UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q/A
(Amendment No.
1)
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March
31, 2020
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. 001-39278
SOLITARIO ZINC CORP.
(Exact name of registrant as specified in its charter)
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Colorado (State or other jurisdiction of incorporation or
organization) 4251 Kipling St. Suite 390, Wheat Ridge, CO(Address
of principal executive offices)(303) 534-1030(Registrant's
telephone number, including area code)
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84-1285791 (I.R.S. Employer Identification No.80033(Zip
Code)
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Indicate by
checkmark 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.
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every
Interactive Data
File required to be submitted and posted 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 and post such files).
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, 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 ☐
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Accelerated
filer ☐
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Non-accelerated
filer (do not check if a smaller reporting company)
☐
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Smaller
reporting company ☒
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Emerging
Growth Company ☐
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
There
were 58,116,366 shares of $0.01 par value common stock outstanding
as of April 30, 2020.
EXPLANATORY
NOTE
The purpose of this
Amendment No. 1 to our Quarterly Report on Form 10-Q for the period
ended March 31, 2020 as filed with the Securities and Exchange
Commission on May 1, 2020 is to furnish Exhibits 101 to the Form
10-Q.
No changes have
been made to the Quarterly Report other than the furnishing of
Exhibit 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB and 101.PRE
described above. This Amendment No. 1 to Form 10-Q does not reflect
subsequent events occurring after the original filing date of the
Form 10-Q or modify or update in any way disclosures made in the
Form 10-Q, as amended.
In addition,
pursuant to Rule 12b-15 under the Securities Exchange Act of 1934,
as a result of this Amended Report, the certifications pursuant to
Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002,
filed and furnished, respectively as exhibits to the Original
Report have been re-executed and re-filed as of the date of this
Amended Report and are included as exhibits
hereto.
TABLE
OF CONTENTS
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Page
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3
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Item 2 Management's
Discussion and Analysis of Financial
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Condition
and Results of Operations
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14
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Item 3 Quantitative
and Qualitative Disclosures About Market Risk
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18
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Item 4 Controls and
Procedures
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18
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19
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19
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Item
2 Unregistered Sales of Equity
Securities and Use of Proceeds
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19
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Item 3 Defaults
Upon Senior Securities
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19
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Item 4 Mine
Safety Disclosures
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19
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19
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19
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20
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PART I - FINANCIAL
INFORMATION
Item 1. Financial
Statements
SOLITARIO
ZINC CORP.
CONDENSED
CONSOLIDATED BALANCE SHEETS
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(in thousands of
U.S. dollars,
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except
share and per share amounts)
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Current
assets:
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Cash
and cash equivalents
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$440
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$574
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Short-term
investments
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6,829
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6,829
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Investments
in marketable equity securities, at fair value
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755
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1,039
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SilverStream
note receivable
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253
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268
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Prepaid
expenses and other
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42
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46
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Total
current assets
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8,319
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8,756
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Mineral
properties
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15,617
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15,617
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Other
assets
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136
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159
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Total
assets
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$24,072
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$24,532
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Liabilities and
Shareholders’ Equity
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Current
liabilities:
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Accounts
payable
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$294
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$228
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Operating lease
liability
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38
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41
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Kinross
call option
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9
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-
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Total
current liabilities
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341
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269
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Long-term
liabilities
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Asset
retirement obligation – Lik
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125
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125
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Operating lease
liability
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-
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7
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Total
long-term liabilities
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125
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132
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Commitments
and contingencies
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Equity:
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Shareholders’
equity:
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Preferred
stock, $0.01 par value, authorized
10,000,000 shares (none issued and
outstanding at March 31, 2020 and
December 31, 2019)
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-
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-
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Common
stock, $0.01 par value, authorized 100,000,000 shares
(58,116,366 and 58,133,066
shares, respectively, issued
and
outstanding at March 31, 2020 and December 31,
2019)
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581
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581
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Additional
paid-in capital
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70,286
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70,204
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Accumulated
deficit
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(47,261)
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(46,654)
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Total
shareholders’ equity
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23,606
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24,131
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Total liabilities and shareholders’ equity
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$24,072
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$24,532
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See
Notes to Unaudited Condensed Consolidated Financial
Statements
SOLITARIO ZINC
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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(in thousands of
U.S. dollars, except per share amounts)
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Three months endedMarch
31
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Revenue, net
– mineral property sale
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$-
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$408
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Costs,
expenses and other:
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Exploration
expense
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$113
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$163
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Depreciation
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6
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7
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General
and administrative
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336
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425
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Total
costs, expenses and other
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455
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595
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Other
(loss) income
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Interest
income (net)
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81
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72
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Loss on
derivative instruments
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(25)
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-
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Gain on sale
of marketable equity securities
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25
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-
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Unrealized
loss on marketable equity securities
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(233)
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(326)
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Total
other loss
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(152)
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(254)
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Net
loss
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$(607)
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$(441)
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Loss
per common share:
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Basic
and diluted
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$(0.01)
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$(0.01)
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Weighted
average shares outstanding:
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Basic
and diluted
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58,130
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58,158
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See
Notes to Unaudited Condensed Consolidated Financial
Statements
SOLITARIO ZINC
CORP.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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(in thousands of
U.S. dollars)
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Three months endedMarch
31,
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Operating
activities:
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Net
loss
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$(607)
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$(441)
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
and amortization
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6
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7
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Amortization
of right of use lease asset
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10
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10
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Unrealized
loss of marketable equity securities
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233
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326
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Employee
stock option expense
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85
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88
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Gain
on sale of marketable equity securities
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(25)
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-
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Loss
on derivative instruments
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25
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-
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Changes
in operating assets and liabilities:
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Prepaid
expenses and other assets
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(21)
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64
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Note
receivable, net of mineral property sold
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-
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(223)
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Accounts
payable and other current liabilities
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56
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(3)
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Net
cash used in operating activities
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(238)
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(172)
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Investing
activities:
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Sale of
short-term investments, net
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40
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602
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Cash from
sale of marketable equity securities
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76
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-
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Purchase
(sale) of derivative instruments – net
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(9)
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-
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Net
cash provided by investing activities
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107
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602
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Financing
activities:
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Purchase of
common stock for cancellation
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(3)
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(9)
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Net
cash used in financing activities
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(3)
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(9)
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Net increase
(decrease) in cash and cash equivalents
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(134)
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421
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Cash
and cash equivalents, beginning of period
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574
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117
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Cash
and cash equivalents, end of period
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$440
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$538
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See
Notes to Unaudited Condensed Consolidated Financial
Statements
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. Solitario is primarily focused
on the acquisition and exploration of zinc-related exploration
mineral properties; however Solitario will evaluate and acquire
other base and precious metal mineral exploration properties. In
addition to focusing on its mineral exploration properties and the
evaluation of mineral properties for acquisition, 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 (i) the sale of certain mineral royalty properties to
SilverStream SEZC, a private Cayman Island royalty and streaming
company (“SilverStream”) for Cdn$600,000 in January
2019 (the “Royalty Sale”), and (ii) the sale in June
2018 of its interest in the royalty on its Yanacocha property. In
addition, Solitario has received proceeds from (i) the sale in 2015
of its former interest in Mount Hamilton LLC
(“MH-LLC”), the owner of its former Mt. Hamilton
project; (ii) the sale of a royalty on its former Mt. Hamilton
project and (iii) joint venture property payments. Revenues and /
or proceeds from the sale or joint venture of properties or assets,
although significant when they occur, have not been a consistent
annual source of cash 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 in Peru and its interest in the Lik project in Alaska to be
its core mineral property assets. Nexa Resources, Ltd.
