NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the
years ended December 31, 2019 and 2018
1.
Business and Summary of
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
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. In addition to focusing on its mineral exploration
properties and the evaluation of mineral properties for
acquisition. Solitario also evaluates potential strategic corporate
transactions as a means to acquire an interest in new precious and
base metal properties and assets with exploration potential as well
as other potential corporate transactions and business combinations
that Solitario determines to be favorable to
Solitario.
Solitario has
recorded revenue in the past from the sale of mineral properties,
including the sale of certain mineral royalty properties in January
2019, discussed below, and the sale in June 2018 of its interest in
the royalty on the Yanacocha property. Revenues and / or proceeds
from the sale or joint venture of properties or assets 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 and its interest in the Lik project to be its core mineral
property assets. Nexa Resources, Ltd. (“Nexa”),
Solitario’s joint venture partner, is continuing 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, Teck American
Incorporated, a wholly owned subsidiary of Teck Resources Limited
(both companies are referred to as “Teck”), in the Lik
deposit to further the exploration of the Lik project, and to
evaluate potential development plans for the Lik
project.
As
of December 31, 2019 and 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
project and the Lik project and to potentially acquire additional
mineral property assets. The fluctuations in precious metal and
other commodity prices has contributed 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.
Recent Developments
On
January 22, 2019, Solitario completed the sale of its interest in
certain royalties to SilverStream SEZC, a private Cayman Island
royalty and streaming company (“SilverStream”) for
Cdn$600,000 (the “Royalty Sale”). The Royalty Sale
covered (i) a royalty on the formerly Solitario-owned 125,000-acre
polymetallic Pedra Branca palladium, platinum, gold, nickel, cobalt
and chrome project in Brazil, (ii) a royalty covering 3,880 acres
of non-producing exploration properties in Mexico, and (iii) a
purchase option on royalties covering 11 separate non-producing
properties covering over 16,500 acres in Montana. At 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. SilverStream may only
provide a notice of conversion if SilverStream has completed an
initial public offering during the term of the SilverStream Note
for minimum proceeds of Cdn$5,000,000, otherwise the SilverStream
Note will be payable in cash at the maturity date. Pursuant to the
terms of the SilverStream Note, if SilverStream were to complete an
initial public offering and the SilverStream Note was converted,
Solitario would receive common shares converted at 85% of the
weighted average quoted price of a share of SilverStream common
stock for the most recent 10-day period prior to the notice of
conversion. During 2019, Solitario recorded mineral property
revenue of $408,000 for 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.
Solitario recorded interest income of $12,000 from the SilverStream
Note during 2019. As of December 31, 2019, the SilverStream Note
was recorded at $268,000, based upon the current US dollar /
Canadian dollar exchange rate, and Solitario recorded a credit to
exchange gain of $5,000, included in general and administrative
expense during 2019.
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 US 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 2019 of $408,000 related to the Royalty
Sale, discussed above, and of $502,000 during 2018 from the sale of
its former Yanacocha exploration mineral property. Solitario
expects any property sales in the future to be on an infrequent
basis. Prior to the Yanacocha sale, the last proceeds from joint
venture property payments was in 2015 and 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.
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 and cash equivalents
Cash
equivalents include investments in highly liquid money-market
securities with original maturities of three months or less when
purchased. At December 31, 2019, approximately $554,000 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
At
December 31, 2019, Solitario has United States Treasury securities
(“USTS”) with maturities of 30 days to 17 months
recorded at their fair value of $6,829,000. 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 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.
Derivative instruments
Solitario accounts
for its derivative instruments in accordance with ASC 815,
"Accounting for Derivative Instruments and Hedging Activities"
(“ASC 815”). During 2016, Solitario acquired
its initial investment in Vendetta Mining Corp.
