SOLITARIO RESOURCES CORP. quarterly report, Q2 FY2019

Solitario Zinc Corp. Form 10-Q Summary

Business Context and Reporting Period

Quarterly report for the three and six months ended June 30, 2019. The filing identifies the registrant as Solitario Zinc Corp. (the request metadata refers to Solitario Resources Corp.). The company is an exploration-stage mineral company focused primarily on zinc-related properties, royalties and potential strategic acquisitions. Its core assets were the Florida Canyon project in Peru and the Lik project in Alaska; it had not developed a mineral property or established proven and probable reserves.

The interim financial statements are unaudited and are prepared under U.S. GAAP. Revenue from property sales is sporadic and is not expected to be a consistent source of cash.

Financial Results and Key Metrics

Metric	Three Months Ended June 30, 2019	Three Months Ended June 30, 2018	Six Months Ended June 30, 2019	Six Months Ended June 30, 2018
Mineral property revenue	$0.0 million	$0.5 million	$0.4 million	$0.5 million
Exploration expense	$0.7 million	$0.2 million	$0.9 million	$0.3 million
General and administrative expense	$0.3 million	$0.8 million	$0.7 million	$1.2 million
Unrealized loss on marketable equity securities	$0.1 million	$0.2 million	$0.4 million	$0.7 million
Net loss	$1.0 million	$0.6 million	$1.4 million	$1.6 million
Loss per share	$0.02	$0.01	$0.02	$0.03

There was no operating revenue or operating profit from mining activities. The company remained loss-making, and conventional revenue and margin measures are not meaningful for this exploration-stage business.

Six-month net cash used in operating activities was $1.0 million, compared with $0.4 million in the prior-year period.
Investing activities provided $1.5 million, primarily from net sales of short-term investments.
Financing activities used $11,000 for share repurchases.
Cash and cash equivalents increased to $564,000 from $117,000 at December 31, 2018.
Cash, short-term investments and marketable equity securities totaled approximately $10.5 million at June 30, 2019. Cash and short-term investments alone totaled $9.3 million.
Working capital was $10.2 million, compared with $11.4 million at December 31, 2018.
Short-term investments consisted primarily of $8.7 million of U.S. Treasury securities.
Marketable equity securities were carried at $1.2 million, including 11 million Vendetta shares valued at $0.8 million and 100,000 Kinross shares valued at $0.4 million.
Total assets were $26.7 million, including $15.6 million of mineral properties.
The filing reports no debt. Liabilities consisted primarily of accounts payable, a $125,000 Lik project asset retirement obligation and $67,000 of operating lease liabilities.

Material Changes Versus the Prior Comparable Period

Second-quarter net loss increased by $389,000, primarily because the prior-year quarter included $502,000 of mineral property revenue and 2019 included substantially higher exploration spending.
Six-month net loss improved by $174,000 despite higher exploration expense, primarily because general and administrative costs, stock-option expense and unrealized investment losses declined.
Exploration expense increased 105% for the six-month period to $865,000. The principal driver was a $527,000 charge for Solitario’s share of Florida Canyon drilling completed by Nexa.
General and administrative expense decreased to $746,000 for the six months from $1.2 million, including lower salaries and benefits and lower stock-option compensation.
Unrealized losses on marketable equity securities declined to $389,000 from $663,000, but the losses remained non-cash and reduced reported earnings.
The January 2019 Royalty Sale generated $408,000 of reported revenue, consisting of cash and the fair value of a SilverStream convertible note, compared with $502,000 of cash revenue from the Yanacocha royalty sale in the 2018 second quarter.
The company repurchased and cancelled 33,200 shares during the first six months and had repurchased 964,100 shares for $460,000 cumulatively under its program as of June 30, 2019.
On January 1, 2019, the company adopted lease accounting under ASC 842, recognizing an $82,000 office lease asset and corresponding liability; the reported income and cash-flow effects were immaterial.

Guidance, Outlook, Risks and Unusual Items

Management expected the Florida Canyon exploration program to be completed in the third quarter of 2019. If the remaining 1,700 meters were completed, the company expected to record an additional $526,000 exploration charge.
Management budgeted approximately $178,000 for its share of 2019 Lik exploration, primarily in the third and fourth quarters, and expected full-year 2019 exploration spending to exceed 2018 levels.
The company did not anticipate additional significant property sales during the remainder of 2019. Future property or asset sales are expected to be infrequent.
Management expected general and administrative spending to remain at comparable quarterly levels and expected interest income to decline as short-term investments were used to fund operations.
The company stated that existing cash, investments and marketable securities were adequate to fund expected expenditures for the next year, but additional capital would be required for any future mine development or operations. Potential funding sources include cash, joint ventures, debt, equity issuance and asset sales.
Solitario had committed up to $1.58 million toward the Florida Canyon drilling program. At June 30, 2019, $527,000 remained payable for the second drilling tranche and was paid in July 2019; a further $526,000 could become payable if the final drilling threshold was reached.
The SilverStream note had a principal amount of Cdn$350,000, matured December 31, 2019, accrued 5% simple interest and was convertible only if SilverStream completed a qualifying initial public offering. Its approximate fair value at June 30, 2019 was $267,000, creating collectability and conversion risk.
Mineral property carrying values depend on future exploration success, permitting, financing, commodity prices and the ability of the company or its partners to develop or sell the properties. No property impairment was recorded during the reported periods.
The $125,000 Lik asset retirement obligation relates to reclamation of existing exploration disturbances. The timing of reclamation is uncertain, and the obligation was not discounted.
Cash held in brokerage accounts and foreign banks, approximately $553,000, was not covered by U.S. FDIC insurance. Treasury securities and marketable equity securities were also not FDIC-insured.
Management reported no material changes to previously disclosed risk factors, no legal proceedings, no defaults, no off-balance-sheet obligations and effective disclosure controls as of June 30, 2019.

Important Facts for Investors to Verify

Verify the identity and corporate naming of the registrant, including the transition from Solitario Zinc Corp. and any reference to Solitario Resources Corp.
Confirm completion of the Florida Canyon drilling program, the potential $526,000 final funding obligation and the treatment of amounts paid to Nexa.
Review the maturity, collectability and any conversion or repayment of the SilverStream note due December 31, 2019.
Assess whether cash and Treasury securities were sufficient for ongoing exploration, acquisitions and share repurchases without new financing.
Monitor the market value and liquidity of the Vendetta and Kinross holdings, which caused significant non-cash earnings volatility.
Evaluate exploration results, permitting, joint-venture funding and development prospects for Florida Canyon, Lik and La Promesa.
Review the assumptions supporting the $15.6 million mineral-property carrying value and the $125,000 Lik reclamation obligation.
Confirm the status of the share repurchase program, which was scheduled to expire December 31, 2019 and had approximately 1.04 million shares remaining under its authorization at June 30, 2019.