UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 (Mark One)

 

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

 

For the quarterly period ended      June 30, 2018March 31, 2019      

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)

 

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)
84-1285791
(I.R.S. Employer Identification No.
80033
(Zip Code)

 

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.

YES S NO  £

 

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).

 

YES  S NO  £

 

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  £Accelerated filer  £Non-accelerated filer
(do not check if a smaller
reporting company)£  ☐
Smaller reporting company  S

Emerging Growth Company£  ☐

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES   £ NO  S

          

 There were 58,287,56658,142,866 shares of $0.01 par value common stock outstanding as of July 30, 2018.

May 6, 2019.

 1 

 

TABLE OF CONTENTS

 

 

PART 1 - FINANCIAL INFORMATION Page
   
Item 1     Financial Statements  3 
     
Item 2    Management's Discussion and Analysis of Financial    
               Condition and Results of Operations  16 
     
Item 3    Quantitative and Qualitative Disclosures About Market Risk  2321 
     
Item 4    Controls and Procedures  2321 
     
PART II - OTHER INFORMATION    
     
Item 1    Legal Proceedings  2322 
     
Item 1A   Risk Factors  2322 
     
Item 2    Unregistered Sales of Equity Securities and Use of Proceeds  2422 
     
Item 3    Defaults Upon Senior Securities  2422 
     
Item 4    Mine Safety Disclosures  2422 
     
Item 5    Other Information  2423 
     
Item 6    Exhibits  2423 
     
SIGNATURES  2524 
     

 2 

 

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements

SOLITARIO ZINC CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands of U.S. dollars, June 30, December 31, March 31, December 31,
except share and per share amounts) 2018 2017 2019 2018
 (unaudited)   (unaudited)  
Assets
Current assets:                
Cash and cash equivalents $210  $214  $538  $117 
Short-term investments  11,121   11,642   9,595   10,223 
Investments in marketable equity securities, at fair value  1,980   2,643   1,259   1,585 
Prepaid expenses and other  78   114   436   211 
Total current assets  13,389   14,613   11,828   12,136 
                
Mineral properties  15,657   15,657   15,617   15,657 
Other assets  121   125   176   110 
Total assets $29,167  $30,395  $27,621  $27,903 
                
Liabilities and Shareholders’ Equity
Current liabilities:                
Accounts payable $153  $141  $692  $688 
Operating lease liability  38   —   
Total current liabilities  730   688 
                
Long-term liabilities                
Asset retirement obligation – Lik  125   125   125   125 
Operating lease liability  38   —   
Total long-term liabilities  163   125 
                
Commitments and contingencies                
                
Equity:                
Shareholders’ equity:                
Preferred stock, $0.01 par value, authorized 10,000,000
shares (none issued and outstanding at June 30, 2018 and
December 31, 2017)
  —     —   
Common stock, $0.01 par value, authorized 100,000,000 shares
(58,289,366 and 58,434,566 shares, respectively, issued
and outstanding at June 30, 2018 and December 31, 2017)
  583   584 
Preferred stock, $0.01 par value, authorized 10,000,000
shares (none issued and outstanding at March 31, 2019 and
December 31, 2018)
  —     —   
Common stock, $0.01 par value, authorized 100,000,000 shares
(58,143,566 and 58,171,466 shares, respectively, issued
and outstanding at March 31, 2019 and December 31, 2018)
  582   582 
Additional paid-in capital  69,690   69,312   69,952   69,873 
Accumulated deficit  (41,384)  (39,767)  (43,806)  (43,365)
Total shareholders’ equity  28,889   30,129   26,728   27,090 
Total liabilities and shareholders’ equity $29,167  $30,395  $27,621  $27,903 

 

See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents 

SOLITARIO ZINC CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands of U.S. dollars, except share and per share amounts) Three months ended
June 30
 Six months
ended
June 30
(in thousands of U.S. dollars, except per share amounts) Three months ended
March 31
 2018 2017 2018 2017 2019 2018
        
Revenue - mineral property sale $502  $—    $502  $—   
Revenue, net – mineral property sale $408  $—   
                        
Costs, expenses and other:                        
Exploration expense  162   188   342   339  $163  $180 
Depreciation and amortization  6   1   12   2 
Depreciation  7   6 
General and administrative  762   560   1,165   860   425   403 
Total costs, expenses and other  930   749   1,519   1,201   595   589 
Other (loss) income                        
Interest income (net)  37   30   63   76   72   26 
Unrealized (loss) gain on marketable equity securities  (222)  333   (663)  461 
Gain on derivative instruments  —     113   —     285 
Total other (loss) income  (185)  476   (600)  822 
Net Loss $(613) $(273) $(1,617) $(379)
Unrealized (loss) on marketable equity securities  (326)  (441)
Total other loss  (254)  (415)
Net loss $(441) $(1,004)
Loss per common share:                        
Basic and diluted $(0.01) $(0.01) $(0.03) $(0.01) $(0.01) $(0.02)
Weighted average shares outstanding (000’s):                
Weighted average shares outstanding:        
Basic and diluted  58,390   38,655   58,439   38,678   58,158   58,444 
                        

 

See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents 

SOLITARIO ZINC CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands of U.S. dollars) Six months ended
June 30,
 Three months ended
March 31,
 2018 2017 2019 2018
Operating activities:                
Net loss $(1,617) $(379) $(441) $(1,004)
Adjustments to reconcile net loss to net cash used in operating activities:                
                
Depreciation and amortization  12   2   7   6 
Unrealized loss (gain) on sale of marketable equity securities  663   (461)
Accrued interest income  —     (13)
Non-cash office lease expense  10   —   
Unrealized loss of marketable equity securities  326   441 
Employee stock option expense  442   —     88   10 
Unrealized gain on derivative instruments  —     (285)
Changes in operating assets and liabilities:                
Prepaid expenses and other current assets  48   (36)
Prepaid expenses and other assets  64   32 
Note receivable, net of mineral property sold  (223)  —   
Accounts payable and other current liabilities  12   119   (3)  24 
Net cash used in operating activities  (440)  (1,053)  (172)  (491)
Investing activities:                
Sale of short-term investments, net  509   2,496   602   408 
Loan to Zazu  —     (1,500)
Purchase of other assets  (8)  —     —     (8)
Proceeds from the sale of marketable equity securities  —     259 
Purchase of marketable equity securities  —     (167)
Sale of derivative instruments  —     43 
Net cash provided by investing activities  501   1,131   602   400 
Financing activities:                
Purchase of common stock for cancellation  (65)  (28)  (9)  (26)
Net cash used in financing activities  (65)  (28)  (9)  (26)
                
Net (decrease) increase in cash and cash equivalents  (4)  50 
Net increase (decrease) in cash and cash equivalents  421   (117)
Cash and cash equivalents, beginning of period  214   119   117   214 
Cash and cash equivalents, end of period $210  $169  $538  $97 
        
        

 

See Notes to Unaudited Condensed Consolidated Financial Statements

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Table of Contents 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.       Business and Significant Accounting Policies

 

Business and company formation

 

Solitario Zinc Corp. (“Solitario”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. Although Solitario has owned exploration projects in both precious and base metals in the past, Solitario has shifted its primary focus tois primarily focused on the acquisition and exploration of zinc-related exploration mineral properties, since the Acquisition (defined below). However,however Solitario may stillwill evaluate and / or acquire other base and precious metal projects as part of its overall mineral property activity.exploration properties. In addition to focusing on its mineral exploration properties and the evaluation of mineral properties for acquisition, or purchase of royalty interests, Solitario also evaluates potential strategic transactions for the acquisition of new precious and base metal properties and assets with exploration potential or business combinations that Solitario determines to be favorable to Solitario.

 

Solitario has recorded revenue in the past from the sale of mineral property, including the sale on April 26,of certain mineral royalty properties in January 2019, discussed below, the sale in June 2018 of its interest in the royalty on the Yanacocha property (discussed below) andproperty. In addition, Solitario has received proceeds from the sale in 2015 of its former interest in Mount Hamilton LLC (“MH-LLC”) the owner of its former Mt. Hamilton project, (the “Mt. Hamilton Transaction”), and joint venture property payments and the sale of a royalty on its former Mt. Hamilton project. Revenues 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 revenuecash 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 expected to continue the developmentexploration 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 and evaluate potential development plans for the Lik project.

