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TRER > SEC Filings for TRER > Form 10-Q on 9-Apr-2013All Recent SEC Filings

Show all filings for TEXAS RARE EARTH RESOURCES CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for TEXAS RARE EARTH RESOURCES CORP.


9-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, unless the context requires otherwise, references to "Texas Rare Earth Resources Corp," "the Company" "we," "our" or "us" refer to Texas Rare Earth Resources Corp. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this quarterly report. This Quarterly Report on Form 10-Q may also contain statistical data and estimates we obtained from industry publications and reports generated by third parties. Although we believe that the publications and reports are reliable, we have not independently verified their data.

Forward-Looking Statements

This Quarterly Report on Form 10-Q and the exhibits attached hereto contain "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively, "forward-looking statements"). Such forward-looking statements concern the Company's anticipated results and developments in the Company's operations in future periods, planned exploration and development of its properties, plans related to its business and other matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as "expects" or "does not expect", "is expected", "anticipates" or "does not anticipate", "plans", "estimates" or "intends", or stating that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q, include, but are not limited to:

the progress, potential and uncertainties of the Company's 2012-2013 rare-earth exploration plans at its Round Top project in Hudspeth County, Texas (the "Round Top Project");
the success of getting the necessary permits for future drill programs and future project development;
expectations regarding the ability of the Company to raise capital and to continue its exploration plans on its properties;
plans regarding anticipated expenditures at the Round Top Project; and
plans outlined under the section heading "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Plan of Operation".

Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

risks associated with the Company's history of losses and need for additional financing;
risks associated with the Company's limited operating history;
risks associated with the Company's properties all being in the exploration stage;
risks associated with the Company's lack of history in producing metals from its properties;
risks associated with a shortage of equipment and supplies;
risks associated with the Company's need for additional financing to develop a producing mine, if warranted;
risks associated with the Company's exploration activities not being commercially successful;
risks associated with the ownership of surface rights at our Round Top Project;
risks associated with increased costs affecting the Company's financial condition;
risks associated with a shortage of equipment and supplies adversely affecting the Company's ability to operate;
risks associated with mining and mineral exploration being inherently dangerous;
risks associated with mineralization estimates;
risks associated with changes in mineralization estimates affecting the economic viability of the Company's properties;
risks associated with uninsured risks;
risks associated with mineral operations being subject to market forces beyond the Company's control;
risks associated with fluctuations in commodity prices;
risks associated with permitting, licenses and approval processes;
risks associated with the governmental and environmental regulations;
risks associated with future legislation regarding the mining industry and climate change;
risks associated with potential environmental lawsuits;
risks associated with the Company's land reclamation requirements;
risks associated with rare earth and beryllium mining presenting potential health risks;
risks related to title in the Company's properties;
risks related to competition in the mining and rare earth elements industries;
risks related to economic conditions;
risks related to our ability to manage growth;


risks related to the potential difficulty of attracting and retaining qualified personnel;
risks related to the Company's dependence on key personnel;
risks related to the Company's Securities and Exchange Commission ("SEC") filing history;
risks and uncertainties related to the Company's self-reporting with the SEC;
risks related to the Company's securities.

This list is not exhaustive of the factors that may affect the Company's forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the section heading "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report. Although the Company has 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. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by law, the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company qualifies all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements.

Overview and Organizational History

We are a mining company engaged in the business of the acquisition, exploration and, if warranted, development of mineral properties. We currently hold two nineteen year leases, executed in September 2011 and November 2011, to explore and develop a 950 acre rare earths project located in Hudspeth County, Texas known as the Round Top Project and prospecting permits covering an adjacent 9,345 acres. We also own unpatented mining claims in New Mexico. Our principal focus will be on developing a metallurgical process to concentrate or otherwise extract the metals from the Round Top rhyolite, although we will continue to examine other opportunities in the region as they develop. We currently have limited operations and have not established that any of our projects or properties contain any proven or probable reserves under SEC Industry Guide
7. Our operations are exploratory in nature.

We currently do not have any producing properties and consequently, we have no current operating income or cash flow and have not generated any revenues. Further exploration will be required before a final evaluation as to the economic and practical feasibility of any of our properties is determined.

As announced on October 3, 2012, we intend to commission an expanded version of the June 2012 Preliminary Economic Analysis to include scaled down operations beginning at 15,000 tonnes per day, and to include other potentially valuable elements such as uranium and thorium which are present in the rock. We believe a "scaled down" model is a much better fit with the present rare earth market. The expanded Preliminary Economic Analysis will also model a variety of processes as we develop them during the course of our ongoing metallurgical research, which is our primary focus at this time.

