty in income taxes
ASC 740 clarifies the accounting
for uncertainty in income taxes recognized in a company's financial statements. ASC 740 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. ASC 740 provides that a company's tax position will be considered settled if the taxing authority has
completed its examination, the company does not plan to appeal, and it is remote that the taxing authority would reexamine the
tax position in the future. The provisions of ASC 740 had no effect on Solitario's financial position or results of operations.
Earnings per share
The calculation of basic and diluted
earnings (loss) per share is based on the weighted average number of shares of common stock outstanding during the three months
ended March 31, 2018 and 2017. Potentially dilutive shares related to outstanding common stock options of 2,082,428 Solitario common
shares for the three months ended March 31, 2018 were excluded from the calculation of diluted earnings (loss) per share because
the effects were anti-dilutive. There were no similar potentially dilutive securities outstanding during the three months ended
March 31, 2017.
Employee stock compensation and incentive plans
Solitario classifies all of its stock
options as equity options in accordance with the provisions of ASC 718, “Compensation – Stock Compensation.”
Recent accounting pronouncements
In February 2016, the FASB issued
ASU 2016-02, “Leases” (“ASU No. 2016-02”), which will require lessees to recognize a right-of-use asset
and a lease liability for all leases that are not short-term in nature. For a lessor, the accounting applied is also largely unchanged
from previous guidance. The new rules will be effective for Solitario in the first quarter of 2019. Solitario does not anticipate
early adoption. Solitario does not expect the adoption of ASU No. 2016-02 to materially change its current accounting methods and
therefore it does not expect the adoption to have a material impact on its consolidated financial position or results of operations.
In January 2016 the FASB issued ASU
No 2016-01
.
ASU No. 2016-01 revises the classification and measurement of investment in certain equity investments and the
presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the
change in fair value of many equity investments to be recognized in net income. ASU No. 2016-01 is effective for interim and annual
periods beginning after December 15, 2017, with early adoption permitted. Solitario adopted ASU No. 2016-01 in the first quarter
of 2018. Solitario recorded a cumulative-effect adjustment for the change in accounting principle to retained earnings of $576,000
related to the adoption of ASU 2016-01. See Note 9, “Shareholders’ Equity and Accumulated Other Comprehensive Income,”
below.
In February 2018, the FASB issued
ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02),
which allows for a reclassification from accumulated other comprehensive income or loss to retained earnings or accumulated deficit
for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA”). ASU 2018-02 also requires certain
related disclosures. ASU 2018-02 is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2018 and should be applied either in the period of adoption or retrospectively to each period in which the effect
of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. Early adoption is permitted. Solitario is
currently evaluating the impact of ASU 2018-02 but does not believe it will have a material effect on Solitario’s
financial position or results of operations.
2. Mineral
Property
The following table details Solitario’s investment
in Mineral Property:
(in thousands)
|
|
March 31,
|
|
|
2018
|
|
2017
|
Exploration
|
|
|
|
|
Lik project (Alaska – US)
|
|
$
|
15,611
|
|
|
$
|
15,611
|
|
La Promesa (Peru)
|
|
|
6
|
|
|
|
6
|
|
Montana Royalty property (US)
|
|
|
40
|
|
|
|
40
|
|
Total exploration mineral property
|
|
$
|
15,657
|
|
|
$
|
15,657
|
|
|
|
|
|
|
|
|
|
|
All exploration costs on our exploration
properties, none of which have proven and probable reserves, including any additional costs incurred for subsequent lease payments
or exploration activities related to our projects are expensed as incurred.
Exploration expense
The following items comprised exploration expense:
(in thousands)
|
|
Three months ended
March 31,
|
|
|
2018
|
|
2017
|
Geologic and field expenses
|
|
$
|
24
|
|
|
$
|
22
|
|
Administrative
|
|
|
156
|
|
|
|
129
|
|
Total exploration costs
|
|
$
|
180
|
|
|
$
|
151
|
|
Asset Retirement Obligation
In connection with the Acquisition,
Solitario recorded an asset retirement obligation of $125,000 for Solitario’s estimated reclamation cost of the existing
disturbance at the Lik project. This disturbance consists of an exploration camp including certain drill sites and access roads
at the camp. The estimate was based upon estimated cash costs for reclamation as determined by the permitting bond required by
the State of Alaska, for which Solitario has purchased a reclamation bond insurance policy in the event Solitario or its 50% partner,
Teck, do not complete required reclamation.