 

As of June 30, 2018,March 31, 2019, Solitario has significant balances of cash and short-term investments that Solitario anticipates using, in part, to further the developmentexploration 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 and six months ended June 30, 2018March 31, 2019 are unaudited and are prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”). They do not include all disclosures required by generally accepted accounting principles for annual financial statements, but in the opinion of management, include all adjustments, consisting only of normal recurring items, necessary for a fair presentation. Interim results are not necessarily indicative of results, which may be achieved in the future or for the full year ending December 31, 2018.2019.

6

 

These financial statements should be read in conjunction with the financial statements and notes thereto which are included in Solitario’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. 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.

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Recent Developments

 

Sale of the Yanacocha Royalty sale

 

On April 26, 2018January 22, 2019, Solitario soldcompleted the sale of its royalty interest in certain royalties to SilverStream SEZC (“SilverStream”), a private Cayman Island royalty and streaming company 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 Yanacocha property (the “Yanacocha Royalty”) toexploration properties in Mexico, and (iii) a wholly owned subsidiary of Newmont Mining Corporation (“Newmont”) for approximately US$502,000purchase option on 11 separate non-producing properties covering over 16,500 acres in cash. The Yanacocha Royalty covered 43 concessions totaling 36,052 hectares. Newmont owns the underlying mineral concessions covered by the Yanacocha Royalty. NoneMontana. On closing of the concessions coveredRoyalty Sale, Solitario received Cdn$250,000 in cash and a convertible note from SilverStream for Cdn$350,000 (the “SilverStream Note”). The SilverStream Note is due December 31, 2019, pays 5% per annum simple interest quarterly, and is convertible into common shares of SilverStream, at the discretion of SilverStream, by providing Solitario a notice of conversion. SilverStream may only provide a notice of conversion if SilverStream has completed an initial public offering during the Yanacocha Royalty have any reported reserves or resources.term of the SilverStream Note for minimum proceeds of Cdn$5,000,000. Per the terms of the SilverStream Note, if converted, Solitario had nowould 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 the three months ended March 31, 2019, Solitario recorded mineral property capitalized costrevenue 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. As of March 31, 2019, the approximate fair value of the SilverStream Note was $262,000, based upon the current US Dollar / Canadian Dollar exchange rate, and Solitario recorded a charge to exchange gain and loss of $1,000, included in the Yanacocha Royaltygeneral and recorded Mineral Property Revenue of $502,000administrative expense during the three and six months ended June 30, 2018.

Purchase of Zazu

On July 12, 2017, Solitario completed the acquisition of Zazu Metals Corp. (“Zazu”) pursuant to a definitive arrangement agreement between Solitario and Zazu whereby Solitario agreed to acquire all the issued and outstanding common shares of Zazu (the "Zazu Shares") by way of a statutory plan of arrangement (the "Arrangement") under theCanada Business Corporations Act (the “Acquisition”). The Arrangement was approved by the Ontario (Canada) Superior Court of Justice on July 7, 2017. Per the Arrangement, Solitario issued 19,788,177 shares of its common stock on July 12, 2017 in exchange for all of the issued and outstanding Zazu Shares, which represented 0.3572 shares of Solitario common stock for each outstanding Zazu Share. Zazu had one primary asset, its interest in the Lik project, and the Acquisition was treated as an asset purchase in accordance with Financial Accounting Standard Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-01 “Business Combinations.” Solitario granted stock options to acquire an aggregate of 1,782,428 shares of Solitario common stock to Zazu option holders the (“Replacement Options”) in connection with the Acquisition. The total purchase price of $16,110,000 was recorded during the year ended DecemberMarch 31, 2017.2019.

 

Financial reporting

 

The condensed 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 adopted ASU 2014-09 (defined below under “Recent accounting pronouncements”) on January 1, 2018. ASU 2014-09 primarily impactshas recorded revenue recognition based upon the timing of transfer of control of goods and services sold. Solitario’s recorded the revenue of $502,000 from the sale of exploration mineral properties and joint venture property payments. Solitario’s policy is to recognize revenue from the Yanacocha Royalty in accordance with ASU 2014-09.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. ProceedsIn 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, discussed above in accordance with Accounting Standards Codification (“ASC”) 606. In addition, Solitario recorded revenue during the second quarter of 2018 for the first time in more than five years of $502,000 from the sale of properties which exceedits Yanacocha exploration mineral property. Solitario expects any property sales in the capitalized cost of the property without reserves are recognized as revenue. Payments receivedfuture to also be on an infrequent basis. Prior to the sale of its Yanacocha exploration mineral property, 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 with reserves are recognized as revenuefor the foreseeable future. Historically, Solitario’s revenues have been infrequent and significant individual transactions and have only been from sales to the extent the proceeds exceed the proportionate basis in the assets sold.well known or vetted mining companies. Solitario records delay rental paymentshas never had a return on any of its sales recorded as revenue in the period received. There were no delay rentals in the periods presented.its history and does not anticipate it will recognize any estimated returns on its current or future recorded revenues.

7

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Some of the more significant estimates included in the preparation of Solitario's financial statements pertain to: (i) Solitario’s carrying value of short-term investments; (ii) the recoverability of mineral properties related to its mineral exploration properties and their future exploration potential; (iii) the fair value of stock option grants to employees, to officers and directors and to others; (iv) the ability of Solitario to realize its deferred tax assets; and (v) Solitario's investment in marketable equity securities.

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Table of Contents

 

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 June 30, 2018, a portionMarch 31, 2019, $516,000 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 June 30, 2018,March 31, 2019, Solitario has $9,424,000$9,277,000 of its current assets in USTSUnited States Treasury Securities (“USTS”) with maturities ranging fromof 15 days to 2220 months. The USTS are recorded at their fair value, based upon quoted market prices. As of June 30, 2018, Solitario has $1,247,000 in separate bank certificates of deposit (“CDs”) each with a maximum value of $250,000,prices and each of which are not covered byunder the FDIC insurance to the full-face value of the CDs. At June 30, 2018, these CDs have maturities of between one and nine months. At June 30, 2018 Solitario has $450,000 in two CD’s with a Peruvian bank with a maturity of two and three months, respectively.rules for United States deposits. Solitario’s short-term investments are recorded at their fair value, based upon quoted market prices. The short-term investmentsUSTS are highly liquid and may be sold in their entirety at any time at their quoted market price and are classified as a current asset.

 

Mineral properties

          

Solitario expenses all exploration costs incurred on its mineral properties prior to the establishment of proven and probable reserves through the completion of a feasibility study. Initial acquisition costs of Solitario’sits mineral properties are capitalized. Solitario capitalizes all of its development expenditures on its projects, subsequent to the completion of a feasibility study. Solitario regularly performs evaluations of its investment in mineral properties to assess the recoverability and/or the residual value of its investments in these assets. All long-lived assets are reviewed for impairment whenever events or circumstances change which indicate the carrying amount of an asset may not be recoverable, utilizing established guidelines based upon undiscounted future net cash flows from the asset or upon the determination that certain exploration properties do not have sufficient potential for economic mineralization.

 

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 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 Accounting Standards Codification (“ASC”) No. 815, "Accounting for Derivative Instruments and Hedging Activities" (“ASC 815”).815. Solitario has entered into covered calls from time to time on its investment in Kinross Gold Corporation (“Kinross”) marketable equity securities. In addition, during 2017, Solitario owned warrants exercisable to acquire shares of Vendetta Mining Corp. (“Vendetta”) common stock (the “Vendetta Warrants”). Each Vendetta Warrant allowed Solitario to purchase one share of Vendetta common stock at a price of Cdn$0.10 per share for a period of two years. At June 30, 2018, Solitario no longer owned any Vendetta Warrants. Solitario has not designated its covered calls as hedging instruments and any changes in the fair value of the covered calls and the Vendetta Warrants are recognized in the statement of operations in the period of the change as gain or loss on derivative instruments.

8

 

Fair value

 

FASB ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), establishesestablished a framework for measuring fair value of financial instruments and requires enhancedrequired disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. For certain of Solitario's financial instruments, including cash and cash equivalents and accounts payable, the carrying amounts approximate fair value due to their short-term maturities. Solitario's short-term investments in USTS and CDs, its marketable equity securities and any covered call options against those marketable equity securities are carried at their estimated fair value based on quoted market prices.