(“Nexa”), Solitario’s joint venture partner, is
expected to continue the exploration and furtherance of the Florida
Canyon project and Solitario is monitoring progress at Florida
Canyon. Solitario is working with its 50% joint venture partner in
the Lik deposit, Teck American Incorporated, a wholly-owned
subsidiary of Teck Resources Limited (both companies are referred
to as “Teck”), to further the exploration and evaluate
potential development plans for the Lik project.
As
of March 31, 2020, Solitario has significant balances of cash and
short-term investments that Solitario anticipates using, in part,
to fund costs and activities intended to further the exploration 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, 2020 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 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, 2020.
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, 2019. 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.
Risks and Uncertainties
Solitario faces
risks related to health epidemics and other outbreaks of
communicable diseases, which could significantly disrupt its
operations and may materially and adversely affect our business and
financial conditions.
Solitario’s
business could be adversely impacted by the effects of the
coronavirus (COVID-19) or other epidemics or pandemics. The extent
to which the coronavirus impacts Solitario’s business,
including our exploration and other activities and the market for
its securities, will depend on future developments, which are
highly uncertain and cannot be predicted at this time, and include
the duration, severity and scope of the outbreak and the actions
taken to contain or treat the coronavirus outbreak. Solitario has
taken steps to conserve its financial resources including reducing
costs, in response to the economic uncertainty associated with
these risks. See Item 1A “Risk Factors”
below.
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 generally accepted accounting principles and are expressed in
U.S. dollars.
Revenue recognition
Solitario has
recorded revenue from the sale of exploration mineral properties
and joint venture property payments. Solitario’s policy is to
recognize revenue from the sale of its exploration mineral
properties (those without reserves) on a property by property
basis, computed as the cash received and / or collectable
receivables less any capitalized cost. Payments received for the
sale of exploration property interests that are less than the
properties cost are recorded as a reduction of the related
property's capitalized cost. In addition, Solitario’s policy
is to recognize revenue on any receipts of joint venture property
payments in excess of its capitalized costs on a property that
Solitario may lease to another mining company.
Solitario has
recognized revenue during the three months ended March 31, 2019 of
$408,000 related to the Royalty Sale in accordance with Accounting
Standards Codification (“ASC”) 606. Solitario expects
any property, royalty or asset sales in the future to be on an
infrequent basis. Solitario does not expect to record joint venture
property payments on any of its currently held properties for the
foreseeable future. Historically, Solitario’s revenues have
been infrequent and significant individual transactions and have
only been from sales to well known or vetted mining companies.
Solitario has never had a return on any of its sales recorded as
revenue in its history and does not anticipate it will recognize
any estimated returns on its current or future recorded
revenues.
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) the recoverability
of mineral properties related to its mineral exploration properties
and their future exploration potential; (ii) the fair value of
stock option grants to employees; (iii) the ability of Solitario to
realize its deferred tax assets; (iv) Solitario's investment in
marketable equity securities; and (v) the collectability of the
SilverStream Note (as defined below).
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 or its joint venture partners 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, 2020, $425,000 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.
Short-term investments
As of
March 31, 2020, Solitario has $6,325,000 of its current assets in
United States Treasury Securities (“USTS”) with
maturities of 15 days to 15 months. In addition, Solitario has two
bank certificates of deposits (“CD’s”) each with
a face value of $250,000. The USTS and CD’s are recorded at
their fair value, based upon quoted market prices. The USTS are not
covered under the FDIC insurance rules for United States deposits.
Solitario’s USTS and CD’s 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 its
mineral properties are capitalized. 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.
Leases
Solitario accounts
for its leases in accordance with ASC
842, Leases (“ASC 842”) by recognizing
right-of-use assets and lease liabilities on the condensed
consolidated balance sheet and disclosing key information about
lease arrangements. Solitario has elected the practical expedient
option to use January 1, 2019, the effective date of adoption of
ASC 842, as the initial date of transition and not to restate
comparative prior periods and to carry forward historical lease
classification. In addition, Solitario has elected the option not
to apply the recognition of assets and liabilities provisions of
ASC 842 to operating leases with initial terms of less than one
year. See Note 4 “Operating Leases” for more
information and disclosures regarding Solitario’s
leases.
Derivative instruments
Solitario accounts
for its derivative instruments in accordance with ASC 815.
Solitario has entered
into covered calls from time to time on its investment in Kinross
Gold Corporation (“Kinross”) marketable equity
securities. Solitario has not designated its covered calls as
hedging instruments and any changes in the fair value of the
covered calls are recognized in the statement of operations in the
period of the change as gain or loss on derivative instruments, and
as a change to operating activities in the statement of cash flows
for the non-cash portion of the gain or loss.
Fair value
ASC 820
established a framework for measuring fair value of financial
instruments and required disclosures about fair value measurements.
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 CD’s, 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. See Note 6, “Fair
Value,” below.
Marketable equity securities
Solitario's
investments in marketable equity securities are carried at fair
value, which is based upon quoted prices of the securities owned.
Solitario records investments in marketable equity securities 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. Changes in fair value are recorded
as unrealized gain or loss in the condensed consolidated statement
of operations.
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 2019 and the first quarter
of 2020 were conducted primarily in Peru, a portion of the payments
under 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.
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, 2020 and 2019.
Potentially dilutive shares related to outstanding common stock
options of 4,373,000 and 4,373,000, respectively, for Solitario
common shares for the three months ended March 31, 2020 and 2019
were excluded from the calculation of diluted loss per share
because the effects were anti-dilutive.
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.”
Recently adopted accounting pronouncements
The
Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2016-13,
Financial Instruments –
Credit Losses (Topic 326): Measurements of Credit Losses on
Financial Statements (“ASU No.
2016-13”). Among
other things, these amendments require the measurement of all
expected credit losses for financial assets held at the reporting
date based on historical experience, current conditions, and
reasonable and supportable forecasts. Financial institutions and
other organizations will now use forward-looking information to
better inform their credit loss estimates. ASU No. 2016-13 is
effective for Solitario for fiscal year, and interim periods within
those fiscal years, beginning after December 15, 2019. Solitario
adopted ASU No. 2016-13 effective January 1, 2020 which did not
have a material impact on its consolidated financial position or
results of operations as of or for the three months ended March 31,
2020.