(“Vendetta”) units, including the 2016 Vendetta
Warrants (defined below). During 2017, Solitario exercised all of
the 2016 Vendetta Warrants. During 2019, Solitario acquired
additional Vendetta units, which included 2019 Vendetta Warrants
(defined below). Changes in fair value of the 2019 Vendetta
Warrants are recognized in the statements of operations in the
period of change as gain or loss on derivative instruments.
Solitario has entered into covered calls from time to time on its
investment in 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 and its warrants are
recognized in the statements of operations in the period of the
change as gain or loss on derivative instruments.
Fair value
Financial
Accounting Standards Board 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 accounts payable and the SilverStream Note, the
carrying amounts approximate fair value due to their short-term
maturities. Solitario's short-term investments in USTS, 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 9, “Fair
Value of Financial Instruments,” below.
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. Changes in fair value are recorded
as unrealized gain or loss in the 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 2018 were conducted
primarily in Peru, a portion of the payments for the land,
leasehold and exploration agreements as well as certain exploration
activities are denominated in United States dollars. 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. These provisions of
ASC 740 had no effect on Solitario's financial position or results
of operations. See Note 7, “Income Taxes,”
below.
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 years ended December 31, 2019 and 2018.
Potentially dilutive shares, consisting of outstanding common stock
options for 4,373,000 and 5,223,160, respectively, Solitario common
shares were excluded from the calculation of diluted earnings
(loss) per share for the year ended December 31, 2019 and 2018
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.” See Note 11, “Employee Stock
Compensation Plans,” below.
Recently adopted accounting pronouncements
On
January 1, 2019, Solitario adopted Accounting Standards Update No.
2016-02 Leases (“ASU
2016-02”) which requires the application of ASC 842
and the recognition of right-of-use
assets and related liabilities associated with all leases that are
not short-term in nature. As a result of the adoption of ASU
2016-02, Solitario recorded both an operating lease asset for its
Wheat Ridge, Colorado office of $82,000 and an operating lease
liability of $82,000 related to the same lease. The adoption of ASU
2016-02 did not require the recording of any other assets or
liabilities on our condensed consolidated balance sheets and had an
immaterial effect on Solitario’s consolidated statement of
operations for 2019 and its consolidated statement of cash flows
for 2019. Solitario has elected the practical expedient option to
use January 1, 2019, the effective date of adoption, as the initial
date of transition and not to restate comparative prior periods and
to carry forward historical lease classification. See Note 4,
“Operating Leases” for more information and disclosures
regarding Solitario’s leases.
Recently issued accounting pronouncements
In 2018, the SEC adopted amendments to the disclosure requirements
for mining registrants. Under these new rules, SEC Industry Guide 7
will be rescinded and replaced with the disclosure standards under
new Regulation S-K Subpart 1300. SEC Industry Guide 7 remains in
effect, subject to a transition period. Solitario will be required
to comply with the new rules for fiscal years 2021 and after.
Accordingly, future adjustment to estimates of mineralized material
will occur due to the differing standards under the new
requirements including, but not limited to, the replacement of any
estimate of mineralized material with an estimate of “mineral
resources.”
The
FASB issued 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 does not expect the adoption of
ASU No. 2016-13 to have a material impact on its consolidated
financial position or results of operations.
2.
Mineral
Properties:
The
following table details Solitario’s capitalized investment in
exploration mineral property:
|
(in
thousands)
|
|
|
|
|
|
|
Exploration
|
|
|
|
Lik
project (Alaska – US)
|
$15,611
|
$15,611
|
|
La
Promesa (Peru)
|
6
|
6
|
|
Montana
Royalty property (US)
|
-
|
40
|
|
Total
exploration mineral property
|
$15,617
|
$15,657
|
Exploration property
Solitario's
exploration mineral properties at December 31, 2019 and 2018
consist of use rights related to its exploration properties, and
the value of such assets is primarily driven by the nature and
amount of economic mineral ore believed to be contained, or
potentially contained, in such properties. The amounts capitalized
as mineral properties include concession and lease or option
acquisition costs. Capitalized costs related to a mineral property
represent its fair value at the time it was acquired. At December
31, 2019, none of Solitario’s exploration properties have
production (are operating) or contain proven or probable reserves.