Solitario has not applied a discount
rate to the recorded asset retirement obligation as the estimated time frame for reclamation is not currently known, as reclamation
is not expected to occur until the end of the Lik project life, which would follow future development and operations, the start
of which cannot be estimated or assured at this time. Additionally, no depreciation will be recorded on the related asset for
the asset retirement obligation until the Lik project goes into operation, which cannot be assured.
3. Marketable
Equity Securities
Solitario's investments in marketable
equity securities are classified as available-for-sale and are carried at fair value, which is based upon quoted prices of the
securities owned. The cost of marketable equity securities sold is determined by the specific identification method. Changes in
market value are recorded in the consolidated statement of operations. During the three months ended March 31, 2018, Solitario
recorded an unrealized loss on marketable equity securities of $441,000. During the three months ended March 31, 2017, Solitario
recorded an unrealized gain on marketable equity securities of $128,000.
On May 2, 2016 Solitario purchased
7,240,000 units of Vendetta for aggregate consideration of $289,000. Each unit included one common share of Vendetta and one Vendetta
Warrant. The total purchase price for the units of $289,000 was allocated between the Vendetta common shares and the Vendetta Warrants
based upon total fair values on the date of purchase. The Vendetta common shares were allocated a purchase cost of $186,000 and
the Vendetta Warrants were allocated a purchase cost of $103,000. During the three months ended March 31, 2017, Solitario sold
1,480,000 common shares of Vendetta for proceeds of $259,000, and a recorded cost of $38,000. In addition, during the three months
ended March 31, 2017 Solitario exercised 2,240,000 of the Vendetta Warrants it held and received 2,240,000 Vendetta common shares,
by paying $167,000 (Cdn$224,000) to Vendetta. The cost of the common shares received from the exercise of the Vendetta Warrants
was recorded based upon the total of the (i) exercise price of the Vendetta Warrants exercised, $167,000, and (ii) the fair value
of the Vendetta Warrants on the date of exercise, which equaled their intrinsic value, $309,000, for a total value of $476,000.
During 2017, subsequent to March 31, 2017, Solitario exercised its remaining 5,000,000 Vendetta Warrants by paying $441,000 and
owns 11,000,000 common shares of Vendetta and no Vendetta Warrants as of March 31, 2018 and December 31, 2017.
The following tables summarize Solitario’s
marketable equity securities and adjustments to fair value:
(in thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Marketable equity at cost
|
|
$
|
1,714
|
|
|
$
|
1,714
|
|
Unrealized gain on marketable equity securities
|
|
|
488
|
|
|
|
929
|
|
Marketable equity securities at fair value
|
|
$
|
2,202
|
|
|
$
|
2,643
|
|
The following table represents changes, including sales,
in marketable equity securities during the three months ended March 31, 2018 and 2017:
(in thousands)
|
|
Three months ended
March 31,
|
|
|
2018
|
|
2017
|
Cost of marketable equity securities sold
|
|
$
|
—
|
|
|
$
|
38
|
|
Realized gain on marketable equity securities sold
|
|
|
—
|
|
|
|
221
|
|
Proceeds from the sale of marketable equity securities sold
|
|
|
—
|
|
|
|
(259
|
)
|
Purchase of marketable equity securities
|
|
|
—
|
|
|
|
477
|
|
Gross unrealized (loss) gain recorded in the statement of operations
|
|
|
(441
|
)
|
|
|
128
|
|
Change in marketable equity securities at fair value
|
|
$
|
(441
|
)
|
|
$
|
346
|
|
4. Other
Assets
The following items comprised other assets:
(in thousands)
|
|
March 31,
|
|
December 31
|
|
|
2018
|
|
2017
|
Furniture and fixtures, net of accumulated depreciation
|
|
$
|
38
|
|
|
$
|
31
|
|
Lik project equipment, net of accumulated depreciation
|
|
|
85
|
|
|
|
90
|
|
Exploration bonds and other assets
|
|
|
4
|
|
|
|
4
|
|
Total other assets
|
|
$
|
127
|
|
|
$
|
125
|
|
5. Derivative
Instruments
Vendetta Warrants
During the three months ended March
31, 2017, Solitario exercised 2,240,000 of the Vendetta Warrants it held and received 2,240,000 Vendetta common shares, by paying
$167,000 (Cdn$224,000) to Vendetta. As a result, as of March 31, 2017, Solitario owned 5,000,000 Vendetta Warrants, which are carried
at fair value, based upon a Black-Scholes model. During the three months ended March 31, 2017, Solitario recorded a gain on derivative
instruments of $148,000, related to the Vendetta Warrants. Solitario owned no Vendetta Warrants during the three months ended March
31, 2018; see Note 3, “Marketable equity securities,” above.