The
FASB issued ASU No. 2018-13, Disclosure Framework – Fair Value (topic
820): Changes to Disclosure Requirements for Fair Value
Measurement (“ASU No. 2018-13”). Among other things, these amendments
change the required disclosures regarding (i) transfers between
Level 1 and Level 2 fair values; (ii) unrealized gains / losses
included in earnings and other comprehensive income for Level 3
instruments; and (iii) amount, reason and policies regarding
transfers between Levels. ASU No. 2018-13 is effective for
Solitario for fiscal year, and interim periods within those fiscal
years, beginning after December 15, 2019. Solitario adopted ASU No.
2016-13 January 1, 2020 which did not have a material impact on its
consolidated financial position or results of operations as of or
for the three months ended March 31, 2020.
Recently issued accounting pronouncements
The SEC
has adopted amendments to its disclosure rules to modernize the
mineral property disclosure requirements for issuers whose
securities are registered with the SEC. These amendments became
effective February 25, 2019 (the “SEC Modernization
Rules”) and, following a two-year transition period, the SEC
Modernization Rules will replace the historical property disclosure
requirements for mining registrants that are included in SEC
Industry Guide 7. Under the SEC
Modernization Rules, consistent with global standards as embodied
by the Committee for Reserves International Reporting Standards
(“CRIRSCO”), registrants will be required to
disclose specified information concerning mineral resources that
have been identified on one or more of its mineral properties.
Consistent with CRIRSCO standards the SEC Modernization Rules have
added definitions to recognize “Measured Mineral
Resources”, “Indicated Mineral Resources” and
“Inferred Mineral Resources.” The Company is not
required to provide disclosure on its mineral properties under the
SEC Modernization Rules until its fiscal year beginning January 1,
2021.
Upon
adoption of the SEC Modernization Rules, among other requirements,
the Company will be required to report its mineral resources, if
any, as Measured, Indicated or Inferred Mineral Resources in
accordance with the SEC Modernization Rules. This will allow
investors to evaluate the Company’s resources on a comparable
basis with other mining and exploration issuers registered with the
SEC. In addition, the SEC Modernization Rules will require the
Company to disclose exploration results, mineral reserves, if any,
and mineral resources based upon information and supporting
documentation prepared by a mining expert (the “qualified
person”). The SEC Modernization Rules will require the
Company to obtain a dated and signed technical report summary from
the qualified person identifying and summarizing the information
reviewed and conclusions reached by the qualified person(s) about
the mineral resources or reserves for each mineral property. The
Company is currently evaluating the requirements under the SEC
Modernization Rules and has not determined what effect adoption
will have on its consolidated financial statements and
disclosures.
2. Mineral
Property
The
following table details Solitario’s investment in Mineral
Property:
|
(in
thousands)
|
|
|
|
|
|
|
|
Exploration
|
|
|
|
Lik
project (Alaska – US)
|
$15,611
|
$15,611
|
|
La
Promesa (Peru)
|
6
|
6
|
|
Total
exploration mineral property
|
$15,617
|
$15,617
|
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.
Royalty sale
On
January 22, 2019, Solitario completed the Royalty Sale to
SilverStream for Cdn$600,000. On closing of the Royalty Sale,
Solitario received Cdn$250,000 in cash and a convertible note from
SilverStream in the principal amount of Cdn$350,000 (the
“SilverStream Note”). The SilverStream Note was
originally due December 31, 2019, accrued 5% per annum simple
interest, payable on a quarterly basis, and is convertible into
common shares of SilverStream, at the discretion of SilverStream,
by providing Solitario a notice of conversion. In December of 2019,
Solitario and SilverStream agreed to extend the due date of the
SilverStream Note to June 30, 2020, and to increase the interest
rate to 8% per annum simple interest. All other terms of the
SilverStream Note remained the same. During the three months ended
March 31, 2020 and 2019, Solitario recorded interest income from
the SilverStream Note of $5,000 and $2,000, respectively. During
the three months ended March 31, 2019, Solitario recorded mineral
property revenue of $408,000 from the Royalty Sale, consisting of
the fair value of the cash received on the date of the sale of
$185,000 and the fair value of the SilverStream Note on the date of
the sale of $263,000 less the carrying value of the royalties sold
of $40,000.
Exploration expense
The
following items comprised exploration expense:
|
(in
thousands)
|
Three months ended March
31,
|
|
|
|
|
|
Geologic and field
expenses
|
$90
|
$147
|
|
Administrative
|
23
|
16
|
|
Total exploration
costs
|
$113
|
$163
|
Asset Retirement Obligation
In
connection with the acquisition of the Lik project in 2017,
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 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 condensed consolidated statement of operations.
During the three months ended March 31, 2020, Solitario recorded an
unrealized loss on marketable equity securities of $233,000. During
the three months ended March 31, 2019, Solitario recorded an
unrealized loss on marketable equity securities of
$326,000.
The
following tables summarize Solitario’s marketable equity
securities and adjustments to fair value:
|
(in
thousands)
|
|
|
|
Marketable
equity securities at cost
|
$1,828
|
$1,879
|
|
Cumulative
unrealized loss on marketable equity securities
|
(1,073)
|
(840)
|
|
Marketable
equity securities at fair value
|
$755
|
$1,039
|
The
following table represents changes in marketable equity securities
during the three months ended March 31, 2020 and 2019:
|
(in
thousands)
|
Three months
ended
March 31,
|
|
|
|
|
|
Cost of marketable
equity securities sold
|
$51
|
$-
|
|
Realized gain on
marketable equity securities sold
|
25
|
-
|
|
Proceeds from the
sale of marketable equity securities sold
|
(76)
|
-
|
|
Net loss on
marketable equity securities
|
(208)
|
(326)
|
|
Change in
marketable equity securities at fair value
|
$(284)
|
$(326)
|
The
following table represents the realized and unrealized gain (loss)
on marketable equity securities:
|
(in
thousands)
|
Three months
ended
March 31,
|
|
|
|
|
|
Unrealized
loss on marketable securities
|
$(233)
|
$(326)
|
|
Realized
gain on marketable equity securities sold
|
25
|
-
|
|
Net
loss on marketable securities
|
$(208)
|
$(326)
|
Solitario sold
2,000,000 shares of Vendetta Mining Corp. (“Vendetta”)
common stock during the three months ended March 31, 2020 for
proceeds of $76,000 and recorded a gain on sale of $25,000 on the
date of sale. Solitario did not sell any marketable equity
securities during the three months ended March 31, 2019 and the
change in the fair value of marketable equity securities was
related entirely to the unrealized loss on marketable equity
securities related to their fair values based upon quoted market
prices for the marketable equity securities held by Solitario
during that period.
Vendetta Warrants
On July
31, 2019, Solitario purchased 3,450,000 Vendetta units for a total
of $233,000. Each Vendetta unit consisted of one share of Vendetta
common stock and one Vendetta warrant (the “Vendetta
Warrants”). Each Vendetta Warrant entitles the holder to
purchase one additional share of Vendetta common stock for a
purchase price of Cdn$0.13 per share for a period of three years.