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See Note 6, “Fair Value,” 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. During the first six months of 2018 Solitario adopted ASU 2016-01, “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825)” (“ASU 2016-01”). In accordance with ASU 2016-01, changesChanges in fair value are recorded as unrealized gain or loss in the consolidated statement of operations during the period of the change. During the first six months of 2018 Solitario recorded a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption of ASU 2016-01. See Note 9, “Shareholders’ Equity and Other Comprehensive Income”, below.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 20172018 and the first halfquarter of 20182019 have been conducted primarily in Peru, a portion of the payments under the land, leasehold and exploration agreements of Solitario are denominated in United States dollars. Realized foreign currency gains and losses are included in the results of operations in the period in which they occur.

 

Income taxes

 

Solitario accounts for income taxes in accordance with ASC 740, “Accounting for Income Taxes” (“ASC 740”). Under ASC 740, income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses and tax credits that are available to offset future taxable income and income taxes, respectively. A valuation allowance is provided if it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

Accounting for uncertainty in income taxes

 

ASC 740 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. ASC 740 provides that a company's tax position will be considered settled if the taxing authority has completed its examination, the company does not plan to appeal, and it is remote that the taxing authority would reexamine the tax position in the future. The provisions of ASC 740 had no effect on Solitario's financial position or results of operations.

 

Earnings per share

 

The calculation of basic and diluted earnings (loss) per share is based on the weighted average number of shares of common stock outstanding during the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. Potentially dilutive shares related to outstanding common stock options exercisable to acquire 4,025,228of 4,373,000 and 2,082,428, respectively, for Solitario common shares for the three and six months ended June 30,March 31, 2019 and 2018 were excluded from the calculation of diluted earnings (loss) per share because the effects were anti-dilutive. There were no similar potentially dilutive securities outstanding during the three and six months ended June 30, 2017.

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Employee stock compensation and incentive plans

 

Solitario classifies all of its stock options as equity options in accordance with the provisions of ASC 718, “Compensation – Stock Compensation.”

 

Recent accounting pronouncements

 

In May 2014, the FASB issuedOn January 1, 2019, Solitario adopted Accounting Standards Update ("ASU") 2014-09,No. 2016-02Revenue from Contracts with Customers (Topic 606),Leases (“ASU 2014-09”2016-02”), which amendedrequires the existing accounting standards for revenue recognition. ASU No. 2014-09 establishes principles for recognizing revenue upon an entity’s determination forapplication of ASC 842 and the transferrecognition of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017. ASU 2014-09 also requires additional disclosure about the nature, timingright-of-use assets and uncertainty of revenue and cash flow arising from customer contracts. The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectivelyrelated liabilities associated with the cumulative effect recognized as of the date of initial application (modified retrospective). Solitario adopted ASU 2014-09 on January 1, 2018. Solitario applied the full retrospective approach in the adoption of ASU 2014-09, which had no impact on its previously issued consolidated financial statements as Solitario had no recorded revenue or pending contracts for the sale of property, goods or services for the comparative prior periods presented as of January 1, 2018.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. ForAs a lessor, the accounting applied is also largely unchanged from previous guidance. The new rules will be effective for Solitario in the first quarterresult of 2019. Solitario does not anticipate early adoption. Solitario does not expect the adoption of ASU 2016-02 to materially change its current accounting methods and therefore it does not expect the adoption to have a material impact on its consolidated financial position or results of operations.

In January 2016 the FASB issued ASU 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. ASU 2016-01 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. Solitario adopted ASU 2016-01 in the first quarter of 2018.1, 2019, Solitario recorded a cumulative-effect adjustmentboth an operating lease asset for the change in accounting principle to retained earningsour Wheat Ridge Colorado office of $576,000$82,000 and an operating lease liability of $82,000 related to the same lease. The adoption of ASU 2016-01. See Note 9, “Shareholders’ Equity2016-02 did not require the recording of any other assets or liabilities on our condensed consolidated balance sheets and Accumulated Other Comprehensive Income,” below.

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02), which allows for a reclassification from accumulated other comprehensive income or loss to retained earnings or accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA”). ASU 2018-02 also requires certain related disclosures. ASU 2018-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. Early adoption is permitted. Solitario is currently evaluating the impact of ASU 2018-02 but does not believe it will have a materialhad an immaterial effect on Solitario’s financial position or resultscondensed consolidated statement of operations.operations and its condensed consolidated statement of cash flows for the three months ended March 31, 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.

 

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2.        Mineral Property

 

The following table details Solitario’s investment in Mineral Property:

(in thousands) June 30, December 31, March 31,
 2018 2017 2019 2018
Exploration            
Lik project (Alaska – US) $15,611  $15,611  $15,611  $15,611 
La Promesa (Peru)  6   6   6   6 
Montana Royalty property (US)  40   40   —     40 
Total exploration mineral property $15,657  $15,657  $15,617  $15,657 

 

All exploration costs on our exploration properties, none of which have proven and probable reserves, including any additional costs incurred for subsequent lease payments or exploration activities related to our projects are expensed as incurred.

 

Royalty sale

On January 22, 2019, Solitario completed the Royalty Sale, discussed above under “Recent Developments” to SilverStream for Cdn$600,000. On closing of the Royalty Sale, Solitario received Cdn$250,000 in cash and the SilverStream Note for Cdn$350,000, with a maturity date of December 31, 2019. During the three months ended March 31, 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.

Exploration expense

 

The following items comprised exploration expense:

 

(in thousands) Three months ended
 June 30,
 Six months ended
 June 30,
 Three months ended
 March 31,
 2018 2017 2018 2017 2019 2018
Geologic and field expenses $21  $99  $45  $121  $147  $24 
Administrative  141   89   297   218   16   156 
Total exploration costs $162  $188  $342  $339  $163  $180 

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Asset Retirement Obligation

 

In connection with the Acquisition,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% joint venture partner, Teck, doesdo not complete required reclamation.

 

Solitario has not applied a discount rate to the recorded asset retirement obligation as the estimated time frame for reclamation is not currently known, as reclamation is not expected to occur until the end of the Lik project life, which would follow future development and operations, the start of which cannot be estimated or assured at this time. Additionally, no depreciation will be recorded on the related asset for the asset retirement obligation until the Lik project goes into operation, which cannot be assured.

 

3.        Marketable Equity Securities

 

Solitario's investments in marketable equity securities are classified as available-for-sale and are carried at fair value, which is based upon quoted prices of the securities owned. The cost of marketable equity securities sold is determined by the specific identification method. Changes in market value are recorded in the condensed consolidated statement of operations. During the three and six months ended June 30,March 31, 2019, Solitario recorded an unrealized loss on marketable equity securities of $326,000. During the three months ended March 31, 2018, Solitario recorded an unrealized loss on marketable equity securities of $222,000 and $663,000, respectively. During the three and six months ended June 30, 2017, Solitario recorded an unrealized gain on marketable equity securities of $333,000 and $461,000, respectively.

On May 2, 2016 Solitario purchased 7,240,000 units of Vendetta for aggregate consideration of $289,000. Each unit included one common share of Vendetta and one Vendetta Warrant. The total purchase price for the units of $289,000 was allocated between the Vendetta common shares and the Vendetta Warrants based upon total fair values on the date of purchase. The Vendetta common shares were allocated a purchase cost of $186,000 and the Vendetta Warrants were allocated a purchase cost of $103,000. During the six months ended June 30, 2017, Solitario sold 1,480,000 common shares of Vendetta for proceeds of $259,000, and a recorded cost of $38,000. In addition, during the six months ended June 30, 2017 Solitario exercised 2,240,000 of the Vendetta Warrants it held and received 2,240,000 Vendetta common shares, by paying $167,000 (Cdn$224,000) to Vendetta. The cost of the common shares received from the exercise of the Vendetta Warrants was recorded based upon the total of the (i) exercise price of the Vendetta Warrants exercised, $167,000, and (ii) the fair value of the Vendetta Warrants on the date of exercise, which equaled their intrinsic value, $309,000, for a total value of $476,000. During 2017, subsequent to June 30, 2017, Solitario exercised its remaining 5,000,000 Vendetta Warrants by paying $441,000 and owns 11,000,000 common shares of Vendetta and no Vendetta Warrants as of June 30, 2018 and December 31, 2017.

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$441,000.

