Solitario Exploration & Royalty Corp. — 2016 First-Quarter Form 10-Q
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2016, with comparative results for the three months ended March 31, 2015. Solitario is an exploration-stage company focused on acquiring precious- and base-metal exploration properties and royalty interests for potential sale, joint venture, or future development.
Following the August 2015 sale of its 80% interest in the Mt. Hamilton project, Solitario shifted away from project development toward exploration, asset acquisition, and monitoring its carried interest in the Bongará project. The company had 38,935,189 common shares outstanding as of April 29, 2016.
Financial position and operating metrics
| Metric | March 31, 2016 | December 31, 2015 / Q1 2015 |
|---|---|---|
| Cash and cash equivalents | $1.036 million | $17.718 million at December 31, 2015 |
| Short-term investments | $16.015 million | None reported at December 31, 2015 |
| Marketable equity securities | $371,000 | $202,000 at December 31, 2015 |
| Total assets | $17.536 million | $18.054 million at December 31, 2015 |
| Current liabilities | $124,000 | $179,000 at December 31, 2015 |
| Working capital | $17.390 million | $17.811 million at December 31, 2015 |
| Total shareholders’ equity | $17.412 million | $17.875 million at December 31, 2015 |
Short-term investments consisted of $8.505 million in U.S. Treasury securities and $7.510 million in bank certificates of deposit. The company had no outstanding RMB loan balance and no off-balance-sheet obligations.
| Three months ended March 31 | 2016 | 2015 |
|---|---|---|
| Revenue | No revenue reported | No revenue reported |
| Exploration expense | $122,000 | $25,000 |
| General and administrative expense | $442,000 | $554,000 |
| Loss before income tax | $551,000 | $451,000 |
| Income tax benefit | $62,000 | None reported |
| Net loss attributable to Solitario | $489,000 | $450,000 |
| Basic and diluted loss per share | $0.01 | $0.01 |
| Net cash used in operating activities | $632,000 | $403,000 |
| Net cash used in investing activities | $15.967 million | $137,000 |
| Cash used for share repurchases | $83,000 | None |
There is no meaningful operating margin because the company reported no revenue and remains exploration-stage. The quarter-end warrant liability was $1,000, and the company recorded a $3,000 warrant-liability gain. No debt was outstanding at March 31, 2016.
Material changes versus the prior comparable period
- Net loss increased to $489,000 from $450,000, primarily because exploration expense rose by $97,000 and derivative gains declined from $82,000 to a $1,000 loss.
- Exploration expense increased to $122,000 from $25,000, including $114,000 of reconnaissance activity directed toward evaluating potential acquisitions and strategic transactions.
- General and administrative expense declined to $442,000 from $554,000. The filing attributes the reduction principally to lower stock-option compensation, which fell to $2,000 from $157,000 after the cancellation of previously awarded options.
- Cash and cash equivalents declined by $16.682 million, largely because the company invested approximately $16.007 million in short-term investments. The shift reduced cash but did not represent a comparable reduction in liquid assets.
- Marketable equity securities increased to $371,000 from $202,000, and accumulated other comprehensive income increased to $218,000 from $111,000 due primarily to unrealized gains.
- The company repurchased 174,000 shares for $83,000 during the quarter. Cumulatively, 319,000 shares had been repurchased for $150,000 under the authorized two-million-share program.
- Mt. Hamilton-related development activity and debt costs no longer affected the 2016 quarter following the 2015 project sale. In the first quarter of 2015, $327,000 of Mt. Hamilton development costs were capitalized, including $169,000 of interest.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects 2016 exploration expenditures to exceed full-year 2015 expenditures and expects quarterly general and administrative costs to remain broadly comparable for the rest of 2016.
- Management stated that cash, short-term investments, and marketable securities were adequate to fund expected expenditures for at least the next year. Additional capital would be needed for development or operation of existing or acquired projects and could come from cash, investments, joint ventures, debt, equity issuance, or asset sales.
- The company expects to continue evaluating and potentially acquiring exploration projects or related assets, but completed no mineral-property acquisitions during the quarter.
- Management expects no significant additional investing uses during the remainder of 2016 absent acquisitions and expects additional share repurchases, subject to the program limit and available capital.
- Commodity-price weakness, the early-stage nature of the properties, exploration and development uncertainty, political and regulatory developments, and the ability to identify and complete acquisitions are material risks.
- All deferred tax assets remained fully offset by a valuation allowance. The $62,000 income-tax benefit primarily reflected deferred taxes associated with unrealized gains on marketable equity securities; management anticipated no currently payable income taxes during 2016.
- The RMB warrants covering 1,624,748 shares expire in August 2016. Management did not expect significant further fair-value changes and did not expect exercise before expiration, although dilution remains possible.
- No material property impairments, legal proceedings, related-party transactions, or changes to previously disclosed risk factors were reported. Disclosure controls were concluded to be effective.
Investor verification points
- Verify the reported investing cash-flow amount: the cash-flow statement reports $15.967 million used, while the MD&A text refers to $15.697 million.
- Confirm the exact share-repurchase totals and monthly table, because the February monthly figures appear inconsistent with the stated cumulative total.
- Assess liquidity based on the composition and maturities of the $16.015 million of Treasury securities and certificates of deposit, rather than cash alone.
- Review the valuation and liquidity risks of the Kinross and other marketable equity securities, including the effect of covered-call positions.
- Monitor exploration spending, acquisition activity, Bongará joint-venture progress, and the potential need for future financing.
- Review the expiration and potential dilution associated with the RMB warrants in August 2016.