Smaller reporting companies are not required
to provide the information required by this item.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
1.
Business and Summary of Significant
Accounting Policies
Sale of Mt. Hamilton LLC
On August 25, 2015 Solitario Exploration &
Royalty Corp. (“Solitario,” the “Company,” “we,” or “us”), along with DHI Minerals
(U.S.) Ltd. (“DHI”), sold their combined interests in the Mt. Hamilton gold project (“Mt. Hamilton”) to
Waterton Nevada Splitter, LLC (“Waterton”), for total cash proceeds of US$30 million (the “Transaction”)
pursuant to a definitive agreement entered into on June 10, 2015 (the “Agreement”). Solitario sold its 80% interest
in Mt. Hamilton LLC (“MH-LLC”), a limited liability company which held 100% of the Mt. Hamilton project assets, and
DHI sold its 20% interest in MH-LLC. DHI is a wholly-owned subsidiary of Ely Gold and Minerals, Inc. (“Ely”). Solitario
received gross cash proceeds of US$24 million and DHI received gross cash proceeds of US$6 million. Solitario’s costs and
fees related to the Transaction, including broker fees and professional service fees, were $439,000. Concurrent with the closing
of the Transaction, Solitario paid $5,000,000 plus $7,000 of interest and fees to fully repay the funds Solitario had borrowed
pursuant to a facility agreement (the “Facility Agreement”) with RMB Australia Holdings Limited (“RMBAH”)
and RMB Resources, Inc., a Delaware corporation (“RMBR”). Certain warrants granted to RMB in connection with the Facility
Agreement to acquire 1,624,748 shares of Solitario common stock (the “RMB Warrants”) expired unexercised during 2016.
During the year ended December 31 2015 virtually
all of the costs associated with MH-LLC and the assets sold were directly related to the development of the Mt. Hamilton project,
and were capitalized to mineral property during all periods. Accordingly, separate presentation of discontinued operations would
not have resulted in any material change to the results presented in the consolidated statements of operations for the year ended
December 31, 2015.
The sale of MH-LLC in 2015 is shown as gain
on sale of discontinued operations as follows:
(in thousands)
|
|
Year ended December 31,
|
|
|
2015
|
Proceeds from sale of MH-LLC
|
|
$
|
24,000
|
|
Net assets and liabilities disposed of
|
|
|
9,998
|
|
Noncontrolling interest
|
|
|
256
|
|
Expenses of sale of MH-LLC
|
|
|
439
|
|
Gain on sale of discontinued operations, before tax
|
|
|
13,307
|
|
Income tax expense
|
|
|
998
|
|
Gain on sale of discontinued operations
|
|
$
|
12,309
|
|
Business and company formation
Solitario is an exploration stage company under
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 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.
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 corporate transactions for the potential acquisition of new
precious and base metal properties and assets with exploration potential or business combinations that we determine favorable to
Solitario.
Solitario has recorded revenue in the past from
the sale of mineral property, including the Transaction, and joint venture property payments and the sale of a royalty on its Mt.
Hamilton property. Revenues from the sale or joint venture of properties, although significant when they occur, have not been a
consistent annual source of revenue and would only occur in the future, if at all, on an infrequent basis.
Financial reporting
The consolidated financial statements include
the accounts of Solitario and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated
in consolidation. The consolidated financial statements are prepared in accordance with accounting principles generally accepted
in the United States of America ("generally accepted accounting principles"), and are expressed in US dollars.
Revenue recognition
Solitario records delay rental payments as revenue
in the period received. Any payments received for the sale of property interests are recorded as a reduction of the related property's
capitalized cost. Proceeds which exceed the capitalized cost of the property without reserves are recognized as revenue. Payments
received on the sale of properties with reserves are recognized as revenue to the extent the proceeds exceed the proportionate
basis in the assets sold. There were no delay rental payments in either 2016 or 2015. In May 2014, the Financial Accounting Standards
Board (“FASB”) amended its guidance on revenue recognition. The core principle of those accounting standards it that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods and services. The standards are effective
for revenue recognition by Solitario beginning in January 2018 and adoption is not expected to have a material impact on Solitario’s
consolidated financial statements.
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; (iv) the ability of Solitario to
realize its deferred tax assets; (v) Solitario's investment in marketable equity securities; and (vi) the fair value of the Vendetta
Mining Corp. (“Vendetta”) warrants Solitario owns.
In performing its activities, Solitario has
incurred certain costs for mineral properties. The recovery of these costs is ultimately dependent upon the sale of mineral property
interests or the development of economically recoverable ore reserves and the ability of Solitario to obtain the necessary permits
and financing to successfully place the properties into production, and upon future profitable operations, none of which is assured.
Cash equivalents
Cash equivalents include investments in highly
liquid money-market securities with original maturities of three months or less when purchased. As of December 31, 2016, a portion
of Solitario’s cash and cash equivalents are held in brokerage accounts and foreign banks, which are not covered under the
Federal Deposit Insurance Corporation (“FDIC”) rules for the United States.