Solitario's exploration mineral properties represent interests in
properties that Solitario believes have exploration and development
potential. Solitario's mineral use rights generally are enforceable
regardless of whether proven and probable reserves have been
established.
In
addition to its capitalized exploration properties, Solitario has
an interest in its Florida Canyon exploration concessions, which
are currently subject to a joint venture agreement where joint
venture partners made stand-by joint venture payments to Solitario
prior to January 1, 2015. Solitario recorded joint venture property
payment revenue received in excess of capitalized costs. Per the
joint venture agreement, as of December 31, 2019, no further
standby joint-venture payments are due to Solitario on the Florida
Canyon project. At December 31, 2019 and 2018, Solitario has no
remaining capitalized costs related to its Florida Canyon joint
venture.
On
January 22, 2019, Solitario completed the Royalty Sale, discussed
above under “Recent Developments” to SilverStream for
Cdn$600,000. At closing of the Royalty Sale, Solitario received
Cdn$250,000 in cash and the SilverStream Note with a principal
amount of Cdn$350,000, and a maturity date of December 31, 2019,
which was subsequently extended to June 30, 2020. During the nine
months ended September 30, 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.
On
April 26, 2018, Solitario sold the Yanacocha Royalty to Newmont for
$502,000 in cash. Newmont owns the underlying mineral concessions
covered by the Yanacocha Royalty. None of the concessions covered
by the Yanacocha Royalty have any reported reserves or resources.
Solitario had no mineral property capitalized cost in the Yanacocha
Royalty and recorded Mineral Property Revenue of $502,000 during
2018.
Discontinued projects
Solitario did not
abandon or impair any of its properties during 2019 or 2018 and did
not record any mineral property write-downs during the years ended
December 31, 2019 or 2018.
Exploration Expense
The
following items comprised exploration expense:
|
|
For the year
ended
December
31,
|
|
(in
thousands)
|
|
|
|
Geologic and field
expenses
|
$1,726
|
$1,165
|
|
Administrative
|
81
|
89
|
|
Total
exploration expense
|
$1,807
|
$1,254
|
Asset Retirement Obligation
In
connection with the acquisition of Zazu, 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 retained 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
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 warrant which allow the holder to
purchase one share of Vendetta common stock at a price of Cdn$0.10
per share for a period of two years (the “2016 Vendetta
Warrants”). The purchase price of the units of $289,000 was
allocated between the Vendetta common shares and the 2016 Vendetta
Warrants based upon total fair values on the date of purchase. The
Vendetta common stock was allocated a purchase cost of $186,000 and
the 2016 Vendetta Warrants were allocated a purchase cost of
$103,000. During 2017 Solitario exercised all of its 2016 Vendetta
Warrants and sold 3,480,000 shares of Vendetta common
stock.
On July
31, 2019, Solitario purchased 3,450,000 Vendetta units for
aggregate consideration of $233,000. Each unit consisted of one
share of Vendetta common stock and one warrant which allows the
holder to purchase one additional share of Vendetta common stock at
a purchase price of Cdn$0.13 per share for a period of three years
(the “2019 Vendetta Warrants”). The purchase of the
units on July 31, 2019 increased Solitario’s holdings of
Vendetta common shares to 14,450,000 shares. On the purchase date
Solitario recorded marketable equity securities of $165,000 for the
Vendetta shares acquired and $68,000 for the 2019 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 2019 Vendetta Warrants based upon
a Black Scholes model, using the stock price of Cdn$0.09,
volatility of 79%, a term of three years and a discount rate of
1.5%. During 2019, Solitario charged loss on derivative instruments
$47,000 for the change in the value of the 2019 Vendetta
Warrants.