Covered Call Options
From time to time Solitario has sold
covered call options against its holdings of Kinross. The business purpose of selling covered calls is to provide additional liquidity
on a limited portion of shares of Kinross that Solitario may sell in the near term, which is generally defined as less than one
year. Solitario has not designated its covered calls as hedging instruments and records gains or loss on the covered call in the
period of the change.
Solitario recorded the following gain
on derivative instruments:
(in thousands)
|
|
Three months ended
March 31,
|
|
|
2018
|
|
2017
|
Gain (loss) on Kinross calls
|
|
$
|
—
|
|
|
$
|
24
|
|
Gain on Vendetta Warrants
|
|
|
—
|
|
|
|
148
|
|
|
|
$
|
—
|
|
|
$
|
172
|
|
6. Fair
Value
For
certain of Solitario’s financial instruments, including cash and cash equivalents and payables, the carrying amounts approximate
fair value due to their short-term maturities. Solitario’s short-term investments in CDs and USTS, Kinross calls and marketable
equity securities are carried at their estimated fair value primarily based on quoted market prices.
Solitario
accounts for its financial instruments under ASC 820. ASC 820 establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 also
requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets
and liabilities must be grouped, based on significant levels of inputs as follows:
|
·
|
Level 1
: quoted
prices in active markets for identical assets or liabilities;
|
|
·
|
Level 2
: quoted
prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
|
|
·
|
Level 3
: Unobservable
inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The
determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. During the three months ended March 31, 2018 there were no reclassifications in financial assets
or liabilities between Level 1, 2 or 3 categories.
The following is a listing of Solitario’s
financial assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within
the hierarchy as of March 31, 2018:
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
2,202
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,202
|
|
United States Treasury securities
|
|
|
9,976
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,976
|
|
Bank Certificates of Deposit
|
|
|
1,247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,247
|
|
The following is a listing of Solitario’s
financial assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within
the hierarchy as of December 31, 2017:
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
2,643
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,643
|
|
United States Treasury securities
|
|
|
10,395
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,395
|
|
Bank Certificates of Deposit
|
|
|
1,247
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,247
|
|
7. Income
Taxes
Solitario accounts for income taxes
in accordance with ASC 740. Under ASC 740, income taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related to certain income and expenses recognized in different
periods for financial and income tax reporting purposes. Deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses and tax credits that are available to offset future taxable income and income taxes,
respectively. A valuation allowance is provided if it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
At March 31, 2018 and December 31,
2017, a valuation allowance has been recorded, which fully offsets Solitario’s net deferred tax assets, because it is more
likely than not that the Company will not realize some portion or all of its deferred tax assets. The Company continually
assesses both positive and negative evidence to determine whether it is more likely than not that the deferred tax assets can be
realized prior to their expiration.
During the three months ended March
31, 2018 and 2017, Solitario recorded no deferred tax expense.
8. Employee
Stock Compensation Plans
On June 18, 2013, Solitario’s
shareholders approved the 2013 Solitario Exploration & Royalty Corp. Omnibus Stock and Incentive Plan (the “2013 Plan”).
Under the terms of the 2013 Plan, a total of 1,750,000 shares of Solitario common stock were reserved for awards to directors,
officers, employees and consultants. On June 29, 2017, Solitario shareholders approved an amendment to the 2013 Plan, which increased
the number of shares of common stock available for issuance under the 2013 Plan from 1,750,000 to 5,750,000. Awards granted under
the 2013 Plan may take the form of stock options, stock appreciation rights, restricted stock, and restricted stock units. The
terms and conditions of the awards are pursuant to the 2013 Plan and are granted by the Board of Directors or a committee appointed
by the Board of Directors.
As of March 31, 2018, and December
31, 2017 there were options outstanding that are exercisable to acquire 2,082,428 and 1,928,428 shares of Solitario common stock,
respectively. These options have exercise prices between $0.54 per share and $1.74 per share. Of these, 1,728,428 shares were
Replacement Options granted in connection with the Acquisition. During the three months ended March 31, 2018, Solitario granted
options exercisable into 100,000 shares to a consultant, with an exercise price of $0.62 per share, a term of seven months and
a grant date fair value of $12,000 based upon a Black-Scholes model with a 66% volatility and a 1% risk-free interest rate. There
were no stock grants during the three months ended March 31, 2017. There were no exercises of options under the 2013 Plan during
the three months ended March 31, 2018 and 2017. During the three months ended March 31, 2018, Solitario recorded stock option
compensation expense of $10,000. Solitario had no stock options outstanding and recorded no stock option compensation expense
during the three months ended March 31, 2017.