Short-term investments
As of December 31, 2016, Solitario has $7,510,000
of our current assets in United States Treasury securities (“USTS”) with maturities of 15 days to one year. The USTS
are recorded at their fair value, based upon quoted market prices. As of December 31, we have $7,499,000 in separate bank certificates
of deposit (“CDs”) each with a maximum value of $250,000, and each of which are covered by Federal Deposit Insurance
Corporation insurance to the full face value of the CDs. At December 31, 2016, the CDs have maturities of between twenty days and
eighteen months. Solitario’s short-term investments are recorded at their fair value, based upon quoted market prices. The
short-term investments are highly liquid and may be sold in their entirety at any time at their quoted market price and are classified
as a current asset.
Mineral properties
Solitario expenses all exploration costs incurred
on its mineral properties prior to the establishment of proven and probable reserves through the completion of a feasibility study.
Initial acquisition costs of its mineral properties are capitalized. Solitario regularly performs evaluations of its investment
in mineral properties to assess the recoverability and/or the residual value of its investments in these assets. All long-lived
assets are reviewed for impairment whenever events or circumstances change which indicate the carrying amount of an asset may not
be recoverable, utilizing established guidelines based upon undiscounted future net cash flows from the asset or upon the determination
that certain exploration properties do not have sufficient potential for economic mineralization.
Derivative instruments
Solitario accounts for its
derivative instruments in accordance with ASC 815, "Accounting for Derivative Instruments and Hedging Activities" (“ASC
815”). Solitario acquired its investment in Vendetta Mining Corp. units, including the Vendetta Warrants (defined below)
during 2016. Solitario has classified the Vendetta Warrants as derivative instruments under ASC 815 and recorded the Vendetta Warrants
at their fair value as other assets on the consolidated balance sheet. Changes in fair value of the Vendetta Warrants are recognized
in the statement of operations in the period of change as gain or loss on derivative instruments. Solitario has entered into covered
calls from time to time on its investment in Kinross marketable equity securities. Solitario has not designated its covered calls
as hedging instruments and any changes in the fair value of the covered calls and its warrants are recognized in the statement
of operations in the period of the change as gain or loss on derivative instruments.
Fair value
FASB ASC 820, “Fair Value Measurements
and Disclosures” (“ASC 820”) establishes a framework for measuring fair value and requires enhanced disclosures
about fair value measurements. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants. For certain of Solitario's
financial instruments, including cash and cash equivalents and accounts payable, the carrying amounts approximate fair value due
to their short-term maturities. Solitario's short-term investments in USTS and CDs, its marketable equity securities and any covered
call options against those marketable equity securities are carried at their estimated fair value based on quoted market prices.
Solitario’s investment in the Vendetta Warrants, defined below, is carried at fair value as determined by a Black-Scholes
model. See Note 7, “Fair Value of Financial Instruments,” below.
Marketable equity securities
Solitario's investments in marketable equity
securities are classified as available-for-sale and are carried at fair value, which is based upon quoted prices of the securities
owned. Solitario records investments in marketable equity securities as available-for-sale for investments in publicly traded marketable
equity securities for which it does not exercise significant control and where Solitario has no representation on the board of
directors of those companies and exercises no control over the management of those companies. The cost of marketable equity securities
sold is determined by the specific identification method. Changes in fair value are recorded in accumulated other comprehensive
income within shareholders' equity, unless a decline in fair value is considered other than temporary, in which case the decline
is recognized as a loss in the consolidated statements of operations.
Foreign exchange
The United States dollar is the functional currency
for all of Solitario's foreign subsidiaries. Although Solitario's South American exploration activities during 2016 and 2015 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. Foreign currency gains and losses are included in the results of operations in the period
in which they occur.
Income taxes
Solitario accounts for income taxes in accordance
with ASC 740, “Accounting for Income Taxes” (“ASC 740”). Under ASC 740, income taxes are provided for the
tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related
to certain income and expenses recognized in different periods for financial and income tax reporting purposes. Deferred tax assets
and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when
the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses and tax credits that
are available to offset future taxable income and income taxes, respectively. A valuation allowance is provided if it is more likely
than not that some portion or all of the deferred tax assets will not be realized.
Accounting for uncertainty in income taxes
ASC 740 clarifies the accounting for uncertainty
in income taxes recognized in a company's financial statements. ASC 740 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740
also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition. ASC 740 provides that a company's tax position will be considered settled if the taxing authority has completed its
examination, the company does not plan to appeal, and it is remote that the taxing authority would reexamine the tax position in
the future. These provisions of ASC 740 had no effect on Solitario's financial position or results of operations. See Note 5, “Income
Taxes,” below.