On the purchase date Solitario recorded marketable equity
securities of $165,000 for the Vendetta shares acquired and $68,000
for the Vendetta Warrants based upon an allocation of the purchase
price of the Vendetta units, based upon (i) the fair value of the
Vendetta common shares received, based upon the quoted market price
for Vendetta common shares and (ii) the fair value of Vendetta
Warrants based upon a Black Scholes model. During the three months
ended March 31, 2020, Solitario charged loss on derivative
instruments $7,000 for the change in the fair value of the Vendetta
Warrants based on a Black Scholes model.
4. Leases
Solitario adopted
ASU 2016-02 effective January 1, 2019 and accounts for its leases
in accordance with ASC 842. Solitario leases one facility, its
Wheat Ridge, Colorado office (the “WR Lease”), that has
a term of more than one year. Solitario has no other material
operating lease costs. The WR Lease is classified as an operating
lease and has a term of 11 months at March 31, 2020, with no
renewal option. At March 31, 2020, the right-of-use office lease
asset for the WR Lease is classified as other assets and the
related liability as current office lease liabilities in the
condensed consolidated balance sheet. The amortization of right of
use lease asset expense is recognized on a straight-line basis over
the lease term, with variable lease payments recognized in the
period those payments are incurred. During the three months ended
March 31, 2020 and 2019, Solitario recognized $10,000 and $10,000,
respectively, of non-cash amortization of right of use lease asset
expense for the WR Lease included in general and administrative
expense. During the three months ended March 31, 2020 and 2019,
cash lease payments of $10,000 and $7,000, respectively, were made
on the WR Lease. These cash payments, less $1,000 of imputed
interest for each period, reduced the related liability on the WR
Lease. The discount rate within the WR Lease is not determinable
and Solitario has applied a discount rate of 5% based upon
Solitario’s estimate of its cost of capital.
The
maturities of Solitario’s lease liability for its WR Lease
are as follows at March 31, 2020:
|
Future lease
payments (in thousands)
|
|
|
|
|
|
2020
|
32
|
|
2021
|
7
|
|
Total lease
payments
|
39
|
|
Less
amount of payments representing interest
|
(1)
|
|
Present value of
lease payments
|
$38
|
Supplemental cash
flow information related to our operating lease was as follows for
the three months ended March 31, 2020 and 2019:
|
(in
thousands)
|
Three months
ended
March 31,
|
|
|
|
|
|
Cash paid for
amounts included in the measurement of lease
liabilities
|
|
|
|
Operating
cash outflows from WR Lease payments
|
$10
|
$7
|
|
Non-cash amounts
related to the WR lease
|
|
|
|
Leased
assets recorded in exchange for new operating lease
liabilities
|
$-
|
$82
|
5 Other
Assets
The
following items comprised other assets:
|
(in
thousands)
|
|
|
|
|
|
|
|
Furniture and
fixtures, net of accumulated depreciation
|
$38
|
$39
|
|
Lik project
equipment, net of accumulated depreciation
|
45
|
50
|
|
Office lease
asset
|
36
|
45
|
|
Vendetta
warrants
|
13
|
21
|
|
Exploration bonds
and other assets
|
4
|
4
|
|
Total
other
|
$136
|
$159
|
6. Fair
Value
Solitario accounts
for its financial instruments under ASC 820. 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 USTS, CD’s, and marketable equity
securities are carried at their estimated fair value primarily
based on quoted market prices. During
the three months ended March 31, 2020 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, 2020:
|
(in
thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Short-term
investments
|
$6,829
|
$-
|
$-
|
$6,829
|
|
Marketable
equity securities
|
$755
|
$-
|
$-
|
$755
|
|
2019
Vendetta Warrants
|
$-
|
$13
|
$-
|
$13
|
|
Liabilities
|
|
|
|
|
|
Kinross
call options
|
$9
|
$-
|
$-
|
$9
|
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, 2019:
|
(in
thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Short-term
investments
|
$6,829
|
$-
|
$-
|
$6,829
|
|
Marketable
equity securities
|
$1,039
|
$-
|
$-
|
$1,039
|
|
2019
Vendetta Warrants
|
$-
|
$21
|
$-
|
$21
|
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 both
March 31, 2020 and December 31, 2019, 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, 2020 and 2019, Solitario recorded
no deferred tax expense.
8.
Commitments
and contingencies
Solitario has
recorded an asset retirement obligation of $125,000 related to its
Lik project in Alaska. See Note 2, “Mineral
Properties,” above.
Solitario leases
office space under a non-cancelable operating lease for the Wheat
Ridge, Colorado office which provides for total minimum rent
payments of $39,000 through March of 2021.
9.
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
both March 31, 2020, and December 31, 2019 there were options
outstanding that are exercisable to acquire 4,373,000 shares of
Solitario common stock, with exercise prices between $0.28 and
$0.77 per share. During the three months ended March 31, 2020,
Solitario did not grant any options. During the three months ended
March 31, 2019, Solitario granted options exercisable to acquire
150,000 shares of common stock, with an exercise price of $0.28 per
share, a five-year term, and a grant date fair value of $23,000
based upon a Black-Scholes model, with a 64% volatility and a 2.4%
risk-free interest rate. In addition, during the three months ended
March 31, 2019, options exercisable into 1,000,160 shares of common
stock, with exercise prices between $1.68 and $0.70 per share,
expired unexercised. There were no exercises of options under the
2013 Plan during either of the three months ended March 31, 2020
and 2019. During the three months ended March 31, 2020 and 2019,
Solitario recorded stock option compensation expense of $85,000 and
$88,000, respectively. At March 31, 2020, the total unrecognized
stock option compensation cost related to non-vested options is
$232,000 and is expected to be recognized over a weighted average
period of 13 months.
10. Shareholders’
Equity
Shareholders’ Equity for the three months ended March 31,
2019:
|
(in thousands,
except
|
|
|
|
|
|
|
Share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
58,171,466
|
582
|
$69,873
|
$(43,365)
|
$27,090
|
|
Stock option
expense
|
-
|
-
|
88
|
-
|
88
|
|
Purchase of shares
for cancellation
|
(27,900)
|
-
|
(9)
|
-
|
(9)
|
|
Net
loss
|
-
|
-
|
-
|
(441)
|
(441)
|
|
Balance
at March 31, 2019
|
58,143,566
|
$582
|
$69,952
|
$(43,806)
|
$26,728
|
Shareholders’ Equity for the three months ended March 31,
2020:
|
(in thousands,
except
|
|
|
|
|
|
|
Share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
58,133,066
|
581
|
$70,204
|
$(46,654)
|
$24,131
|
|
Stock option
expense
|
-
|
-
|
85
|
-
|
85
|
|
Purchase of shares
for cancellation
|
(16,700)
|
-
|
(3)
|
-
|
(3)
|
|
Net
loss
|
-
|
-
|
-
|
(607)
|
(607)
|
|
Balance
at March 31, 2020
|
58,116,366
|
$581
|
$70,286
|
$(47,261)
|
$23,606
|
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 2019,
Solitario’s Board of Directors extended the expiration date
of the share repurchase program through December 31, 2020. During
the three months ended March 31, 2020 and 2019, Solitario purchased
16,700 and 27,900 shares of Solitario common stock, respectively,
for an aggregate purchase price of $3,000 and $9,000, respectively.