As of
December 31, 2019, Solitario owned 14,500,000 shares of Vendetta
common stock which are carried at their fair value based upon the
quoted market price of Vendetta, whose common shares are listed on
the TSX venture exchange, and included in marketable equity
securities.
The
following tables summarize Solitario’s marketable equity
securities and adjustments to fair value:
|
(in
thousands)
|
|
|
|
|
|
|
Marketable
equity securities at cost
|
$1,879
|
$1,714
|
|
Cumulative
unrealized (loss) gain on marketable equity securities
|
(840)
|
(129)
|
|
Marketable
equity securities at fair value
|
$1,039
|
$1,585
|
During
2019 Solitario added 3,450,000 shares of Vendetta through the
purchase of the Vendetta units, discussed above, and recorded an
increase in marketable equity securities of $165,000. Solitario did
not acquire any marketable equity securities during 2018. Solitairo
did not sell any marketable equity securities during 2019 or 2018.
Solitario recorded a loss on marketable equity securities of
$711,000 and $1,058,000, respectively, during 2019 and 2018 for the
change in the fair value of its marketable equity
securities.
4. Operating
Lease
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 administrative 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 14 months at December 31,
2019, with no renewal option. At December 31, 2019, the
right-of-use office lease asset for the WR Lease is classified as
other assets and the related liability separated between current
and non-current office lease liabilities in the consolidated
balance sheet. Lease 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 2019, Solitario
recognized $40,000 of non-cash lease expense for the WR Lease
included in general and administrative expense. Cash lease payments
of $37,000 were made on the WR Lease during 2019 and this amount,
less $3,000 of imputed interest during 2019, reduced the related
liability on the WR Lease. The discount rate within the WR Lease is
not determinable and Solitario applied a discount rate of 5% based
upon Solitario’s estimate of its cost of capital in recording
the WR Lease.
The
maturities of Solitario’s lease liability for its WR Lease
are as follows at December 31, 2019:
|
(in
thousands)
|
|
|
Lease payments per
year
|
|
|
2020
|
$42
|
|
2021
|
7
|
|
Total lease
payments
|
49
|
|
Less
amount of payments representing interest
|
(1)
|
|
Present value of
lease payments
|
$48
|
The
following is supplemental cash flow information related to our
operating lease for 2019:
|
(in
thousands)
|
Year
ended December 31,
2019
|
|
|
|
|
Cash paid for
amounts included in the measurement of lease
liabilities
|
|
|
Operating
cash outflows from WR Lease payments
|
$37
|
|
Non-cash amounts
related to the WR lease
|
|
|
Right
of use 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
|
$39
|
$36
|
|
Lik project
equipment, net of accumulated depreciation
|
50
|
70
|
|
Office lease
asset
|
45
|
-
|
|
Vendetta
warrants
|
21
|
-
|
|
Exploration bonds
and other assets
|
4
|
4
|
|
Total other
assets
|
$159
|
$110
|
During
2017, Solitario acquired $100,000 of exploration-related equipment
at the Lik project as part of the acquisition of the Lik project.
The equipment is being depreciated over a five-year life on a
straight-line basis and Solitario recorded depreciation expense of
$20,000 during 2019 and 2018 related to this
equipment.
On July
31, 2019, Solitario acquired the 2019 Vendetta Warrants and
recorded $68,000 for the fair value of the 2019 Vendetta Warrants,
discussed above, and recorded a loss on derivative instruments
related to the 2019 Vendetta Warrants of $47,000, see Note 8,
“Derivative Instruments,” below.
6.
Revenue mineral property
sale
On
January 22, 2019, Solitario completed the sale of its interest in
certain royalties to SilverStream, discussed above and recorded
mineral property revenue of $408,000 for 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.
At
closing of the Royalty Sale, Solitario received Cdn$250,000 in cash
and the SilverStream Note in the principal amount of Cdn$350,000.