Earnings per share
The calculation of basic and diluted earnings
(loss) per share is based on the weighted average number of shares of common stock outstanding during the years ended December
31, 2016 and 2015. Potentially dilutive shares related to outstanding common stock options of 40,000 for the year ended December
31, 2015, and the RMB Warrants of 1,624,748 for the year ended December 31, 2015 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
at December 31, 2016, and the effects of the potentially dilutive shares outstanding during the year ended December 31, 2016 were
excluded from the calculation of diluted earnings per share because the effects were anti-dilutive.
Employee stock compensation and incentive plans
Solitario classifies all of its stock options
as equity options in accordance with the provisions of ASC 718, “Compensation – Stock Compensation.” See Note
9, “Employee Stock Compensation Plans,” below.
Recent accounting pronouncements
In May 2014, the FASB issued Accounting
Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers (Topic 606),
(“ASU No. 2014-09”),
which amended the existing accounting standards for revenue recognition. ASU No. 2014-09 establishes principles for recognizing
revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received
in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning
after December 15, 2017. The amendments may be applied retrospectively to each prior period (full retrospective) or retrospectively
with the cumulative effect recognized as of the date of initial application (modified retrospective). Solitario will adopt ASU
2014-09 in the first quarter of 2018 and apply the full retrospective approach and does not expect the impact on its consolidated
financial statements to be material.
In February 2016, the FASB issued ASU 2016-02,
“Leases” (“ASU No. 2016-02”), which will require lessees to recognize a right-of-use asset and a lease
liability for all leases that are not short-term in nature. For a lessor, the accounting applied is also largely unchanged from
previous guidance. The new rules will be effective for Solitario in the first quarter of 2019. Solitario does not anticipate early
adoption. Solitario does not expect the adoption of ASU No. 2016-02 to materially change its current accounting methods and therefore
it does not expect the adoption to have a material impact on its consolidated financial position or results of operations.
In January 2016 the FASB issued ASU No 2016-01,
Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825) (“ASU
No. 2016-01”)
.
ASU No. 2016-01 revises the classification and measurement of investment in certain equity investments
and the presentation of certain fair value changes for certain financial liabilities measured at fair value. ASU No. 2016-01 requires
the change in fair value of many equity investments to be recognized in net income. ASU No. 2016-01 is effective for interim and
annual periods beginning after December 15, 2017, with early adoption permitted. Adoption of ASU No. 2016-01 may result in a cumulative
effect adjustment to the consolidated statement of equity retained earnings as of the beginning of the year of adoption. Solitario
is evaluating the new guidance and has not determined the impact of ASU No. 2016-01 on its consolidated financial statements.
2.
Mineral Properties
:
The following table details Solitario’s capitalized investment
in exploration mineral property:
(in thousands)
|
|
December 31,
|
|
|
2016
|
|
2015
|
Exploration
|
|
|
|
|
La Promesa (Peru)
|
|
$
|
6
|
|
|
$
|
6
|
|
Montana Royalty property (US)
|
|
|
40
|
|
|
|
—
|
|
Canta Colorado (Peru)
|
|
|
—
|
|
|
|
3
|
|
Norcan (Mexico)
|
|
|
—
|
|
|
|
5
|
|
Aconchi (Mexico)
|
|
|
—
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total exploration mineral property
|
|
$
|
46
|
|
|
$
|
19
|
|
Capitalized costs
Solitario had been capitalizing its development
costs incurred at its Mt. Hamilton project subsequent to the completion of a feasibility study on the Mt. Hamilton project in February
2012. The following table details the capitalization during 2015 up to the date of the Transaction:
(in thousands)
|
|
Year ended
December 31,
|
|
|
2015
|
Development expenditures
|
|
$
|
692
|
|
Capitalized interest
|
|
|
493
|
|
Property payments
|
|
|
190
|
|
Capitalized depreciation
|
|
|
7
|
|
Total capitalized costs
|
|
$
|
1,382
|
|
Included in the property payments during 2015
are the issuance of 66,500 common shares of Solitario with fair values of $51,000, issued to underlying leaseholders, which were
recorded as an increase to common stock, for the par value of the shares issued and to additional paid-in-capital. Additionally,
during 2015, Solitario capitalized interest due to RMBAH under the Facility Agreement, which was paid in full upon completion of
the Transaction.
Exploration property
Solitario's exploration mineral properties at
December 31, 2016 and 2015 consist of use rights related to its exploration properties, and the value of such assets is primarily
driven by the nature and amount of economic mineral ore believed to be contained, or potentially contained, in such properties.
The amounts capitalized as mineral properties include concession and lease or option acquisition costs. Capitalized costs related
to a mineral property represent its fair value at the time it was acquired. At December 31, 2016, none of Solitario’s exploration
properties have production (are operating) or contain proven or probable reserves. Solitario's exploration mineral properties represent
interests in properties that Solitario believes have exploration and development potential. Solitario's mineral use rights generally
are enforceable regardless of whether proven and probable reserves have been established.