 

The following tables summarize Solitario’s marketable equity securities and adjustments to fair value:

(in thousands) June 30,
    2018
 December 31,
    2017
 March 31,
2019
 December 31,
2018
Marketable equity at cost $1,714  $1,714 
Unrealized gain on marketable equity securities  266   929 
Marketable equity securities at cost $1,714  $1,714 
Cumulative unrealized loss on marketable equity securities  (455)  (129)
Marketable equity securities at fair value $1,980  $2,643  $1,259  $1,585 

         

The following table represents changes, including sales, in marketable equity securities during the three and six months ended June 30,March 31, 2019 and 2018:

(in thousands) Three months ended
March 31,
  2019 2018
Gross (loss) recorded in the statement of operations $(326) $(441)
Change in marketable equity securities at fair value $(326) $(441)

Solitario did not sell any marketable equity securities during the three months ended March 31, 2019 or 2018 and 2017: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 the periods.

 

(in thousands) Three months ended
June 30,
 Six months ended
June 30,
  2018 2017 2018 2017
Cost of marketable equity securities sold $—    $—    $—    $38 
Realized gain on marketable equity securities sold  —     —     —     221 
Proceeds from the sale of marketable equity securities sold  —     —     —     (259)
Purchase of marketable equity securities  —     —     —     477 
Gross unrealized (loss) gain recorded in the statement of operations  (222)  333   (663)  461 
Change in marketable equity securities at fair value $(222) $333  $(663) $679 
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4.        Leases

 

4.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 23 months at March 31, 2019, with no renewal option. At March 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 condensed 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 the three months ended March 31, 2019, Solitario recognized $10,000 of non-cash lease expense for the WR Lease included in general and administrative expense. Cash lease payments of $7,000 were made on the WR Lease during the three months ended March 31, 2019 and this amount, less $1,000 of imputed interest, 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, 2019:

(in thousands) 
  
2019  $   31 
202042 
2021  7 
Total lease payments80 
  Less amount of payments representing interest(4)
Present value of lease payments$  76 

Supplemental cash flow information related to our operating lease was as follows for the period ended March 31, 2019:

(in thousands) Three months ended March 31,
  2019
Cash paid for amounts included in the measurement of lease liabilities    
   Operating cash outflows from WR Lease payments $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) June 30, December 31
  2018 2017
Furniture and fixtures, net of accumulated depreciation $37  $31 
Lik project equipment, net of accumulated depreciation  80   90 
Exploration bonds and other assets  4   4 
Total other assets $121  $125 

5.        Derivative Instruments

Vendetta Warrants

During the six months ended June 30, 2017, Solitario exercised 2,240,000 of the Vendetta Warrants it held and received 2,240,000 Vendetta common shares, by paying $167,000 (Cdn$224,000) to Vendetta. As a result, as of June 30, 2017, Solitario owned 5,000,000 Vendetta Warrants, which were carried at fair value, based upon a Black-Scholes model. During the three and six months ended June 30, 2017, Solitario recorded a gain on derivative instruments of $99,000 and $247,000, respectively, related to the Vendetta Warrants. Solitario owned no Vendetta Warrants during the three and six months ended June 30, 2018. See Note 3, “Marketable equity securities,” above.

Covered Call Options

From time to time Solitario has sold covered call options against its holdings of Kinross. The business purpose of selling covered calls is to provide additional liquidity on a limited portion of shares of Kinross that Solitario may sell in the near term, which is generally defined as less than one year. Solitario has not designated its covered calls as hedging instruments and records gains or loss on the covered call in the period of the change.

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Solitario recorded the following gain on derivative instruments:

(in thousands) Three months ended
June 30,
 Six months ended
June 30,
  2018 2017 2018 2017
  Gain on Kinross calls $—    $14  $—    $38 
  Gain on Vendetta Warrants  —     99   —     247 
  $—    $113  $—    $285 
(in thousands) March 31, December 31
  2019 2018
Furniture and fixtures, net of accumulated depreciation $34  $36 
Lik project equipment, net of accumulated depreciation  65   70 
Exploration bonds and other assets  4   4 
Office lease asset  73   —   
Total other assets $176  $110 

 

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 CDs and USTS, Kinross covered calls and marketable equity securities are carried at their estimated fair value primarily based on quoted market prices.

Solitario accounts for its financial instruments under ASC 820. ASC 820 establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

·Level 1: quoted prices in active markets for identical assets or liabilities;
·Level 2: quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
·Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. During the three and six months ended June 30, 2018March 31, 2019 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 June 30, 2018:March 31, 2019:

 

(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets                                
Short-term investments $9,595  $—    $—    $9,595 
Marketable equity securities $1,980  $—    $—    $1,980   1,259   —     —     1,259 
United States Treasury securities  9,424   —     —     9,424 
Bank Certificates of Deposit  1,697   —     —     1,697 

 

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The following is a listing of Solitario’s financial assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of December 31, 2017:2018:

 

(in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets                                
Short-term investments $10,223  $—    $—    $10,223 
Marketable equity securities $2,643  $—    $—    $2,643  $1,585  $—    $—    $1,585 
United States Treasury securities  10,395   —     —     10,395 
Bank Certificates of Deposit  1,247   —     —     1,247 

 

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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 June 30, 2018March 31, 2019 and December 31, 2017,2018, 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 and six months ended June 30,March 31, 2019 and 2018, and 2017, 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.

In August of 2018, Solitario agreed to fund a portion of a 2018 – 2019 drilling program at the Florida Canyon project. Per the agreement, Solitario will fund up to $1,580,000 of a planned 41-hole 17,000-meter drilling program to be conducted through December 31, 2019 (the “Drilling Program”). Upon Nexa completing the first 1,700 meters of the Drilling Program, Solitario will pay Nexa $527,000, upon completion of the next 1,700 meters (3,400 meters total) of the Drilling Program, Solitario will pay Nexa $527,000, and upon completion of the next 1,700 meters (5,100 meters total) of the Drilling Program, Solitario will pay Nexa the balance remaining on its $1,580,000 funding commitment, or $526,000. Solitario has no obligation to pay Nexa prior to the attainment of the separate 1,700-meter thresholds. The funding commitments are in the form of an advance on Solitario’s commitment to fund 30% of any future development of Florida Canyon under the existing joint venture agreement with Nexa. Accordingly, in the event Florida Canyon is developed, which cannot be assured at this time, any funds paid to Nexa under this agreement, will reduce the amount of Solitario’s obligation to fund 30% of future development costs, and / or repay loans from Nexa for future development costs at the Florida Canyon project. During 2018, Nexa completed four holes and a total of 2,203 meters under the Drilling Program and Solitario recorded a charge to exploration expense of $527,000. As of March 31, 2019, Solitario has recorded an account payable to Nexa of $527,000, which was paid in April 2019. Should Nexa complete the remaining 2,897 meters (5,100 meters less the completed 2,203 meters) during the remainder of 2019, Solitario will be obligated to pay Nexa $1,053,000 during 2019.

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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 June 30, 2018,March 31, 2019, and December 31, 2017,2018 there were options outstanding that are exercisable to acquire 4,025,2284,373,000 and 1,928,4285,223,160 shares, respectively, of Solitario common stock, respectively. These options have exercisewith option prices between $0.62$0.28 and $0.77 per share and $1.96 per share. Of these, 1,425,228 options are Replacement Options granted in connection with the Acquisition. During the three and six months ended June 30, 2018, 357,200 Replacement OptionsMarch 31, 2019, Solitario granted options exercisable into 150,000 shares of common stock, with an exercise price of $2.24$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. During the sixthree months ended June 30,March 31, 2018, Solitario granted options exercisable to acquireinto 100,000 shares to a consultant, with an exercise price of $0.62 per share, a seven-month term of seven months and having a grant date fair value of $12,000 based upon a Black-Scholes model with a 66% volatility and a 1% risk-free interest rate. There were no stock grants during the three and six months ended June 30, 2017. There were no exercises of options under the 2013 Plan during the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. During the three and six months ended June 30, 2018, Solitario recorded non-cash stock option compensation expense of $432,000 and $442,000, respectively. Solitario had no stock options outstanding and recorded no stock option compensation expense during the three and six months ended June 30, 2017.

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 at Solitario’s annual meeting on June 19, 2018. The Conditional Options have a five-year life, an exercise price of $0.77 per share, and a grant date fair value of $970,000, based upon a Black-Scholes model with a volatility of 64%, and a risk-free interest rate of 1.70%. 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,March 31, 2019 and 2020). Included in the stock options compensation expense during the three and six months ended June 30, 2018, discussed above, Solitario recorded stock option compensation expense of $422,000$88,000 and $10,000. At March 31, 2019, the total unrecognized stock option compensation cost related to non-vested options is $572,000 and is expected to be recognized over a weighted average period of 22 months.