As of
March 31, 2020, Solitario has purchased a total of 986,000 shares
for an aggregate purchase price of $465,000 under the share
repurchase program since its inception.
11. Subsequent
Event
In
April 2020, in response to significant market volatility and
uncertainty and the resulting need for Solitario to conserve its
financial resources, Solitario applied for and received a loan in
the amount of $70,000 (the “PPP Loan”) pursuant to the
Paycheck Protection Program under the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”) to help fund
Company payroll, rent and utilities obligations. The PPP Loan has a two-year term and bears
interest at a rate of 1.0% per annum. Monthly principal and
interest payments are deferred for six months after the date of
disbursement. The PPP Loan may be prepaid at any time prior to
maturity, under certain conditions, with no prepayment penalties.
The Promissory Note contains events of default and other provisions
customary for a loan of this type. The Paycheck Protection Program
provides that the PPP Loan may be partially or wholly forgiven if
the funds are used for certain qualifying expenses as described in
the CARES Act. Solitario intends to use the proceeds from the PPP
Loan for qualifying expenses and to apply for forgiveness of the
PPP Loan in accordance with the terms of the CARES Act. However,
Solitario cannot completely assure at this time that such
forgiveness of the PPP Loan will occur.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the
information contained in the consolidated financial statements of
Solitario for the years ended December 31, 2019 and 2018, and
Management’s Discussion and Analysis of Financial Condition
and Results of Operations contained in Solitario’s Annual
Report on Form 10-K, as amended, for the year ended December 31,
2019. Solitario's financial condition and results of operations are
not necessarily indicative of what may be expected in future
periods. Unless otherwise indicated, all references to dollars are
to U.S. dollars.
(a)
Business Overview and Summary
We are
an exploration stage company under Industry Guide 7, as issued by
the SEC, with a focus on the acquisition of precious and base metal
properties with exploration potential and the development or
purchase of royalty interests. Currently our primary focus is the
acquisition and exploration of zinc-related exploration mineral
properties. However, we will continue to evaluate other mineral
properties for acquisition, and we hold a portfolio of mineral
exploration properties and assets for future sale, joint venture or
on which to create a royalty prior to the establishment of proven
and probable reserves. Although our mineral properties may be
developed in the future by us, through a joint venture or by a
third party, we have never developed a mineral property. In
addition to focusing on our current mineral exploration properties,
we also from time to time evaluate potential strategic transactions
for the acquisition of new precious and base metal properties and
assets with exploration potential.
Our
current geographic focus for the evaluation of potential mineral
property assets is in North and South America; however, we have
conducted property evaluations for potential acquisition in other
parts of the world. At March 31, 2020, we consider our carried
interest in the Florida Canyon project in Peru and our interest in
the Lik project in Alaska to be our core mineral property assets.
In addition, at March 31, 2020, we have one exploration property in
Peru. We are conducting independent exploration activities in Peru
and through joint ventures operated by our partners in Peru and the
United States. We also conduct potential acquisition evaluations in
other countries located in South and North America.
We have
recorded revenue in the past from the sale of mineral properties,
including from the Royalty Sale in January 2019 and the sale in
June 2018 of our interest in the royalty on the Yanacocha property.
Revenues and / or proceeds from the sale or joint venture of
properties or assets, although generally significant when they have
occurred in the past, have not been a consistent source of revenue
and would only occur in the future, if at all, on an infrequent
basis. We have reduced our exposure to the costs of our exploration
activities in the past through the use of joint ventures. Although
we anticipate that the use of joint venture funding for some of our
exploration activities will continue for the foreseeable future, we
can provide no assurance that these or other sources of capital
will be available in sufficient amounts to meet our needs, if at
all.
As
of March 31, 2020, we have balances of cash and short-term
investments that we anticipate using, in part, to (i) fund costs
and activities intended to further the exploration of the Lik
project, (ii) fund costs and activities intended to further the
exploration at the Florida Canyon project, (iii) conduct
reconnaissance exploration and (iv) 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 advanced mineral exploration projects or other related assets at
potentially attractive terms.
As
of March 31, 2020, the effects of the COVID-19 virus have not had a
material effect on Solitario’s activities related to the
exploration of its Lik and Florida Canyon projects. However, going
forward for the remainder of 2020, we will continue to monitor
planned activities for the full year 2020 at both Florida Canyon
and Lik. The extent to which the coronavirus impacts our business,
including our exploration and other activities and the market for
our securities, will depend on future developments, which are
highly uncertain and cannot be predicted at this time. Please see
Item 1A, “Risk Factors,” below.
(b)
Results of Operations
Comparison of the quarter ended March 31, 2020 to the quarter ended
March 31, 2019
We had
a net loss of $607,000 or $0.01 per basic and diluted share for the
three months ended March 31, 2020 compared to a net loss of
$441,000 or $0.01 per basic and diluted share for the three months
ended March 31, 2019. As explained in more detail below, the
primary reasons for the increase in the net loss in the three
months ended March 31, 2020 compared to the loss in the first three
months of 2019 were (i) the Royalty Sale revenue, net, of $408,000
during the three months ended March 31, 2019 with no similar
mineral property revenue during the three months ended March 31,
2020 and (ii) a loss on derivative instruments of $25,000 during
the three months ended March 31, 2020, with no similar loss in the
three months ended March 31, 2019. Partially offsetting the above
items were (i) a reduction in exploration expense to $113,000
during the three months ended March 31, 2020 compared to
exploration expense of $163,000 during the three months ended March
31, 2019; (ii) a reduction in general and administrative expense to
$336,000 during the three months ended March 31, 2020 compared to
general and administrative expense of $425,000 during the three
months ended March 31, 2019; (iii) an increase in interest income
to $81,000 during the three months ended March 31, 2020 compared to
interest income of $72,000 during the three months ended March 31,
2019; (iv) a reduction in the non-cash loss on unrealized loss on
marketable equity securities to $233,000 during the three months
ended March 31, 2020 compared to a non-cash unrealized loss on
marketable equity securities of $326,000 during the three months
ended March 31, 2019 and (v) a gain on sale of marketable equity
securities of $25,000 during the three months ended March 31, 2020
with no similar gain during the three months ended March 31, 2019.
Each of the major components of these items is discussed in more
detail below.
During
the three months ended March 31, 2019, we completed the Royalty
Sale, discussed above in Note 2 “Mineral Property,” in
the condensed consolidated financial statements, and recorded net
revenues of $408,000. We received $185,000 in cash and the
SilverStream Note for $263,000, less our capitalized cost of
$40,000 for the royalties sold. There were no similar items during
the three months ended March 31, 2020.