In addition to its capitalized exploration properties,
Solitario has an interest in its Bongará exploration concession, which is currently subject to a joint venture agreement
where joint venture partners made stand-by joint venture payments to Solitario prior to January 1, 2015. Solitario recorded joint
venture property payment revenue received in excess of capitalized costs. Per the joint venture agreement, as of December 31, 2016,
no further standby joint-venture payments are due to Solitario on the Bongará project. At December 31, 2016 and 2015, Solitario
has no remaining capitalized costs related to its Bongará joint venture.
Solitario previously sold its mineral interests
in its Yanacocha exploration projects and retained a royalty interest. Solitario has no capitalized costs related to its Yanacocha
royalty interest. During the year ended December 31, 2016, Solitario acquired certain net smelter royalties on non-producing exploration
leases in Montana previously owned by Atna Resources, Ltd. for $40,000.
Discontinued projects
During 2016, Solitario closed its exploration
office in Mexico. Solitario retained a 1% net smelter royalty on its Norcan and Aconchi exploration projects in Mexico. Solitario
recorded a mineral property write-down of $10,000 related to the Norcan and Aconchi properties during 2016. During 2016, Solitario
abandoned its interest in its Canta Colorado property in Peru and recorded a mineral property write-down expense of $3,000 related
to Canta Colorado. In addition, Solitario recorded a loss on other assets in Mexico of $14,000 related to the cessation of its
exploration activities in Mexico during 2016.
During 2015, Solitario converted its operating
interest in Pedra Branca Mineracao, Ltd (“PBM”), which was the owner of the Pedra Branca project in Brazil, to a 1%
net smelter royalty in the Pedra Branca project, upon the termination of its interest in PBM. Solitario had no remaining asset
value related to its investment in PBM, as it had accounted for its interest in PBM under the equity method of accounting and had
recognizing a reduction of its remaining interest in PBM to zero prior to the year ended December 31, 2015. Solitario recorded
no mineral property write-down expense during 2015.
Exploration Expense
The following items comprised exploration expense:
|
|
For the year ended
December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Geologic and field expenses
|
|
$
|
537
|
|
|
$
|
31
|
|
Administrative
|
|
|
91
|
|
|
|
58
|
|
Total exploration expense
|
|
$
|
628
|
|
|
$
|
89
|
|
3.
Marketable Equity Securities
On May 2, 2016 Solitario purchased 7,240,000
units of Vendetta for aggregate consideration of $289,000. Each unit included one common share of Vendetta and one purchase warrant
which allows the holder to purchase one share of Vendetta common stock at a price of Cdn$0.10 per share for a period of two years
(the “Vendetta Warrants”). The purchase price of 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 stock was allocated a purchase
cost of $186,000 and the Vendetta Warrants were allocated a purchase cost of $103,000. As of December 31, 2016, the common shares
of Vendetta are carried at their fair value based upon the quoted market price of Vendetta, a publicly traded company on the TSX
venture exchange, and included in marketable equity securities. The Vendetta Warrants are carried at their fair value, based upon
a Black-Scholes valuation model. During the year ended December 31, 2016, Solitario recorded a gain on derivative instruments of
$629,000, related to the Vendetta Warrants; see Note 6, “Derivative Instruments,” below.
The following tables summarize Solitario’s
marketable equity securities and accumulated other comprehensive income related to its marketable equity securities:
(in thousands)
|
|
December 31,
|
|
|
2016
|
|
2015
|
Marketable equity securities at fair value
|
|
$
|
1,339
|
|
|
$
|
202
|
|
Cost
|
|
|
274
|
|
|
|
91
|
|
Accumulated other comprehensive income for
unrealized holding gains
|
|
|
1,065
|
|
|
|
111
|
|
Deferred taxes on accumulated other comprehensive
income for unrealized holding gains
|
|
|
353
|
|
|
|
—
|
|
Accumulated other comprehensive income
|
|
$
|
712
|
|
|
$
|
111
|
|
The following table represents changes in marketable equity securities:
(in thousands)
|
|
Year ended
December 31,
|
|
|
2016
|
|
2015
|
Gross cash proceeds from sales
|
|
$
|
56
|
|
|
$
|
809
|
|
Cost
|
|
|
16
|
|
|
|
1,778
|
|
Gross gain (loss) on sale included in earnings during the period
|
|
|
40
|
|
|
|
(969
|
)
|
Deferred taxes on gross gain on sale included in earnings
|
|
|
(15
|
)
|
|
|
—
|
|
Reclassification adjustment to unrealized gain in other
comprehensive income for net (gain) loss included in earnings
|
|
|
(25
|
)
|
|
|
969
|
|
Gross unrealized holding gain (loss) arising during the period
included in other comprehensive income (loss)
|
|
|
994
|
|
|
|
(1,296
|
)
|
Deferred taxes on unrealized holding losses included in other comprehensive
(income) loss
|
|
|
(368
|
)
|
|
|
1,558
|
|
Net unrealized holding gain
|
|
|
626
|
|
|
|
262
|
|
Other comprehensive income from marketable equity
securities
|
|
$
|
601
|
|
|
$
|
1,231
|
|
4.