As of December 31, 2019, the SilverStream Note is due June 30, 2020
and accrues interest at 8% per annum simple interest. Solitario
recorded interest income of $12,000 from the SilverStream Note
during 2019. As of December 31, 2019, the SilverStream Note was
recorded at $268,000, based upon the current US dollar / Canadian
dollar exchange rate, and Solitario recorded a credit to exchange
gain of $5,000 related to the SilverStream Note, included in
general and administrative expense during 2019.
On
April 26, 2018, Solitario sold its royalty interest in the
non-producing Yanacocha property to a wholly owned subsidiary of
Newmont for approximately $502,000 in cash. The Yanacocha Royalty
covered 43 concessions totaling 36,052 hectares. Newmont owns the
underlying mineral concessions covered by the Yanacocha Royalty.
None of the concessions covered by the Yanacocha Royalty had any
reported reserves or resources. Solitario had no mineral property
capitalized cost in the Yanacocha Royalty and recorded Mineral
Property Revenue of $502,000 during 2018.
7.
Income
Taxes:
Consolidated loss
before income taxes includes losses from foreign operations of
$1,261,000 and $260,000 in 2019 and 2018,
respectively.
The net
deferred tax assets/liabilities in the December 31, 2019 and 2018
consolidated balance sheets include the following
components:
|
(in
thousands)
|
|
|
|
Deferred tax
assets:
|
|
|
|
Loss
carryovers
|
$13,284
|
$12,432
|
|
Investment
in Mineral Property
|
1,669
|
1,669
|
|
Capitalized
Exploration Costs
|
652
|
877
|
|
Stock
option compensation expense
|
228
|
150
|
|
Unrealized
loss on derivative securities
|
237
|
60
|
|
Other
|
135
|
135
|
|
Valuation
allowance
|
(15,999)
|
(15,099)
|
|
Total deferred tax
assets
|
206
|
224
|
|
Deferred tax
liabilities:
|
|
|
|
Unrealized
gains on marketable equity securities
|
198
|
209
|
|
Other
|
8
|
15
|
|
Total deferred tax
liabilities
|
206
|
224
|
|
Net
deferred tax liabilities
|
$-
|
$-
|
A
reconciliation of expected federal income taxes on income (loss)
from continuing operations at statutory rates, with the expense for
income taxes is as follows:
|
(in
thousands)
|
|
|
|
Expected income tax
benefit
|
$(691)
|
$(756)
|
|
Equity based
compensation
|
7
|
-
|
|
Foreign tax rate
differences
|
(116)
|
(27)
|
|
State income
tax
|
(84)
|
(143)
|
|
Expiration of
Capital Loss Carryovers
|
66
|
-
|
|
Adjustment to
Deferred Taxes
|
(101)
|
2,058
|
|
Change in Tax
Rate
|
-
|
53
|
|
Change in valuation
allowance
|
900
|
(1,164)
|
|
Permanent
differences and other
|
19
|
(21)
|
|
Income tax
(benefit) expense
|
$-
|
$-
|
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the
“Tax Act”) was signed into law making significant
changes to the Internal Revenue Code. Changes include, but are not
limited to, a federal corporate tax rate decrease from 35% to 21%
for tax years beginning after December 31, 2017, the transition of
U.S international taxation from a worldwide tax system to a
territorial system, and a one-time transition tax on the mandatory
deemed repatriation of foreign earnings.
While
the Tax Act provides for a territorial tax system, beginning in
2018, it includes two new U.S. tax base erosion provisions, the
global intangible low-taxed income (“GILTI”) provisions
and the base-erosion and anti-abuse tax (“BEAT”)
provisions. The GILTI provisions require the Company to include in
its U.S. income tax return foreign subsidiary earnings in excess of
an allowable return on the foreign subsidiary’s tangible
assets. The Company currently has no profitable foreign
subsidiaries. Therefore, this provision currently has no impact on
the Company.