On September 1, 2017, the Board of
Directors granted, subject to shareholder approval at the next meeting of shareholders, an additional 2,300,000 stock options under
the 2013 Plan to officers and members of the board of directors (the “Conditional Options”). The Conditional Options
have a five-year life, and exercise price of $0.77 per share, and a grant date fair value of $970,000, based upon a Black-Scholes
model with a volatility of 64%, and a risk-free interest rate of 1.70%. If approved, the Conditional Options will vest on the schedule
of 25% on date of grant and 25% on each of the next three anniversary dates of the date of grant. The Conditional Options are not
deemed outstanding and will not become exercisable in whole or in part unless Solitario shareholders approve the grants, and the
option grants will be void if Solitario shareholders do not approve the grants. Solitario will not record any stock option expense
related to these options unless and until shareholder approval is received.
9. Shareholders’
Equity and Accumulated Other Comprehensive Income
(in thousands, except
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Share amounts)
|
|
Common
|
|
Common
|
|
Additional
|
|
|
|
Other
|
|
Total
|
|
|
Stock
|
|
Stock
|
|
Paid-in
|
|
Accumulated
|
|
Comprehensive
|
|
Shareholders’
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Income
|
|
Equity
|
Balance at December 31, 2017
|
|
|
58,434,566
|
|
|
|
584
|
|
|
$
|
69,312
|
|
|
$
|
(40,343
|
)
|
|
$
|
576
|
|
|
$
|
30,129
|
|
Cumulative-effect adjustment
change in accounting principle
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
576
|
|
|
|
(576
|
)
|
|
|
—
|
|
Adjusted balance January 1, 2018
|
|
|
58,434,566
|
|
|
|
584
|
|
|
|
69,312
|
|
|
|
(39,767
|
)
|
|
|
—
|
|
|
|
30,129
|
|
Stock option expense
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
Purchase of shares for cancellation
|
|
|
(52,614
|
)
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(26
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,004
|
)
|
|
|
—
|
|
|
|
(1,004
|
)
|
Balance at March 31, 2018
|
|
|
58,381,952
|
|
|
$
|
584
|
|
|
$
|
69,296
|
|
|
$
|
(40,771
|
)
|
|
$
|
—
|
|
|
$
|
29,109
|
|
Solitario adopted ASU No. 2016-01
in the first quarter of 2018. Solitario recorded a cumulative-effect adjustment for the change in accounting principle to retained
earnings of $576,000 related to the adoption of ASU 2016-01. In addition, Solitario eliminated its previously recorded gain on
sale of marketable equity securities of $221,000 in its consolidated statement of operations for the three months ended March 31,
2017 resulting in an adjusted unrealized gain on marketable equity securities of $128,000 for the three months ended March 31,
2017 as a result of the adoption of ASU 2016-01. These changes increased the net loss for the three months ended March 31, 2017
from $13,000 to $106,000. These changes as a result of the adoption of ASU 2016-01 were similarly reflected in the adjustment to
net income for marketable equity securities in the statement of cash flows for the three months ended March 31, 2017.
Share Repurchase Program
On October 28, 2015, Solitario’s
Board of Directors approved a share repurchase program that authorized Solitario to purchase up to two million shares of its outstanding
common stock. During 2017, Solitario’s Board of Directors extended the expiration date of the share repurchase program through
December 31, 2018. During the three months ended March 31, 2018 and 2017, Solitario purchased 52,614 and 8,400 shares of Solitario
common stock, respectively, for an aggregate purchase price of $26,000 and $6,000, respectively. As of March 31, 2018, Solitario
has purchased a total of 720,414 shares for an aggregate purchase price of $374,000 under the share repurchase program since its
inception.
10. Subsequent
Event
On April 27, 2018 Solitario, through
its wholly-owned subsidiary, Minera Solitario Peru, S.A.C., sold its non-producing Yanacocha royalty to Minera Los Topados S.A.,
a wholly-owned subsidiary of Newmont Mining Corporation for $502,000 in cash.