Other Assets:
The following items comprised other assets:
(in thousands)
|
|
December 31,
|
|
|
2016
|
|
2015
|
Furniture and fixtures, net of accumulated depreciation
|
|
$
|
32
|
|
|
$
|
41
|
|
Exploration bonds and other assets
|
|
|
4
|
|
|
|
4
|
|
Vendetta Warrants
|
|
|
735
|
|
|
|
—
|
|
Total other assets
|
|
$
|
771
|
|
|
$
|
45
|
|
5.
Income Taxes
:
Solitario's income tax
expense from continuing operations consists of the following as allocated between foreign and United States components:
(in thousands)
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(309
|
)
|
|
|
662
|
|
State
|
|
|
(44
|
)
|
|
|
(102
|
)
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
Income tax (benefit) expense
|
|
$
|
(353
|
)
|
|
$
|
560
|
|
Income tax (benefit) expense
is included in the financial statements as follows:
(in thousands)
|
|
2016
|
|
2015
|
Continuing Operations
|
|
$
|
(353
|
)
|
|
$
|
560
|
|
Discontinued Operations
|
|
|
—
|
|
|
|
998
|
|
Other Comprehensive Income
|
|
|
353
|
|
|
|
(1,558
|
)
|
Consolidated loss before
income taxes includes losses from foreign operations of $154,000 and $98,000 in 2016 and 2015, respectively.
As discussed in Note 1, “Business and
Summary of Significant Accounting Policies,” during 2015, the Transaction resulted in a $13,307,000 before tax gain reported
in discontinued operations. Solitario recorded $998,000 of tax expense in discontinued operations which was net of $3,930,000 tax
benefit for the release of valuation allowance. Income taxes have been allocated between discontinued operations and continuing
operations in accordance with ASC 740.
See Note 3, “Marketable Equity Securities,”
for detail of the deferred taxes associated with the sale of marketable equity securities and the deferred taxes associated with
unrealized gains and losses associated with other comprehensive income related to marketable equity securities.
The net deferred tax assets/liabilities in the
December 31, 2016 and 2015 consolidated balance sheets include the
following components:
(in thousands)
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loss carryovers
|
|
$
|
8,168
|
|
|
$
|
6,982
|
|
Stock option compensation expense
|
|
|
—
|
|
|
|
7
|
|
Royalty
|
|
|
1,482
|
|
|
|
1,482
|
|
Unrealized loss on derivative securities
|
|
|
—
|
|
|
|
38
|
|
Other
|
|
|
105
|
|
|
|
105
|
|
Valuation allowance
|
|
|
(9,118
|
)
|
|
|
(8,571
|
)
|
Total deferred tax assets
|
|
|
637
|
|
|
|
43
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized gain on derivative securities
|
|
|
196
|
|
|
|
—
|
|
Unrealized gains on marketable equity securities
|
|
|
395
|
|
|
|
41
|
|
Other
|
|
|
46
|
|
|
|
2
|
|
Total deferred tax liabilities
|
|
|
637
|
|
|
|
43
|
|
Net deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
A reconciliation of expected federal income
taxes on income (loss) from continuing operations at statutory rates, with the expense for income taxes is as follows:
(in thousands)
|
|
2016
|
|
2015
|
Expected income tax benefit
|
|
$
|
(701
|
)
|
|
$
|
(976
|
)
|
Reversal of disproportionate tax effect in other comprehensive income
|
|
|
—
|
|
|
|
1,558
|
|
Equity based compensation
|
|
|
366
|
|
|
|
575
|
|
Foreign tax rate differences
|
|
|
6
|
|
|
|
3
|
|
State income tax
|
|
|
(237
|
)
|
|
|
(606
|
)
|
True-up of deferred taxes
|
|
|
—
|
|
|
|
267
|
|
Tax attributes of disposed subsidiary
|
|
|
1,652
|
|
|
|
3,941
|
|
Previously unrecognized basis in disposed subsidiary
|
|
|
(1,884
|
)
|
|
|
(4,170
|
)
|
Change in valuation allowance
|
|
|
547
|
|
|
|
(40
|
)
|
MH-LLC investment
|
|
|
—
|
|
|
|
1
|
|
Permanent differences and other
|
|
|
(102
|
)
|
|
|
7
|
|
Income tax (benefit) expense
|
|
$
|
(353
|
)
|
|
$
|
560
|
|
During 2016, the valuation allowance was decreased
primarily due to the removal of deferred tax assets related to abandoned properties in Mexico. During 2015, the valuation allowance
was decreased primarily due to the utilization of loss carryforwards for which no tax benefit was previously realized.