10.        Shareholders’ Equity

Shareholders’ Equity for the vested portion of the Conditional Options approved during the period.three months ended March 31, 2018:

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9.        Shareholders’ Equity and Accumulated Other Comprehensive Income

(in thousands, except        Accumulated           Accumulated  
Share amounts)Common Common Additional   Other Total Common Common Additional   Other Total
Stock Stock Paid-in Accumulated Comprehensive Shareholders’ Stock Stock Paid-in Accumulated Comprehensive Shareholders’
Shares Amount Capital Deficit Income Equity Shares Amount Capital Deficit Income Equity
Balance at December 31, 2017 58,434,566   584  $69,312  $(40,343) $576  $30,129   58,434,566   584  $69,312  $(40,343) $576  $30,129 
Cumulative-effect adjustment
change in accounting principle
 —     —     —     576   (576)  —     —     —     —     576   (576)  —   
Adjusted balance January 1, 2018 58,434,566   584   69,312   (39,767)  —     30,129   58,434,566   584   69,312   (39,767)  —     30,129 
Stock option expense —     —     10   —     —     10   —     —     10   —     —     10 
Purchase of shares for cancellation (52,614)  —     (26)  —     —     (26)  (52,614)  —     (26)  —     —     (26)
Net loss —     —     —     (1,004)  —     (1,004)  —     —     —     (1,004)  —     (1,004)
Balance at March 31, 2018 58,381,952  $584   69,296   (40,771) $—     29,109   58,381,952  $584  $69,296  $(40,771) $—    $29,109 
Stock option expense —     —     432   —     —     432 
Purchase of shares for cancellation (92,586)  (1)  (38)  —     —     (39)
Net loss —     —     —     (613)  —     (613)
Balance at June 30, 2018 58,289,366  $583  $69,690  $(41,384) $—    $28,889 

 

Solitario adopted ASU No. 2016-01 in the first quarter of 2018. ASU No. 2016-01 revised the classification and measurement of investment in certain equity investments and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires the change in fair value of many equity investments to be recognized in net income. Solitario recorded a cumulative-effect adjustment for the change in accounting principle to retained earnings of $576,000 on January 1, 2018 related to the adoption of ASU 2016-01. In addition, as a result of the adoption of ASU 2016-01, Solitario (i) eliminated its previously recorded gain on sale of marketable equity securities of nil and $221,000, respectively, in its consolidated statement of operations for the three months and six months ended June 30, 2017, and (ii) eliminated its previously recorded income tax benefit of $89,000 for the three and six months ended June 30, 2017, which resulted in an adjusted unrealized gain on marketable equity securities of $333,000 and $461,000, respectively, for the three and six months ended June 30, 2017. These changes reduced the net loss

Shareholders’ Equity for the three months ended June 30, 2017 from $517,000 to $273,000 and reduced the net loss for the six months ended June 30, 2017 to $379,000 from $530,000. These changes as a result of the adoption of ASU 2016-01 were similarly reflected in the adjustments to net income and marketable equity securities in the statement of cash flows for the three and six months ended June 30, 2017.March 31, 2019:

(in thousands, except          
Share amounts) Common Common Additional   Total
  Stock Stock Paid-in Accumulated Shareholders’
  Shares Amount Capital Deficit Equity
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 

 

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Share Repurchase Program

 

On October 28, 2015, Solitario’s Board of Directors approved a share repurchase program that authorized Solitario to purchase up to two million shares of its outstanding common stock. During 2017,2018, Solitario’s Board of Directors extended the expiration date of the share repurchase program through December 31, 2018.2019. During the three months ended June 30,March 31, 2019 and 2018, and 2017, Solitario purchased 92,58627,900 and 30,30052,614 shares of Solitario common stock, respectively, for an aggregate purchase price of $39,000$9,000 and $22,000, respectively. During the six months ended June 30, 2018 and 2017, Solitario purchased 145,200 and 39,700 shares of Solitario common stock, respectively, for an aggregate purchase price of $65,000 and $28,000,$26,000, respectively. As of June 30, 2018,March 31, 2019, Solitario has purchased a total of 813,000958,800 shares for an aggregate purchase price of $413,000$458,000 under the share repurchase program since its inception.

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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, 20172018 and 2016,2017, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Solitario’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. 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 at March 31, 2019 under Industry Guide 7, as issued by the SECSEC. We were incorporated in the state of Colorado on November 15, 1984 as a wholly-owned subsidiary of Crown Resources Corporation ("Crown"). In July 1994, we became a publicly traded company on the Toronto Stock Exchange (the "TSX") through our initial public offering. We have been actively involved in mineral exploration since 1993. Our primary business is to acquire exploration mineral properties and/or discover economic deposits on our mineral properties and advance these deposits, either on our own or through joint ventures, up to the development stage (development activities include, among other things, completion of a feasibility study for the identification of proven and probable reserves, as well as permitting and preparing a deposit for mining). At that point, or sometime prior to that point, we would likely attempt to sell a given mineral property, pursue its development either on our own, or through a joint venture with a focus ofpartner that has expertise in mining operations, or obtain a royalty from a third party that continues to advance the acquisition of precious and base metal properties with exploration potential and the development or purchase of royalty interests. Upon the completion of the Acquisition, we have shifted our primary focus towardproperty. We are primarily focused on the acquisition and exploration of zinc-related exploration mineral properties. However, we will continue to evaluate and acquire other mineral properties for acquisitionbase and hold a portfolio ofprecious metal mineral exploration properties and assets for future sale, joint venture or 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.properties. In addition to focusing on our mineral exploration propertiescurrent assets and the evaluation of mineral properties for acquisition, or purchase of royalty interests, we also evaluate potential strategic corporate transactions for the acquisition of new precious and base metal properties and assets with exploration potential.potential or business combinations we determine to be favorable to Solitario.

Our 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. Our exploration properties may be developed in the future by us or through a joint venture, although we have never developed a mineral property. At March 31, 2019, 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, 2019, 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 conduct potential acquisition evaluations in other countries of both South and North America.

 

We have recorded revenue in the past from the sale of mineral properties,property, including the saleRoyalty Sale of our Yanacocha Royalty on April 26, 2018 for $502,000,certain mineral royalty properties in January 2019, discussed above, and the sale in June 2018 of our interest in the royalty on the Yanacocha property. In addition, we have received proceeds from the sale in 2015 of our former interest in MH-LLC during 2015,the owner of our former Mt. Hamilton project, and from joint venture property payments and the sale of a royalty on our former Mt. Hamilton property. Proceedsproject. Revenues and / or proceeds from the sale or joint venture of our properties or assets, although significant when they occur, have not historically been a consistent annual source of cash or revenue and would only occur in the future, if at all, on an infrequent basis in the future.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.

 

We currently consider our carried interest in our Florida Canyon project in Peru and our interest in the Lik project in Alaska to be our core mineral property assets. We expect our joint venture partner will continue the exploration development and furtherance of the Florida Canyon project and we are monitoring progress at the Florida Canyon project. We are planning a joint 2018 exploration program at the Lik project with Teck, our 50% partner at Lik. In addition, at June 30, 2018, we have one exploration property in Peru, and one non-producing royalty property in each of Brazil, United States and Mexico. We are conducting independent exploration activities in Peru and through joint ventures operated by our partners in Peru and the United States. We conduct potential acquisition evaluations in other countries of both South and North America.

As of June 30, 2018,March 31, 2019, we have significant balances of cash and short-term investments that we anticipate using, in part, to further the development of the Lik and Florida Canyon projectsproject 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 advanced mineral exploration projects or other related assets at potentially attractive terms.