Our net
exploration expense decreased to $113,000 during the three months
ended March 31, 2020 compared to exploration expense of $163,000
during the three months ended March 31, 2019 as a result of (i) a
decrease in our reconnaissance exploration activities primarily
related to the evaluation of mineral properties and / or entities
for potential acquisition or other strategic transactions and (ii)
a decrease in our activities at our La Promesa project in Peru and
Lik project in Alaska during the three months ended March 31, 2020
compared to the three months ended March 31, 2019, when we were
carrying out community work at La Promesa and working with our
joint venture partner, Teck, on reviews of exploration data at Lik.
During the three months ended March 31, 2019 we had three contract
geologists in Peru, and our Denver personnel spent a majority of
their time on reconnaissance exploration activities described above
and related matters. We have budgeted approximately $976,000 for
the full-year exploration expenditure for 2020, which includes
approximately $528,000 for Solitario’s share of a joint
drilling program with Teck at the Lik project in Alaska, which the
bulk of those expenses are planned for the third and fourth quarter
of 2020. We expect our full-year exploration expenditures for 2020
to be below the exploration expenditures for full-year 2019,
however these expenditures may be impacted by the effects of the
COVID-19 pandemic, as discussed above.
Exploration
expense (in thousands) by project for the three months ended March
31, 2020 and 2019 consisted of the following:
|
|
|
|
|
Project
Name
|
|
|
|
Florida
Canyon
|
$2
|
$-
|
|
Lik
|
6
|
19
|
|
La
Promesa
|
-
|
24
|
|
Reconnaissance
|
105
|
120
|
|
Total
exploration expense
|
$113
|
$163
|
General
and administrative costs, excluding stock option compensation
costs, discussed below, were $251,000 during the three months ended
March 31, 2020 compared to $337,000 during the three months ended
March 31, 2019. The major components of these costs were related to
(i) salaries and benefit expense of $83,000 during the first three
months of 2020 compared to salary and benefit costs of $108,000
during the three months ended March 31, 2019, as we reduced staff
and taken salary reductions during 2020; (ii) legal and accounting
expenditures of $11,000 in the first three months of 2020 compared
to $53,000 in the first three months of 2019; (iii) office rent and
expenses of $43,000 during the three months ended March 31, 2020,
compared to $42,000 during the three months ended March 31, 2019;
and (iv) travel and shareholder relation costs of $112,000 during
the first three months of 2020 compared to $133,000 during the
three months ended March 31, 2019. We anticipate the full-year
general and administrative costs will be lower for 2020 compared to
2019.
We
recorded $85,000 of stock option expense for the amortization of
unvested grant date fair value with a credit to additional
paid-in-capital during the three months ended March 31, 2020
compared to $88,000 of stock option compensation expense during the
three months ended March 31, 2019. These non-cash charges related
to the expense for vesting on stock options outstanding during the
three months ended March 31, 2020 and 2019. See Note 9,
“Employee Stock Compensation Plans,” above, for
additional information on our stock option expense.
During
the three months ended March 31, 2020, we sold 2,000,000 shares of
our holdings of Vendetta common stock for proceeds of $76,000 and
recorded a gain on sale of marketable equity securities of $25,000.
After the completion of the sale of the Vendetta shares, we hold
12,450,000 shares of Vendetta common stock. See Note 3
“Marketable Equity Securities” to the condensed
consolidated financial statements for a discussion of the sale of
Vendetta common stock.
We recorded an unrealized loss on marketable
equity securities of $233,000 during the three months ended March
31, 2020 compared to an unrealized loss on marketable equity
securities of $326,000 during the three months ended March 31,
2019. The loss during the three
months ended March 31, 2020 and 2019 was primarily related to a
decrease in the value of our holdings of 12,450,000 shares of
Vendetta common stock which decreased from a fair value of $479,000
at December 31, 2019 to a fair value of $350,000 at March 31, 2020
based on quoted market prices. In addition we hold 100,000 shares
of Kinross, which decreased from a fair value of $474,000 at
December 31, 2019 to a fair value of $398,000 at March 31, 2020,
the combination of which accounted for the bulk of the unrealized
loss on marketable equity securities during the quarter ended March
31, 2020.
We
regularly perform evaluations of our mineral property assets to
assess the recoverability of our 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 guidelines based upon future net
cash flows from the asset as well as our estimates of the
geological potential of an early stage mineral property and its
related value for future sale, joint venture or development by us
or others. During the three months ended March 31, 2020 and 2019,
we recorded no property impairments.
At
March 31, 2020 and 2019, our net operating loss carry-forwards
exceed our built-in gains on marketable equity securities resulting
in a net tax asset position for which we provide a valuation
allowance for all net deferred tax assets. We recorded no income
tax expense or benefit during the three months ended March 31, 2020
or 2019. As a result of our exploration activities, we anticipate
we will not have currently payable income taxes during 2020. In
addition to the valuation allowance discussed above, we provide a
valuation allowance for our foreign net operating losses, which are
primarily related to our exploration activities in Peru. We
anticipate we will continue to provide a valuation allowance for
these net operating losses until we are in a net tax liability
position with regards to those countries where we operate or until
it is more likely than not that we will be able to realize those
net operating losses in the future.
(c)
Liquidity and Capital Resources
Cash and Short-term Investments
As of
March 31, 2020, we have $7,269,000 in cash and short-term
investments. As of March 31, 2020, we have $6,325,000 of our
current assets in USTS with maturities of 15 days to 15 months. In
addition, we have two CD’s each with a face value of
$250,000. The USTS and CD’s are recorded at their fair value,
based upon quoted market prices. We anticipate we will roll over
that portion of our short-term investments not used for exploration
expenditures, operating costs or mineral property acquisitions as
they become due during the remainder of 2020.
We
intend to utilize a portion of our cash and short-term investments
in our exploration activities and the potential acquisition of
mineral assets over the next several years. We also expect to use a
portion of our cash to repurchase shares of our common stock
pursuant to the terms of a share repurchase program, discussed
above in Note 10, “Shareholders’ Equity,” to the
unaudited condensed consolidated financial statements. The share
repurchase program may be terminated at any time and does not
require Solitario to purchase a minimum number of
shares.
Investment in Marketable Equity Securities
Our
marketable equity securities are carried at fair value, which is
based upon market quotes of the underlying securities. At March 31,
2020 we own 12,450,000 shares of Vendetta common stock and 100,000
shares of Kinross common stock. The Vendetta shares are recorded at
their fair market value of $350,000 and the Kinross shares are
recorded at their fair value of $398,000 at March 31, 2020. In
addition, we own other marketable equity securities with a fair
value of $8,000 at March 31, 2020. During the three months ended
March 31, 2020 we sold 2,000,000 shares of Vendetta common stock,
as discussed above. We anticipate we may sell some of our
marketable equity securities during the remainder of 2020 depending
on cash needs and market conditions.