During 2016 and 2015, other comprehensive income/(loss)
was recognized in the amounts of approximately $954,000 and ($327,000), respectively. In 2016 we recognized an
income tax benefit of $353,000 and in 2015 no tax benefit was recorded in other comprehensive income/(loss) as a $111,000 valuation
allowance fully offset the attendant tax benefit.
At December 31, 2016, Solitario has unused US
Federal Net Operating Loss ("NOL") carryovers of $1,658,000 and unused US State NOL carryovers of $3,191,000 which begin
expiring in 2034. Solitario has unused Capital Loss carryovers of $11,845,000 for US Federal and US State purposes which begin
expiring in 2019. Solitario has foreign loss carryforwards for which Solitario has provided a full valuation allowance and which
expire over five years related to its prior exploration in Peru.
Solitario adopted ASC 740, which prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. ASC 740 requires that Solitario recognize in its consolidated financial statements, only
those tax positions that are “more-likely-than-not” of being sustained as of the adoption date, based on the technical merits
of the position. As a result of the implementation of ASC 740, Solitario performed a comprehensive review of its material tax positions
in accordance with recognition and measurement standards established by ASC 740. The provisions of ASC 740 had no effect on Solitario’s
financial position, cash flows or results of operations at December 31, 2016 or December 31, 2015, or for the years then ended
as Solitario had no unrecognized tax benefits.
Solitario and its subsidiaries are subject to
the following material taxing jurisdictions: United States Federal, State of Colorado and Peru. Solitario’s United States
federal return for years 2013 and forward and our United States state and Peru returns for tax years 2012 and forward are subject
to examination. Solitario’s policy is to recognize interest and penalties related to uncertain tax benefits in income tax
expense. Solitario has no accrued interest or penalties related to uncertain tax positions as of December 31, 2016, or December
31, 2015 or for the years then ended
6.
Derivative Instruments:
RMB warrants
The RMB Warrants, which entitled
the holder to purchase a total of 1,624,748 shares of Solitario common stock, expired worthless on August 21, 2016. As of December
31, 2016, Solitario has no liability related to the RMB Warrants. Solitario recorded a $4,000 liability for the RMB Warrants as
of December 31, 2015 for the fair value of the RMB Warrants based upon a Black-Scholes model. Solitario recorded a gain on derivative
instruments of $4,000 for the year ended December 31, 2016 related to the expiration of the RMB Warrants.
Covered call options
From time to time Solitario has sold covered
call options against its holdings of Kinross. The business purpose of selling covered calls is to provide additional income on
a limited portion of shares of Kinross that Solitario may sell in the near term, which is generally defined as less than one year.
Solitario has not designated its covered calls as hedging instruments as described in ASC 815, “Derivatives and Hedging,”
and any changes in the fair value of its covered calls are recognized in the statement of operations in the period of the change.
As of December 31, 2016, Solitario had two covered calls against its holdings of Kinross common stock, which had a fair value of
$2,000. As of December 31 2015, all of the covered calls had expired unexercised and there were no liabilities related to those
calls entered during each of the years.
Solitario recorded the following gain on derivative
instruments:
(in thousands)
|
|
Year ended
December 31,
|
|
|
2016
|
|
2015
|
Gain on Kinross calls
|
|
$
|
43
|
|
|
$
|
84
|
|
Gain on Vendetta Warrants
|
|
|
629
|
|
|
|
—
|
|
|
|
$
|
672
|
|
|
$
|
84
|
|
The following table provides the location and
amount of the fair values of Solitario's derivative instruments presented in the consolidated balance sheets as of December 31,
2016 and 2015:
|
|
Derivatives
|
(in thousands)
|
|
Balance Sheet Location
|
|
2016
|
|
2015
|
Vendetta warrants
|
|
Other assets
|
|
$
|
735
|
|
|
$
|
—
|
|
RMB warrants
|
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
4
|
|
Kinross calls
|
|
Other current liabilities
|
|
$
|
2
|
|
|
$
|
—
|
|
7.
Fair Value of Financial Instruments
:
For certain of Solitario's financial instruments,
including cash and cash equivalents, payables and short-term debt, the carrying amounts approximate fair value due to their short
maturities. Solitario's marketable equity securities, including its investment in shares of Kinross common stock, Vendetta common
stock and TNR Gold Corp (“TNR”) common stock, are carried at their estimated fair value primarily based on publicly
available quoted market prices.
Solitario applies ASC 820, "Fair Value
Measurements" (“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
years ended December 31, 2016 and 2015, there were no reclassifications in financial assets or liabilities between Level 1, 2 or
3 categories.
The following is a listing of Solitario’s
financial assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within
the hierarchy as of December 31, 2016:
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
1,339
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,339
|
|
Vendetta Warrants
|
|
|
|
|
|
|
735
|
|
|
|
|
|
|
|
735
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kinross calls
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
2
|
|
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, 2015:
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
202
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
202
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB Warrants
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
4
|
|
Items measured at fair value on a recurring basis:
Marketable equity securities
:
At December
31, 2016 and 2015, the fair value of Solitario’s holdings in shares of Vendetta, Kinross, and TNR marketable equity securities
and the Kinross calls are based upon quoted market prices.