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(b) Results of Operations

 

Comparison of the quarter ended June 30, 2018March 31, 2019 to the quarter ended June 30, 2017March 31, 2018

 

We had a net loss of $613,000$441,000 or $0.01 per basic and diluted share for the three months ended June 30, 2018March 31, 2019 compared to a net loss of $273,000$1,004,000 or $0.01$0.02 per basic and diluted share for the three months ended June 30, 2017.March 31, 2018. As explained in more detail below, the primary reasons for the increasedecrease in the net loss in the three months ended June 30, 2018March 31, 2019 compared to the net loss in the first three months ended June 30, 2017of 2018 were (i) an increase in general and administrative expenses to $761,000the Royalty Sale revenue, net, of $408,000 during the three months ended June 30, 2018 compared to general and administrative costs of $560,000March 31, 2019 with no similar mineral property revenue during the three months ended June 30, 2017;March 31, 2018; (ii) a reduction in the recording ofnon-cash loss on unrealized loss on marketable equity securities to $326,000 during the three months ended March 31, 2019 compared to a non-cash unrealized loss on marketable equity securities of $223,000$441,000 during the three months ended June 30, 2018 compared to a non-cash unrealized gain on marketable equity securities of $333,000 during the three months ended June 30, 2017; andMarch 31, 2018; (iii) a decrease to no gain on derivative instruments in the three months ended June 30, 2018 compared to a gain on derivative instruments of $113,000 during the three months ended June 30, 2017. These increases in the net loss during the three months ended June 30, 2018 were partially offset by (i) the recording of mineral property sale revenue of $502,000 from the sale of the Yanacocha Royalty during the three months ended June 30, 2018, with no similar revenue amount during the same period of 2017 and (ii) a decrease in exploration expense to $162,000$163,000 during the three months ended June 30, 2018March 31, 2019 compared to exploration expense of $188,000$180,000 during the three months ended June 30, 2017.March 31, 2018; and (iv) an increase in interest income to $72,000 during the three months ended March 31, 2019 compared to interest income of $26,000 during the three months ended March 31, 2018. Partially offsetting the above items which decreased the loss were (i) an increase in depreciation during the three months ended March 31, 2019 to $7,000 compared to depreciation and amortization of $6,000 during the three months ended March 31, 2018; and (ii) an increase in general and administrative expenses to $425,000 during the three months ended March 31, 2019 compared to general and administrative costs of $403,000 during the three months ended March 31, 2018. 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 under “Recent Developments,” 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, 2018.

Our net exploration expense decreased to $162,000$163,000 during the three months ended June 30, 2018March 31, 2019 compared to exploration expense of $188,000$180,000 during the three months ended June 30, 2017. We decreased our direct exploration expenditures at our Florida Canyon project during 2018 compared to 2017 as we were completing our pre-feasibility economic analysis during 2017, with no similar activity during the three months ended June 30,March 31, 2018. During the three months ended June 30, 2018,March 31, 2019, we were primarily focused on the planning of exploration activities with(i) decreased our joint owner Teck at our Lik project in Alaska and working on exploration plans with our joint venture partner Nexa Resources, Ltd. at our Florida Canyon project in Peru in anticipation of the 2018 exploration season in the second half of 2018. Our reconnaissance exploration activities primarily related to the evaluation of mineral properties and / or entities for potential acquisition or other strategic transactions duringand (ii) decreased our activities at Florida Canyon compared to the three months ended June 30, 2018 and 2017 and the expenditures were comparable during the second quarter of 2018 and the second quarter of 2017. We anticipate a significant increase in our exploration activities and expense during the second half of 2018 as the weather conditions are more conducive to exploration activities at both Lik and Florida Canyon.March 31, 2018. During the three months ended June 30, 2018March 31, 2019 we had three contract geologists in Peru, and our Denver personnel spent a majority of their time on reconnaissance and exploration planning activities described above and related matters. We have budgeted additionalanticipate Nexa will begin the 2019 exploration expenditures related to our Lik project andprogram at our Florida Canyon project during the remaindersecond quarter of 20182019, as discussed above in Note 8, “Contingencies and toCommitments.” Should Nexa complete the extentdrilling program as budgeted, we acquire any newanticipate we will record $1,053,000 in exploration projects, to expandexpense at Florida Canyon for 2019. In addition, we have budgeted approximately $178,000 for our share of exploration at our Lik project in Alaska for the full year of 2019, which the bulk of those activities further.expenses are planned for the third and fourth quarter of 2019. As a result, we expect our full-year exploration expenditures for 20182019 to exceed the expenditures for full-year 2017.2018.

 

Exploration expense (in thousands) by project for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 consisted of the following:

 

 Three months ended
June 30,
 Six months ended
June 30,
 March 31, March 31,
Project Name 2018 2017 2018 2017 2019 2018
Florida Canyon $7  $68  $21  $88  $—    $14 
Lik  10   —     25   —     19   15 
La Promesa  23   11   52   16   24   29 
Reconnaissance  122   109   244   235   120   122 
Total exploration expense $162  $188  $342  $339  $163  $180 

 

General and administrative costs, excluding stock option compensation costs, discussed below, were $330,000$337,000 during the three months ended June 30, 2018March 31, 2019 compared to $559,000$393,000 during the three months ended June 30, 2017.March 31, 2018. The major components of these costs were related to (i) salaries and benefit expense of $162,000$108,000 during the first three months ended June 30, 2018of 2019 compared to salary and benefit costs of $158,000 during the three months ended June 30, 2017;March 31, 2018, as we have reduced staff and taken salary reductions during 2019; (ii) legal and accounting expenditures of $85,000 during$53,000 in the first three months ended June 30, 2018of 2019 compared to $304,000 during$41,000 in the first three months ended June 30, 2017, when we were negotiating the terms and preparing the merger documents for the acquisition of Zazu, which was completed in July of 2017;2018; (iii) office rent and expenses of $35,000$43,000 during the three months ended June 30, 2018,March 31, 2019, compared to $34,000$40,000 during the three months ended June 30, 2017;March 31, 2018; and (iv) travel and shareholder relation costs of $47,000$133,000 during the first three months of 2019 compared to $154,000 during the three months ended June 30,March 31, 2018 as we reduced our outside investor relations efforts during the first three months of 2019 compared to $64,000 during the first three months ended June 30, 2017 when we incurred additional investor relations expense for investor presentations and providing investors with information regarding the Acquisition.of 2018. We anticipate the general and administrative costs will be incurred at comparable quarterly amounts for the remainder of 2018.2019.

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We recorded $432,000$88,000 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, 2019 compared to $10,000 of stock option compensation expense during the three months ended June 30, 2018, which included $422,000 for the amortization of vested grant date fair value for the Conditional Options which were grantedMarch 31, 2018. The increase was related to vesting on September 1, 2017, but were subject to shareholder approval, which was received on June 19, 2018 as discussed in Note 8, “Employee Stock Compensation Plans,” above. There was no comparableadditional stock option expense during the three months ended June 30, 2017 as we had granted no options and had no optionsbeing outstanding during the three months ended June 30, 2017.March 31, 2019 compared to the first quarter of 2018. See Note 9, “Employee Stock Compensation Plans,” above, for additional information on our stock option expense. We anticipate our stock option expense related to vesting of grant date fair value will be comparable to the first quarter during the remainder of 2019.

 

We recorded an unrealized loss on marketable equity securities of $223,000$326,000 during the three months ended June 30, 2018March 31, 2019 compared to an unrealized gainloss on marketable equity securities of $333,000$441,000 during the three months ended June 30, 2017.March 31, 2018. The loss during the three months ended June 30, 2018March 31, 2019 was primarily related to a decrease in the value of our holdings of 11,000,000 shares of Vendetta common stock which decreased from a fair value of $1,792,000$1,249,000 at MarchDecember 31, 2018 to a fair value of $1,589,000$906,000 at June 30, 2018March 31, 2019 based on quoted market prices. We adopted ASU 2016-01 in the first quarter of 2018. We recorded a cumulative-effect adjustment for the change in accounting principle to retained earnings of $576,000 related to the adoption of ASU 2016-01. In addition, as a result of the adoption of ASU 2016-01, we (i) eliminated the previously recorded gain on sale of marketable equity securities of nil and $221,000, respectively, in our consolidated statement of operations for the three months and six months ended June 30, 2017, and (ii) eliminated our previously recorded income tax benefit of $89,000 for the three and six months ended June 30, 2017, which resulted in an adjusted unrealized gain on marketable equity securities of $333,000 and $461,000, respectively, for the three and six months ended June 30, 2017. These changes reduced the net loss for the three months ended June 30, 2017 from $517,000 to $273,000 and reduced the net loss for the six months ended June 30, 2017 to $379,000 from $530,000. See Note 9, “Shareholders’ Equity and Other Comprehensive Income” in the unaudited consolidated financial statements, above.