Working Capital
We had
working capital of $7,978,000 at March 31, 2020 compared to working
capital of $8,487,000 as of December 31, 2019. Our working capital
at March 31, 2020 consists primarily of our cash and cash
equivalents, our investment in USTS and CD’s, discussed
above, our investment in marketable equity securities of $755,000,
and other current assets of $295,000, which include the
SilverStream Note of $253,000 at March 31, 2020, less our accounts
payable of $294,000 and other current liabilities of $47,000. As of
March 31, 2020, our cash balances along with our short-term
investments and marketable equity securities are adequate to fund
our expected expenditures over the next year.
The
nature of the mineral exploration business requires significant
sources of capital to fund exploration, development and operation
of mining projects. We will need additional capital if we decide to
develop or operate any of our current exploration projects or any
projects or assets we may acquire. We anticipate we would finance
any such development through the use of our cash reserves,
short-term investments, joint ventures, issuance of debt or equity,
or the sale of other exploration projects or assets.
Stock-Based Compensation Plans
As of
both March 31, 2020, and December 31, 2019 there were options
outstanding that are exercisable to acquire 4,373,000 shares of
Solitario common stock. The outstanding options have exercise
prices between $0.77 per share and $0.28 per share. We do not
anticipate the exercise of options to be a significant source of
cash flow during the remainder of 2020.
Share Repurchase Program
On
October 28, 2015, our Board of Directors approved a share
repurchase program that authorized us to purchase up to two million
shares of our outstanding common stock. During 2019, our Board of
Directors extended the term of the share repurchase program until
December 31, 2020. All shares purchased to date have been cancelled
and reduced the number of shares of outstanding common stock. The
amount and timing of any shares purchased has been determined by
our management and the purchases were effected in the open market
or in privately negotiated transactions based upon market
conditions and other factors, including price, regulatory
requirements and capital availability and in compliance with
applicable state and federal securities laws. The repurchase
program does not require the purchase of any minimum number of
shares of common stock by the Company, and may be suspended,
modified or discontinued at any time without prior notice. No
purchases have been made outside of the United States, including on
the TSX. Payments for shares of common stock repurchased under the
program have been funded using the Company’s working capital.
As of March 31, 2020, Solitario has purchased a total of 986,000
shares for an aggregate purchase price of $465,000 under the share
repurchase program since its inception and these shares are no
longer included in our issued and outstanding shares. Subject to
any legal restrictions and our available financial resources, we
anticipate we will continue to purchase a limited number of shares
under the share repurchase plan during 2020 as determined by
management.
(d)
Cash Flows
Net
cash used in operations during the three months ended March 31,
2020 increased to $238,000 compared to $172,000 of net cash used in
operations for the three months ended March 31, 2019 primarily as a
result of the mineral property revenue, net, cash received during
the three months ended March 31, 2019 of $185,000 from the Royalty
Sale, discussed above, with no similar item during the three months
ended March 31, 2020. This was partially offset by (i) a decrease
in non-stock option general and administrative expense to $251,000
during the three months ended March 31, 2020 compared to $337,000
during the three months ended March 31, 2019, discussed above and
(iii) a decrease in exploration expenses to $113,000 during the
three months ended March 31, 2020 compared to $163,000 during the
three months ended March 31, 2019, as a result of a decrease in
exploration activities at our La Promesa and Lik projects and a
reduction in reconnaissance exploration during 2020 compared to
2019, discussed above. Based upon projected expenditures in our
2020 budget, we anticipate continued use of funds from operations
through the remainder of 2020, primarily for exploration related to
our Lik project and reconnaissance exploration. See “Results
of Operations” discussed above for further explanation of
some of these variances.
During
the three months ended March 31, 2020, we provided $107,000 in cash
from investing activities compared to $602,000 of cash provided
from investing activities during the three months ended March 31,
2019. The primary sources of the cash provided related to the net
proceeds from short-term investment sales and purchases of $40,000
and $602,000, respectively, during the three months ended March 31,
2020 and 2019. In addition, during the three months ended March 31,
2020 we sold 2,000,000 shares of Vendetta common stock for proceeds
of $76,000, with no similar item last year. We may sell additional
marketable equity securities during the remainder of 2020, as
discussed above. However, we do not anticipate the sale of
marketable equity securities will be a significant source of cash
during the remainder of 2020. We will continue to liquidate a
portion of our short-term investments as needed to fund our
operations and or potential mineral property acquisitions during
the remainder of 2020. Any potential mineral property acquisition
or strategic corporate investment during the remainder of 2020,
discussed above under “Business Overview and Summary,”
could involve a significant change in our cash provided or used for
investing activities, depending on the structure of any potential
transaction.
We used
$3,000 and $9,000, respectively, for the purchase of our common
stock during the three months ended March 31, 2020 and 2019, as
discussed above under “Share Repurchase Program” in
“Liquidity and Capital Resources.” We anticipate the
use of funds for additional purchases of our common stock during
the remainder of 2020, however, this will be limited to the maximum
number of shares, permissible under the share repurchase
program.
(e)
Off-balance sheet arrangements
As of
March 31, 2020, and December 31, 2019 we have no off-balance sheet
obligations.
(f)
Development Activities, Exploration Activities, Environmental
Compliance and Contractual Obligations
We are
not involved in any development activities, nor do we have any
contractual obligations related to any potential development
activities as of March 31, 2020. As of March 31, 2020, there have
been no changes to our exploration activities, environmental
compliance or other contractual obligations from those disclosed in
our Management’s Discussion and Analysis included in our
Annual Report on Form 10-K for the year ended December 31,
2019.
(g)
Discontinued Projects
We sold
our Brazil, Mexico and Montana royalty properties during the three
months ended March 31, 2019 in the Royalty Sale, discussed above.
We did not record any mineral property write-downs during the three
months ended March 31, 2020 and 2019.
(h)
Critical Accounting Estimates
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 to the Consolidated Financial Statements
included in our Annual Report on Form 10-K for the year ended
December 31, 2019, describe the significant accounting estimates
and policies used in preparation of our consolidated financial
statements. Actual results in these areas could differ from
management’s estimates.
(i)
Related Party Transactions
As of
March 31, 2020, and for the three months ended March 31, 2020, we
have no related party transactions or balances.
(j)
Recent Accounting Pronouncements
See
Note 1, “Business and Summary of Significant Accounting
Policies,” to the unaudited condensed consolidated financial
statements under Recent Accounting
Pronouncements” above for a discussion of our
significant accounting policies.