Vendetta Warrants:
The Vendetta Warrants are not
traded on any public exchange. Solitario determines the fair value of the Vendetta Warrants using a Black-Scholes pricing model,
using inputs, including share price, volatility of Vendetta common stock and discount rates that include an assessment
of performance risk, that are readily available from public markets; therefore, they are classified as Level 2 inputs as of December
31, 2016.
RMB Warrants
: The RMB Warrants were not traded
on any public exchange. Solitario determined the fair value of the RMB Warrants using a Black-Scholes pricing model, using inputs,
including share price, volatility of Solitario common stock and discount rates that include an assessment of performance risk,
that are readily available from public markets; therefore, they are classified as Level 2 inputs as of December 31, 2015.
During the year ended December 31, 2016, Solitario
did not change any of the valuation techniques used to measure its financial assets and liabilities at fair value.
8.
Commitments and Contingencies:
In acquiring its interests in mineral claims
and leases, Solitario has entered into lease agreements, which may be canceled at its option without penalty. Solitario is required
to make minimum rental and option payments in order to maintain its interests in certain claims and leases. See Note 2, “Mineral
Properties,” above. Solitario estimates its 2017 property rentals and option payments, excluding certain earn-in payments
discussed below, for properties we own or operate to be approximately $271,000. Assuming that our joint ventures continue in their
current status and that we do not appreciably change our property positions on existing properties, approximately $263,000 of
these annual payments are paid or are reimbursable to us by our joint venture partners. In addition, we may be required to make
further payments in the future if we elect to exercise our options under those agreements or if we enter into new agreements.
Solitario leases office space under a non-cancelable
operating lease for the Wheat Ridge, Colorado office which provides for total minimum annual rent payments of $38,000 through January
of 2019.
9.
Employee Stock Compensation Plans:
On August 24, 2016, the holders of options to
acquire Solitario common stock voluntarily surrendered for cancellation all options previously granted to such persons pursuant
to the 2013 Solitario Exploration and Royalty Corp Omnibus Stock and Incentive Plan (the “2013 Plan”) and the 2006
Stock Option Incentive Plan (the “2006 Plan”). Solitario cancelled the options upon surrender. As a result, there are
no outstanding options under either the 2006 Plan or the 2013 Plan as of December 31, 2016.
Historically, stock option awards at the time
of grant had a five year term and vested 25% on date of grant and 25% on each of the next three anniversary dates. Solitario recognizes
stock option compensation expense on the date of grant for 25% of the grant date fair value, and subsequently, based upon a straight
line amortization of the unvested grant date fair value of each of its outstanding options. During the years ended December 31,
2016 and 2015, Solitario recorded $970,000 and $516,000, respectively, of stock option expense for the amortization of the grant
date fair value through the date of cancellation and for any unrecognized grant date fair value on the date of cancellation of
each of its outstanding options with a credit to additional paid-in-capital. Solitario classifies its stock options under the 2006
Plan and the 2013 Plan as equity options in accordance with the provisions of ASC 718, “Compensation – Stock Compensation.”
a.) The 2006 Plan
On June 27, 2006, Solitario's shareholders approved
the 2006 Plan. Under the terms of the 2006 Plan, the Board of Directors reserved a total of 2,800,000 shares of Solitario common
stock for the potential awards to directors, officers and employees with exercise prices equal to the market price of Solitario's
common stock at the date of grant. As of June 26, 2016, the 2006 Plan terminated, and in accordance with the terms of the 2006
Plan, no additional awards may be made pursuant to the 2006 Plan.
b.) 2006 Plan stock option
grants
The following table shows the grant date fair
value of Solitario’s only option grant during either 2016 or 2015 from the 2006 Plan as of the date of grant.