We recorded a gain on derivative instruments of $113,000, during the three months ended June 30, 2017, with no similar item during the three months ended June 30, 2018. The gain during the three months ended June 30, 2017 was primarily related to a $99,000 gain on our Vendetta Warrants primarily as a result of an increase in the price of Vendetta common shares as quoted on the TSX Venture Exchange during the three months ended June 30, 2017, which positively affected the fair value of the Vendetta Warrants based upon a Black-Scholes model. In addition, during the three months ended June 30, 2017 we recorded a gain on derivative instruments related to the change in value of Kinross covered calls of $14,000 during the three months ended June 30, 2017 related to changes in the value of Kinross calls owned during the three months ended June 30, 2017. At June 30, 2018 we no longer own any Vendetta Warrants and or Kinross calls, and we do not manage or control our derivative instruments for gain or loss and we do not anticipate significant income or loss as a result of changes in the value of derivative instruments during the remainder of 2018.

 

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 and six months ended June 30,March 31, 2019 and 2018, and 2017, we recorded no property impairments.

 

At June 30,March 31, 2019 and 2018, and 2017, 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 and six months ended June 30, 2018March 31, 2019 or 2017.2018. As a result of our exploration activities, we anticipate we will not have currently payable income taxes during 2018.2019. 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.

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Comparison of the six months ended June 30, 2018 to the six months ended June 30, 2017

We had a net loss of $1,617,000 or $0.03 per basic and diluted share for the six months ended June 30, 2018 compared to a net loss of $379,000 or $0.01 per basic and diluted share for the six months ended June 30, 2017. As explained in more detail below, the primary reasons for the increase in our net loss were (i) an increase in general and administrative costs to $1,165,000 during the six months ended June 30, 2018, including $442,000 of non-cash stock option compensation expense, compared to $860,000 of general and administrative costs during the six months ended June 30, 2017; (ii) an unrealized loss on marketable equity securities of $663,000 during the six months ended June 30, 2018 compared to an unrealized gain on marketable equity securities of $461,000 during the six months ended June 30, 2017; (iii) an increase in exploration expense to $342,000 during the six months ended June 30, 2018 compared to exploration expense of $339,000 during the six months ended June 30, 2017; and (iv) a decrease in interest income to $63,000 during the six months ended June 30, 2018 compared to interest income of $76,000 during the six months ended June 30, 2017. These causes of the increase in our net loss were partially offset by the recording of mineral property sale revenue of $502,000 from the sale of the Yanacocha Royalty during the three months ended June 30, 2018, with no similar revenue amount during the three months ended June 30, 2017. The significant changes for these items are discussed in more detail below.

Our net exploration expense increased to $342,000 during the six months ended June 30, 2018 compared to $339,000 in the comparable period of 2017. During the six months ended June 30, 2018 we performed initial exploration work on our Lik project, which we acquired during 2017. In addition, we increased reconnaissance of new projects during the six months ended June 30, 2018 compared to the six months ended June 30, 2017 and we were working with the local community on our La Promesa project in Peru to obtain approvals for drilling permits which increased our exploration costs during the first six months of 2018 compared to the six months ended June 30, 2017. Partially offsetting these increased costs during the six months ended June 30, 2018 compared to the six months ended June 30, 2017 we initiated a preliminary economic assessment on our Florida Canyon project during the six months ended June 30, 2017 with no similar project at Florida Canyon during the six months ended June 30, 2018.

General and administrative costs, excluding stock option compensation costs discussed below, were $723,000 during the six months ended June 30, 2018 compared to $860,000 during the six months ended June 30, 2017. The major components of the costs were (i) salaries and benefit expense during the six months ended June 30, 2018 of $319,000 compared to salaries and benefit expense of $316,000 in the same period of 2017; (ii) legal and accounting expenditures of $127,000 in the six months ended June 30, 2018, compared to $334,000 during the six months ended June 30, 2017, which were in large part related to the Acquisition; (iii) other costs of $76,000 during the six months ended June 30, 2018 compared to $74,000 in the same period of 2017; and (iv) travel and shareholder relation costs of $201,000 during the six months ended June 30, 2018 compared to $136,000 in the same period of 2017. During the six months ended June 30, 2018, Solitario recorded $442,000 of stock option expense for the amortization of unvested grant date fair value with a credit to additional paid-in capital, with no stock option expense during the six months ended June 30, 2017, as discussed above.

We recorded an unrealized loss on marketable equity securities of $663,000 during the six months ended June 30, 2018 compared to an unrealized gain on marketable equity securities of $461,000 during the six months ended June 30, 2017. The non-cash unrealized loss during the six months ended June 30, 2018 was primarily related to a decrease in the value of our holdings of 11,000,000 shares of Vendetta common stock which decreased from a fair value of $2,191,000 at December 31, 2017 to a fair value of $1,589,000 at June 30, 2018 based on quoted market prices. During the six months ended June 30, 2017 the fair value of our holdings of Vendetta marketable equity securities increased from a fair value of $1,021,000 at December 31, 2016 to a fair value of $1,597,000 at June 30, 2017, which, when aggregated with non-cash unrealized losses from holdings of other marketable equity securities, accounted for the non-cash unrealized gain of $461,000 during the six months ended June 30, 2017. We may look to reduce our holdings of marketable equity securities as a source of cash flow over the next year, which may reduce the volatility of the changes in unrealized gains and losses in marketable equity securities during the remainder of 2018.

During the six months ended June 30, 2018 our interest income on short-term investments decreased to $63,000 compared to interest income of $76,000 for the six months ended June 30, 2017 primarily as a result of a lower invested balance in short-term investments during the first six months of 2018 compared to 2017, which was partially offset by a slightly increased average interest rate received on USTS invested during 2018. We anticipate as we utilize our invested funds for exploration and general and administrative cost our interest income will reduce during the remainder of 2018.

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(c) Liquidity and Capital Resources

 

Cash and Short-term Investments

 

As of June 30, 2018,March 31, 2019, we have $11,331,000$11,392,000 in cash and short-term investments. As of June 30, 2018,March 31, 2019, we have invested $9,424,000$9,277,000 of our current assets in USTS with maturities ranging fromof 15 days to 2120 months. The USTS are recorded at their fair value, based upon quoted market prices. As of June 30, 2018, we have invested $1,247,000 in separate CDs with maximum values of $250,000, each of which is covered by FDIC insurance to the full-face value of the CDs. At June 30, 2018, the CDs have maturities of between 1 and 9 months. The CDs are recorded at their fair value, based upon quoted market prices. We anticipate we will roll over that portion of our USTS and CDs not used for exploration expenditures, operating costs or mineral property acquisitions as they become due during the remainder of 2018.2019.

 

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 stock buy-back program announced on October 28, 2015, and discussed above in Note 9,10, “Shareholders’ Equity, and Accumulated Other Comprehensive Income” to the unaudited consolidated financial statements. The stock buy-back program may be terminated at any time and does not require Solitario to purchase a minimum number of shares.

 

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Investment in Marketable Equity Securities

 

Our marketable equity securities are classified as available-for-sale and are carried at fair value, which is based upon market quotes of the underlying securities. At June 30, 2018March 31, 2019 we own 11,000,000 shares of Vendetta common stock and 100,000 shares of Kinross common stock. The Vendetta shares are recorded at their fair market value of $1,589,000$906,000 and the Kinross shares are recorded at their fair value of $376,000$344,000 at June 30, 2018.March 31, 2019. In addition, we own other marketable equity securities with a fair market value of $15,000$9,000 at June 30, 2018.March 31, 2019. We did not sell any of our marketable equity securities during the three and six months ended June 30,March 31, 2019 or 2018. During the six months ended June 30, 2017, we sold 1,480,000 common shares of Vendetta for proceeds of $259,000, and we exercised 2,240,000 of our Vendetta Warrants and received 2,240,000 Vendetta common shares, by paying $167,000 (Cdn$224,000) to Vendetta. The cost of the shares received from the exercise of the Vendetta Warrants was recorded based upon the total of the (i) exercise price of the Vendetta Warrants exercised, $167,000, and (ii) the fair value of the Vendetta Warrants on the date of exercise, which equaled their intrinsic value, $309,000, for a total value of $476,000.