The
BEAT provisions in the Tax Act eliminates the deduction of certain
base-erosion payments made to related foreign corporations and
impose a minimum tax if greater than regular tax. The Company does
not expect it will be subject to this tax and therefore has not
included any tax impacts of BEAT in its consolidated financial
statements for the years ended December 31, 2019 and
2018.
As a
result of the ownership change resulting from Solitario’s
acquisition of Zazu Metals (Alaska) Corp, utilization of its United
States Federal and State of Alaska net operating losses will be
limited due to the annual limitation provided by Section 382 of the
Internal Revenue Code.
During
2019, the valuation allowance increased primarily due to the
addition of deferred tax assets related to current year net
operating losses. During 2018, the valuation allowance decreased
primarily due to the adjustments to deferred taxes that were part
of the Zazu acquisition and the disposition of royalties that were
part of the Yanacocha sale.
At
December 31, 2019, Solitario has unused US Federal Net Operating
Loss carryovers of $17,576,000 and unused US State Net Operating
Loss carryovers of $18,174,000 which begin expiring in 2027. As a
result of the ownership change of Zazu Metals (Alaska) Corp,
utilization of some of these federal and state losses will be
limited due to the annual limitation provided by Section 382 of the
Internal Revenue Code. Solitario has unused Capital Loss carryovers
of $10,416,000 for US Federal and US State purposes which begin
expiring in 2020. Solitario has Canadian loss carryforwards of
$9,611,000 which begin expiring in 2027. Other foreign loss
carryforwards for which Solitario has provided a full valuation
allowance related to Solitario’s exploration activities in
Peru. The Peru losses do not expire.
Solitario adopted
ASC 740, which 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 requires that Solitario recognize in its consolidated
financial statements, only those tax positions that are
“more-likely-than-not” of being sustained as of the
adoption date, based on the technical merits of the position. As a
result of the implementation of ASC 740, Solitario performed a
comprehensive review of its material tax positions in accordance
with recognition and measurement standards established by ASC 740.
The provisions of ASC 740 had no effect on Solitario’s
financial position, cash flows or results of operations at December
31, 2019 or December 31, 2018, or for the years then ended as
Solitario had no unrecognized tax benefits.
Solitario and its
subsidiaries are subject to the following material taxing
jurisdictions: United States Federal, State of Colorado, State of
Alaska, Canada and Peru. Solitario’s United States federal,
Canada and State of Alaska returns for years 2017 and forward and
Solitario’s Peru and State of Colorado returns for tax years
2015 and forward are subject to examination. Solitario’s
policy is to recognize interest and penalties related to uncertain
tax benefits in income tax expense. Solitario has no accrued
interest or penalties related to uncertain tax positions as of
December 31, 2019, or December 31, 2018 or for the years then
ended.
8.
Derivative
Instruments:
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 income 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 and any changes in the fair
value of its covered calls are recognized in the statement of
operations in the period of the change. During 2019 Solitario sold
covered calls against its holdings of Kinross for $9,000 in cash,
all of which expired unexercised during 2019. As of December 31,
2019, there were no remaining liabilities related to call
options.
Vendetta Warrants
At
December 31, 2019 Solitario held 2019 Vendetta Warrants which give
Solitario the right to purchase 3,450,000 Vendetta common shares
for Cdn$0.13 per share through July 31, 2022. At December 31, 2019,
Solitario recorded 2019 Vendetta Warrants at their fair value of
$21,000 based upon a Black Scholes model with a stock price of
Cdn$0.05, a term of 2.6 years, a volatility of 65%, and an interest
rate of 1.6%. Solitario recorded a loss on derivative instruments
related to the 2019 Vendetta Warrants of $47,000 during
2019.
The
following items comprise gain (loss) on derivative
instruments:
|
(in
thousands)
|
|
|
|
|
|
|
Gain on
Kinross calls – realized
|
$9
|
$-
|
|
Loss on
Vendetta Warrants – unrealized
|
(47)
|
-
|
|
|
$(38)
|
$-
|
9.