(k)
Forward Looking Statements
This
Form 10-Q contains forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended
(the “1934 Act”) with respect to our financial
condition, results of operations, business prospects, plans,
objectives, goals, strategies, future events, capital expenditures,
and exploration and development efforts. Words such as
“anticipates,” “expects,”
“intends,” “forecasts,”
“plans,” “believes,” “seeks,”
“estimates,” “may,” “will,” and
similar expressions identify forward-looking statements. These
forward-looking statements are based on our current expectations
and assumptions about future events and are based on currently
available information as to the outcome and timing of future
events. When considering forward-looking statements, you should
keep in mind the risk factors and other cautionary statements
described herein and under the heading "Risk Factors" included in
Item 1A of Part I of our Annual Report on Form 10-K for
the year ended December 31, 2019. These forward-looking
statements appear in a number of places in this report and include
statements with respect to, among other things:
●
Our estimates of
the value and recovery of our short-term investments;
●
Our estimates of
future exploration, development, general and administrative and
other costs;
●
Our ability to
realize a return on our investment in the Lik project;
●
Our ability to
successfully identify, and execute on transactions to acquire new
mineral exploration properties and other related
assets;
●
Our estimates of
fair value of our investment in shares of Vendetta and
Kinross;
●
Our estimate of the
collectability of the SilverStream Note:
●
Our expectations
regarding development and exploration of our properties including
those subject to joint venture and shareholder
agreements;
●
The impact of
political and regulatory developments;
●
Our future
financial condition or results of operations and our future
revenues and expenses;
●
Our business
strategy and other plans and objectives for future operations;
and
●
Risks related to pandemics, including the outbreak
of the coronavirus global health pandemic
(COVID-19).
Although we have
attempted to identify important factors that could cause actual
results to differ materially from those described in
forward-looking statements, there may be other factors that cause
results not to be as anticipated, estimated or intended. There can
be no assurance that these statements will prove to be accurate as
actual results and future events could differ materially from those
anticipated in the statements. Except as required by law, we assume
no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events
or otherwise.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
Smaller
Reporting Companies are not required to provide the information
required by this item.
Item 4. Controls and
Procedures
Disclosure Controls and Procedures
As
required by Rule 13a-15 under the 1934 Act, as of March 31, 2020,
we carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures. This
evaluation was carried out under the supervision and with the
participation of our Chief Executive Officer (our principal
executive officer) and our Chief Financial Officer (our principal
financial officer). Based upon and as of the date of that
evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were
effective as of March 31, 2020.
Disclosure controls
and procedures are controls and other procedures that are designed
to ensure that information required to be disclosed in our reports
filed or submitted under the 1934 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 in our reports
filed under the 1934 Act is accumulated and communicated to our
management, including our principal executive officer and our
principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the
1934 Act) during the quarter ended March 31, 2020 that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II - OTHER INFORMATION
None
Except
as detailed below with regard to risks related to the coronavirus
pandemic and other potential pandemics, there were no material
changes to the Risk Factors associated with our business disclosed
in Part I, Item 1A of our Annual Report on Form 10-K for the year
ended December 31, 2019.
The
outbreak of pandemics, including the coronavirus (COVID-19) may
affect our operations
We face
risks related to health epidemics and other outbreaks of
communicable diseases, which could significantly disrupt our
operations and may materially and adversely affect our business and
financial conditions.
Our
business could be adversely impacted by the effects of the
coronavirus (COVID-19) or other epidemics or pandemics. In December
2019, a novel strain of the coronavirus emerged in China and the
virus has now spread globally, including the
areas we operate in - the western U.S., Alaska, and
Peru. The extent to which the coronavirus impacts our
business, including our exploration and other activities and the
market for our securities, will depend on future developments,
which are highly uncertain and cannot be predicted at this time,
and include the duration, severity and scope of the outbreak and
the actions taken to contain or treat the coronavirus outbreak. In
particular, the continued spread of the coronavirus and travel and
other restrictions established to curb the spread of the
coronavirus, could materially and adversely impact our business
including without limitation, planned exploration programs at our
Florida Canyon and Lik projects during 2020, employee health,
workforce productivity, increased insurance premiums, limitations
on travel, the availability of industry experts and personnel, the
timing to process drill and other metallurgical testing, and other
factors that will depend on future developments beyond our control,
which may have a material and adverse effect on our business,
financial condition and results of operations.
There
can be no assurance that our personnel will not be impacted by the
coronavirus or other pandemic diseases and that we could ultimately
see our workforce productivity reduced or incur increased medical
costs or insurance premiums as a result of these health risks. In
addition, a significant outbreak of coronavirus could result in a
widespread global health crisis that could adversely affect global
economies and financial markets resulting in an economic downturn that could have an
adverse effect on the demand for precious and base metals and our
future prospects.
Unregistered Sales of Equity
Securities and Use of Proceeds
The
following table provides information about our purchase of our
common shares under the share repurchase program during the three
months ended March 31, 2020.
Issuer Purchases of
Equity Securities
|
|
Period
|
Total Number of
Shares Purchased
|
Average Price Paid
Per Share
|
Total Number of
Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum number of
Shares that May Yet Be Purchased Under the Plans or Programs
(1)
|
|
January 1, 2020-
January 31, 2020
|
-
|
n/a
|
-
|
1,030,700
|
|
February 1, 2020
– February 28, 2020
|
-
|
n/a
|
-
|
1,030,700
|
|
March 1, 2020
– March 31, 2020
|
16,700
|
$0.17
|
16,700
|
1,014,000
|
(1)
As of March 31,
2020, we have purchased a total of 986,000 shares for an aggregate
purchase price of $465,000 under the share repurchase program and
these shares are no longer included in our issued and outstanding
shares.
Defaults upon Senior
Securities
None
None
None
The
Exhibits to this report are listed in the Exhibit
Index.
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.
|
|
SOLITARIO ZINC
CORP. |
|
|
|
|
|
|
|
Date: May 1,
2020
|
By:
|
/s/ James R.
Maronick
|
|
|
|
|
James R.
Maronick
|
|
|
|
|
Chief Financial
Officer
|
|
|
|
Amended
and Restated Articles of Incorporation of Solitario Exploration
& Royalty Corp., as Amended (incorporated by reference to
Exhibit 3.1 to Solitario’s Form 10-Q filed on August 10,
2010)
|
|
|
|
|
|
Articles
of Amendment to Restated Articles of Incorporation of Solitario
Zinc Corp. (incorporated by reference to Exhibit 3.1 to
Solitario’s Current Report on Form 8-K filed on July 14,
2017)
|
|
|
|
|
|
Amended
and Restated By-laws of Solitario Zinc Corp. (Solitario Exploration
& Royalty Corp.) (incorporated by reference to Exhibit 99.1 to
Solitario’s Form 10-K filed on March 22, 2013)
|
|
|
|
|
|
Form of
Common Stock Certificate of Solitario Zinc Corp. (incorporated by
reference to Exhibit 4.1 to Solitario’s Form 10-Q filed on
November 8, 2017)
|
|
|
|
|
|
Certification
of Chief Executive Officer pursuant to SEC Rule 13a-14(a)/15d-14(a)
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
Certification
of Chief Financial Officer pursuant to SEC Rule 13a-14(a)/15d-14(a)
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
101*
|
The
following financial statements, formatted in XBRL: (i) Condensed
Consolidated Balance Sheets as of March 31, 2020 and
December 31, 2019, (ii) Condensed Consolidated Statements of
Operations for the three months ended March 31, 2020 and 2019,
(iii) Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2020 and 2019; and (iv) Notes to the
Condensed Unaudited Consolidated Financial Statements, tagged as
blocks of text.
|
|
|
|
|
*
|
Filed
herewith
|