Grant date fair value
Grant Date
|
|
6/22/16
|
Option – grant date price (Cdn$)
|
|
$
|
0.72
|
|
Options granted
|
|
|
350,000
|
|
Expected life years
|
|
|
5.0
|
|
Expected volatility
|
|
|
63
|
%
|
Risk free interest rate
|
|
|
1.0
|
%
|
Weighted average fair value
|
|
$
|
0.30
|
|
Grant date fair value
|
|
$
|
105,000
|
|
c.) 2006 Plan stock option
activity
During 2016 and 2015 there were no shares issued
from the exercise of options. The following table summarizes the activity for stock options outstanding under the 2006 Plan as
of December 31, 2016 and 2015:
|
|
2016
|
|
2015
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
|
|
Average
|
|
Aggregate
|
|
|
|
|
Exercise
|
|
Intrinsic
|
|
|
|
Exercise
|
|
Intrinsic
|
|
|
Options
|
|
Price (Cdn$)
|
|
Value(1)
|
|
Options
|
|
Price (Cdn)$
|
|
Value(1)
|
2006 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
40,000
|
|
|
$
|
1.66
|
|
|
|
|
|
|
|
2,348,000
|
|
|
$
|
1.66
|
|
|
|
|
|
Granted
|
|
|
350,000
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Cancelled/expired (2)
|
|
|
(390,000
|
)
|
|
$
|
0.82
|
|
|
|
|
|
|
|
(2,188,000
|
)
|
|
|
1.66
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(120,000
|
)
|
|
|
1.60
|
|
|
|
|
|
Outstanding, end of year
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
40,000
|
|
|
$
|
1.60
|
|
|
$
|
—
|
|
Exercisable, end of year
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
20,000
|
|
|
$
|
1.60
|
|
|
$
|
—
|
|
(1)The intrinsic value at December 31, 2015 based upon the quoted
market price of Cdn$0.70, respectively, per share for our common stock on the TSX and an exchange ratio of 0.72120, United States
dollars per Canadian dollar. There were no options outstanding from the 2006 Plan at December 31, 2016.
(2)On August 24, 2016, holders of option awards from the 2006 Plan
voluntarily cancelled awards for 350,000 options with an option price of Cdn$.072 with an expiration date of June 21, 2021 and
40,000 options with an option price of Cdn$1.66 with an expiration date of August 14, 2019 to allow Solitario to have additional
financial flexibility. No consideration was given or received by the holders of the options to cancel the awards.
d.) The 2013 Plan
On June 18, 2013, Solitario’s shareholders
approved the 2013 Plan. Under the terms of the 2013 Plan, a total of 1,750,000 shares of Solitario common stock are reserved for
awards to Directors, officers, employees and consultants. Such awards 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.
e.) 2013 Plan stock option
grants
The following table shows the grant date fair
value of Solitario’s only award during either 2016 or 2015 from the 2013 Plan as of the date of grant.
Grant date fair value
Grant Date
|
|
7/28/16
|
Option – grant date price
|
|
$
|
0.72
|
|
Options granted
|
|
|
1,699,000
|
|
Expected life years
|
|
|
5.0
|
|
Expected volatility
|
|
|
63
|
%
|
Risk free interest rate
|
|
|
0.9
|
%
|
Weighted average fair value
|
|
$
|
0.50
|
|
Grant date fair value
|
|
$
|
850,000
|
|
Solitario made no grants of awards during 2015
from the 2013 Plan. Options grants from the 2013 Plan have a five-year term, and vest 25% on date of grant and 25% on each of the
next three anniversary dates. Solitario recognizes stock option compensation expense on the date of grant for 25% of the grant
date fair value, and subsequently, based upon a straight-line amortization of the unvested grant date fair value and for any unrecognized
grant date fair value on the date of cancellation of each of its outstanding options.
f.) Stock option activity
During 2016 and 2015 no options granted from
the 2013 Plan were exercised. The following table summarizes the activity for stock options and RSUs outstanding under the 2013
Plan as of December 31, 2016 and 2015:
|
|
2016
|
|
2015
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Aggregate
|
|
|
|
Average
|
|
Aggregate
|
|
|
RSUs/
|
|
Exercise
|
|
Intrinsic
|
|
RSUs/
|
|
Exercise
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Value(1)
|
|
Options
|
|
Price
|
|
Value(1)
|
2013 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
1,400,000
|
|
|
$
|
0.96
|
|
|
|
|
|
Granted
|
|
|
1,699,000
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Cancelled/expired(2)
|
|
|
(1,699,000
|
)
|
|
|
0.94
|
|
|
|
|
|
|
|
(1,250,000
|
)
|
|
|
0.94
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
1.10
|
|
|
|
|
|
|
|
(150,000
|
)
|
|
|
1.10
|
|
|
|
|
|
Outstanding, end of year
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Exercisable, end of year
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
(1)There were no options outstanding from the 2013 Plan at December
31, 2016 and 2015.
(2) On August 24, 2016, holders of option awards from the 2013 Plan
voluntarily cancelled awards for 1,699,000 options with an option price of $.072 with an expiration date of July 27, 2021 to allow
Solitario to have additional financial flexibility. No consideration was given or received by the holders of the options to cancel
the awards.
10.
Share Repurchase
Program
On October 28, 2015, Solitario’s Board
of Directors approved a share repurchase program that initially authorized Solitario to purchase up to two million shares of its
outstanding common stock through December 31, 2016. During 2016, Solitario’s Board of Directors extended the expiration date
of the share repurchase program through December 31, 2017. During the years ended December 31, 2016 and 2015, Solitario purchased
475,600 and 145,000 shares of Solitario common stock, respectively, for an aggregate purchase price of $248,000 and $67,000, respectively.
As of December 31, 2016, Solitario has purchased a total of 620,600 shares for an aggregate purchase price of $315,000 under the
share repurchase program since its inception.