Fair Value of Financial
Instruments:
For
certain of Solitario's financial instruments, including cash and
cash equivalents, the SilverStream Note, payables and short-term
debt, the carrying amounts approximate fair value due to their
short maturities. Solitario's marketable equity securities,
including its investment in shares of Kinross common stock,
Vendetta common stock and TNR Gold Corp (“TNR”) common
stock, are carried at their estimated fair value based on publicly
available quoted market prices.
Solitario applies
ASC 820 that 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 years ended
December 31, 2019 and 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
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
|
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, 2018:
|
(in
thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Short-term
investments
|
$10,223
|
$-
|
$-
|
$10,223
|
|
Marketable
equity securities
|
$1,585
|
$-
|
$-
|
$1,585
|
Items measured at fair value on a recurring basis:
Short-term investments: At December 31, 2019 and 2018,
Solitario’s holdings of short-term investments consist of
USTS recorded at their fair value based upon quoted market
prices.
Marketable equity securities: At December 31, 2019 and 2018, the
fair value of Solitario’s holdings in shares of Vendetta,
Kinross, and TNR marketable equity securities are based upon quoted
market prices.
2019 Vendetta Warrants: At December 31, 2019 the fair value
of Solitario’s 2019 Vendetta Warrants is based upon a Black
Scholes model, using market inputs.
During
the year ended December 31, 2019, Solitario did not change any of
the valuation techniques used to measure its financial assets and
liabilities at fair value.
10.
Commitments and
Contingencies:
In
acquiring its interests in mineral claims and leases, Solitario has
entered into lease agreements, which may be canceled at its option
without penalty. Solitario is required to make minimum rental and
option payments in order to maintain its interests in certain
claims and leases. See Note 2, “Mineral Properties,”
above. Solitario estimates its 2020 property rentals and option
payments for properties Solitario owns, has under joint venture or
Solitario operates to be approximately $859,000. Assuming that
Solitario’s joint ventures continue in their current status
and that Solitario does not appreciably change its property
positions on existing properties, approximately $816,000 of these
annual payments are paid or are reimbursable to us by
Solitario’s joint venture partners. Solitario may be required
to make further payments in the future if it acquires new
properties or enters into new agreements.
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 annual rent
payments of $43,000 through March of 2021.
11.
Employee Stock
Compensation Plans:
On June
18, 2013, Solitario’s shareholders approved the Solitario
Resources Corporation Omnibus Stock Incentive Plan (the “2013
Plan”). Under the terms of the 2013 Plan, as amended, a total
of 5,750,000 shares of Solitario common stock are reserved for
awards to directors, officers, employees and consultants. 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.
a.) 2013
Plan stock option grants
The
following table shows the grant date fair value of
Solitario’s awards during 2019 pursuant to the 2013
Plan:
|
Grant
Date
|
|
|
Option –
grant date price
|
$0.28
|
|
Options
granted
|
150,000
|
|
Expected life
years
|
5.0
|
|
Expected
volatility
|
64%
|
|
Risk free interest
rate
|
2.4%
|
|
Weighted average
fair value
|
$0.16
|
|
Grant date fair
value
|
$23,000
|
(1)
Option grants have
a five-year term, and vest 25% on date of grant and 25% on each of
the next three anniversary dates.
The
following table shows the grant date fair value of
Solitario’s awards during 2018 pursuant to the 2013
Plan:
|
Grant
Date
|
|
|
|
Option –
grant date price
|
$0.62
|
$0.31
|
|
Options
granted
|
100,000
|
1,623,000
|
|
Expected life
years
|
0.80
|
5.00
|
|
Expected
volatility
|
66%
|
64%
|
|
Risk free interest
rate
|
1.0%
|
3.0%
|
|
Weighted average
fair value
|
$0.12
|
$0.17
|
|
Grant date fair
value
|
$12,000
|
$282,000
|
(2)
Option granted to a
consultant had an expected life of 0.8 years on grant date and was
fully vested during 2018. Option remains vested for a maximum of
five years from date of grant or termination of the consulting
contract.