 

Working Capital

 

We had working capital of $13,236,000$11,098,000 at June 30, 2018March 31, 2019 compared to working capital of $14,472,000$11,448,000 as of December 31, 2017.2018. Our working capital at June 30, 2018March 31, 2019 consists primarily of our cash and cash equivalents, our investment in USTS, and CDs, discussed above, and our investment in marketable equity securities of $1,980,000,$1,259,000, other current assets of $436,000, which include the SilverStream note of $262,000 at March 31, 2019, less our accounts payable of $153,000.$692,000. As of June 30, 2018,March 31, 2019, 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 June 30, 2018,March 31, 2019, and December 31, 20172018 there were options outstanding that are exercisable to acquire 4,025,2284,373,000 and 1,982,4282,028,428 shares of Solitario common stock, respectively, with exercise prices between $0.62$0.77 per share and $1.96$0.28 per share. During the three and six months ended June 30, 2018, 2,300,000 Conditional Options, granted on September 1, 2017, subject to shareholder approval, were approved, and are included in our outstanding options. In addition, at June 30, 2018 we have options outstanding for 1,371,228 shares from Replacement Options granted in connection with the Acquisition. See additional discussion of our stock-based compensation plan in Note 8, “Employee Stock Compensation Plans” to our condensed consolidated financial statements above. We do not anticipate the exercise of any options to be a significant source of cash flow during the remainder of 2018.

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2019.

 

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 2017,2018, our Board of Directors extended the term of the share repurchase program until December 31, 2018.2019. 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 and will be determined by our management and the purchases will be 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. Purchases may also be made in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “1934 Act”). 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 will be 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 June 30, 2018,March 31, 2019, Solitario has purchased a total of 813,000958,800 shares for an aggregate purchase price of $413,000$458,000 under the share repurchase program since its inception and these shares are no longer included in our issued and outstanding shares. We anticipate we will continue to purchase a limited number of shares under the share repurchase plan during 20182019 as determined by management.

 

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(d) Cash Flows

 

Net cash used in operations during the sixthree months ended June 30, 2018March 31, 2019 decreased to $440,000$172,000 compared to $1,053,000$491,000 for the sixthree months ended June 30, 2017March 31, 2018 primarily as a result of (i) the salemineral property revenue, net, cash received of our Yanacocha$185,000 from the Royalty for $502,000 in cash; andSale, discussed above; (ii) a decrease in non-stock option general and administrative expense excluding non-cash option compensation expense, to $733,000$337,000 during the sixthree months ended June 30, 2018March 31, 2019 compared to $860,000$393,000 during the sixthree months ended June 30, 2017. These reductions in the use of cash were partially offset by (i) an increaseMarch 31, 2018, discussed above; (iii) a decrease in exploration expenses to $342,000$163,000 during the sixthree months ended June 30, 2018March 31, 2019 compared to $339,000$180,000 during the sixthree months ended June 30, 2017;March 31, 2018, as a result of a decrease in reconnaissance exploration, discussed above; and (ii) a decrease(iv) an increase in interest income during the sixthree months ended June 30, 2018March 31, 2019 to $63,000$72,000 compared to $76,000$26,000 during the three months ended June 30, 2017.March 31, 2018. Based upon projected expenditures in our 20182019 budget, we anticipate continued use of funds from operations through the remainder of 2018,2019, primarily for exploration related to our Florida Canyon project and our Lik project and reconnaissance exploration. See “Results of Operations” discussed above for further explanation of some of these variances.

 

During the sixthree months ended June 30, 2018,March 31, 2019, we provided $501,000$602,000 in cash from investing activities compared to the provision of $1,131,000$400,000 of cash from investing activities during the sixthree months ended June 30, 2017.March 31, 2018. The primary sources of cash related to (i) the net proceeds from short-term investment sales and purchases of $509,000$602,000 and $2,496,000,$408,000, respectively, during the sixthree months ended June 30, 2018March 31, 2019 and 2017; (ii) the provision of $1,500,000 to Zazu in the form of a convertible debenture prior to and in anticipation of the Acquisition during the six months ended June 30, 2017; (iii) the sale of Vendetta shares for proceeds of $259,000 during the six months ended June 30, 2017, with no similar sale during the six months ended June 30, 2018 and (iv) the sale of Kinross calls of $43,000 during the six months ended June 30, 2017, with no similar sale during the six months ended June 30, 2018. During the sixthree months ended June 30,March 31, 2018 we purchased $8,000 of office equipment. During the six months ended June 30, 2017 we used $167,000 of cash for the purchase of the Vendetta shares discussed above. We do not anticipate significant sales of marketable equity securities during the remainder of 2018, however2019. However, we will continue to liquidate a portion of our investments in USTS and CDs as needed to fund our operations and or potential mineral property acquisitions during the remainder of 2018.2019. Any potential mineral property acquisition or strategic corporate investment during the remainder of 2018,2019, 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 $65,000$9,000 and $28,000,$26,000, respectively, for the purchase of our common stock during the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, 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 2018,2019, however, this will be limited to the maximum number of shares, permissible under the share repurchase program.

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(e) Off-balance sheet arrangements

 

As of June 30, 2018,March 31, 2019, and December 31, 20172018 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 June 30, 2018.March 31, 2019. As of June 30, 2018,March 31, 2019, 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, 2017.2019.

 

(g) Discontinued Projects

 

WithWe sold our Brazil, Mexico and Montana royalty properties during the exception ofthree months ended March 31, 2019 in the sale of the Yanacocha Royalty Sale, discussed above, we had no discontinued projects andabove. We did not record any mineral property write-downs during the three and six months ended June 30, 2018March 31, 2019 and 2017.2018.

 

(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, 2017,2018, 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. During the six months ended June 30, 2018, Solitario adopted ASU 2016-01. Solitario recorded a cumulative effect of the change in accounting principle to retained earnings of $576,000 related to the adoption of ASU 2016-01. See Note 9, “Shareholders’ Equity and Accumulated Other Comprehensive Income” to the unaudited consolidated financial statements, for a discussion of ASU 2016-01.

 

(i) Related Party Transactions

 

As of June 30, 2018,March 31, 2019, and for the three and six months ended June 30, 2018,March 31, 2019, we have no related party transactions or balances.

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(j) Recent Accounting Pronouncements

 

See Note 1, “Business and Summary of Significant Accounting Policies,” to the unaudited consolidated financial statements underRecent 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 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 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, 2017.2018. These forward-looking statements appear in a number of places in this report and include statements with respect to, among other things:

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·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 acquired in the Acquisition;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; and
·Our business strategy and other plans and objectives for future operations.

 

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 June 30, 2018,March 31, 2019, 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 June 30, 2018.March 31, 2019.

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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 June 30, 2018March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

 

None

 

Item 1A.Risk Factors

 

There are 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, 2017.

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2018.

 

Item 2.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 June 30, 2018.March 31, 2019.

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)
April 1, 2018- April 30, 2018  46,896  $0.42   46,896   1,232,690 
May 1, 2018 – May 31, 2018  17,690  $0.42   17,690   1,215,000 
June 1, 2018 – June 30, 2018  28,000  $0.42   28,000   1,187,000 
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, 2019- January 31, 2019  1,505  $0.26   1,505   1,067,595 
February 1, 2019 – February 28, 2019  13,895  $0.31   13,895   1,053,700 
March 1, 2019 – March 31, 2019  12,500  $0.39   12,500   1,041,200 
(1)As of June 30, 2018,March 31, 2019, we have purchased a total of 813,000958,800 shares for an aggregate purchase price of $413,000$458,000 under the share repurchase program and these shares are no longer included in our issued and outstanding shares.

 

Item 3.Defaults upon Senior Securities

 

None

 

Item 4.Mine Safety Disclosures

 

None

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Item 5.Other Information

 

None

 

Item 6.Exhibits

 

The Exhibits to this report are listed in the Exhibit Index.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SOLITARIO ZINC CORP.

 

August 1, 2018May 7, 2019

Date

By:/s/ James R. Maronick
James R. Maronick
Chief Financial Officer
 
  

 

 

EXHIBIT INDEX

 

 

 3.1  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)
     
 3.1.1  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)
     
 3.2  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)
     
 4.1  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)
     
 10-1*Performance Loan Agreement for Funding of Drilling Program between Solitario and Compania Minera Milpo for the funding of the drilling of the Florida Canyon Project during 2018 and 2019 dated August 1, 2018.
10-2*Purchase and Sale Agreement between Solitario and SilverStream SEZC for the sale of certain royalty properties for cash and a convertible note dated January 8, 2019.
31.1* 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
     
 31.2* 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
     
 32.1* 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30,March 31, 2019 and 2018, and 2017, (iii) Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2018March 31, 2019 and 2017;2018; and (iv) Notes to the Condensed Unaudited Consolidated Financial Statements, tagged as blocks of text.
     
 *  Filed herewith