(3)
Option grants have
a five-year term, and vest 25% on date of grant and 25% on each of
the next three anniversary dates.
b.) Stock
option activity
During
2019 and 2018 no options granted from the 2013 Plan were exercised.
The following table summarizes the activity for stock options
outstanding under the 2013 Plan for the years ended December 31,
2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
beginning of year
|
5,223,160
|
$0.76
|
|
1,982,428
|
$1.29
|
|
|
Granted
(3)
|
150,000
|
$0.28
|
|
4,023,000
|
$0.58
|
|
|
Exercised
|
-
|
-
|
|
-
|
-
|
|
|
Expired
|
(1,000,160)
|
$1.47
|
|
(782,268)
|
$2.09
|
|
|
Forfeited
|
-
|
-
|
|
-
|
-
|
|
|
Outstanding, end of
year
|
4,373,000
|
$0.58
|
$3,000
|
5,223,160
|
$0.76
|
$-
|
|
Exercisable, end of
year
|
2,774,000
|
$0.63
|
$840
|
2,770,910
|
$0.95
|
$-
|
(1)
Intrinsic value based upon December 31, 2019 price of a share of
Solitario common stock as quoted on the NYSE American exchange of
$0.30 per share.
(2)
Intrinsic value based upon December 31, 2018 price of a share of
Solitario common stock as quoted on the NYSE American exchange of
$0.23 per share.
(3)
Options granted during 2018, include 2,300,000 Conditional Options
(defined below), approved by Solitario shareholders on June 19,
2018.
During
the years ended December 31, 2019 and 2018, Solitario recorded
$343,000 and $660,000, respectively, of stock option expense under
the 2013 Plan for the amortization of the grant date fair value of
each of its outstanding options with a credit to additional
paid-in-capital. At December 31, 2019, the total unrecognized stock
option compensation cost related to non-vested options is $317,000
and is expected to be recognized over a weighted average period of
14 months.
On
September 1, 2017, the Board of Directors granted, subject to
shareholder approval at the next meeting of shareholders, 2,300,000
stock options under the 2013 Plan to officers and members of the
Board of Directors (the “Conditional Options”). The
Conditional Options were approved by Solitario’s shareholders
at Solitario’s annual meeting on June 19, 2018. The
Conditional Options vest on the schedule of 25% on date of approval
of the grant (June 19, 2018) and 25% on each of the next three
anniversary dates of the date of grant (September 1, 2018, 2019 and
2020).
12.
Shareholders’ equity
and accumulated other comprehensive income
We adopted ASU 2016-01, “Financial
Instruments – Overall (subtopic 825-10) Recognition and
Measurement of Financial Assets and Liabilities,” (“ASU
2016-01”). ASU
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 2016-01 requires the change in fair value of many equity
investments to be recognized in net income. Solitario adopted ASU 2016-01 in the first quarter
of 2018. Solitario recorded a cumulative-effect adjustment
for the change in accounting principle from other comprehensive
income in the equity section of the consolidated balance sheet to
accumulated deficit of $576,000 related to the adoption of ASU
2016-01.
13.
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 years ended December 31, 2019 and 2018, Solitario purchased
38,400 and 263,100 shares of Solitario common stock, respectively,
for an aggregate purchase price of $13,000 and $101,000,
respectively. As of December 31, 2019, Solitario has purchased a
total of 969,300 shares for an aggregate purchase price of $462,000
under the share repurchase program since its
inception.
13.
Subsequent
events
Solitario
has
evaluated events subsequent to December 31, 2019 to assess the need
for potential recognition or disclosure in this report. Such events
were evaluated through the date these financial statements were
available to be issued. Based upon this evaluation, it was
determined that no subsequent events occurred that require
recognition or disclosure in the financial
statements.