In addition to the Round Top Project, we also own title to 12 unpatented mining claims, the Macho group, comprising 240 acres covering the Old Dude Mine, located in Sierra County, New Mexico. The Old Dude Mine has a production history of silver, lead, zinc and gold dating from the 1890s. We also own another 18 unpatented mining claims and fractional claims, the HA group, comprising 274 acres covering an andesite hosted vein system similar to and 10 miles to the southwest of the Macho District. These claims surround another historic producer, the Graphic Mine. The geologic setting at the HA property is the same as the Macho. We do not intend to schedule any physical exploration such as drilling or geophysics at these properties but will actively seek joint development or sale of them.

Our headquarters are located at 539 El Paso, Sierra Blanca, Texas 79851. Effective August 31, 2012, our offices at 304 Inverness Way South, Suite 365, Englewood, Colorado have been closed. Our El Paso warehouse located at 11459 Pellicano Dr., El Paso, Texas will also be closed in June 2013. On January 1, 2013, we moved our accounting functions to our former office in Tyler, Texas under the supervision of our CFO, G. W. McDonald.

The current management and board is shareholder-centric, and receives either no cash compensation or much less than previous management, see our most recent proxy statement of Schedule 14A as filed with the SEC on December 28, 2012, for more information regarding the compensation of officers and directors. We will require definitive scientific documentation, rigorous economic studies, consideration of a wide range of alternatives and meticulous oversight of any cash outlays of shareholder funds.

We were incorporated in the State of Nevada in 1970 as Standard Silver Corporation. In July 2004, our Articles of Incorporation were amended and restated to increase the number of shares of common stock to 25,000,000, and in March 2007, we affected a 1-for-2 reverse stock split. In September, 2008 we amended and restated our Articles of Incorporation to allow the increase of the number of shares of common stock from 25,000,000 to 100,000,000, and to authorize an additional 10,000,000 shares of preferred stock, to be issued at management's discretion. In September 2010, we amended our Amended and Restated Articles of Incorporation to change our name from Standard Silver Corporation to Texas Rare Earth Resources Corp.


On August 24, 2012, we changed our state of incorporation from the State of Nevada to the State of Delaware (the "Reincorporation") pursuant to a plan of conversion dated August 24, 2012. The Reincorporation was previously submitted to a vote of, and approved by, our stockholders at a special meeting of the stockholders held on April 25, 2012.

Recent Corporate Developments

The following significant corporate developments occurred during our six months ended February 28, 2013 and the subsequent period through the filing of this quarterly report:

On September 14, 2012, we and Mr. Anthony Garcia mutually agreed upon the resignation of Mr. Garcia as our Senior Vice President of Project Development and Engineering effective retroactively to August 31, 2012. In connection with Mr. Garcia's resignation as our Senior Vice President of Project Development, we entered into a Confidential Severance, Waiver and Release Agreement with Mr. Garcia, dated September 14, 2012, to be retroactively effective August 31, 2012, whereby in exchange for a full general release and waiver of any obligations owed by us to Mr. Garcia, Mr. Garcia is entitled to receive: (i) continuation of his current salary of $200,000, as of the time of termination, for a period of twelve months (minus applicable withholding), paid through our payroll practices; and (2) continuation of health benefits through our payment of his COBRA premiums, if elected within the time period required by law, during the period from September 1, 2012 through February 28, 2013 (or such shorter period as Mr. Garcia is entitled to COBRA continuation coverage under the terms of our insurance policies or plans).

Effective September 26, 2012, we and Mr. Wm. Christopher Mathers, our former CFO, entered into a supplemental agreement (the "Supplemental Agreement") to Mr. Mathers' February 15, 2011 Employment Agreement (the "Employment Agreement"), pursuant to which we and Mr. Mathers agreed upon the terms and conditions of Mr. Mather's departure at the end of the calendar year 2012. Pursuant to the material terms of the Supplemental Agreement, Mr. Mathers remained employed as our Chief Financial Officer until his resignation on January 1, 2013. The Employment Agreement remained in full force and effect and was unamended, except as set forth below, and Mr. Mathers continued to perform his services to the Registrant in accordance with the standards set forth in the Employment Agreement through December 31, 2012. During the transition period, Mr. Mathers was required to use his reasonable best efforts to (i) create a smooth transition to our successor Chief Financial Officer, Mr. McDonald (ii) sublet our Colorado office space and (iii) perform such other duties as may arise pursuant to the terms of the Employment Agreement, including handling certain specific filings of the Company.

Upon satisfaction of the terms of his employment pursuant to the standards of the Employment Agreement, pursuant to the Supplement Agreement, we and Mr. Mathers have agreed to terminate the Employment Agreement on January 1, 2013 and pay Mr. Mathers a cash severance amount under the terms thereof of $240,000. By executing the Supplement Agreement, Mr. Mathers agreed not to terminate his Employment Agreement for "Good Reason" thereunder as a result of the recent changes to our board of directors. The Supplement Agreement also redefines "Misconduct" under the terms of the Employment Agreement.

The 180 calendar day grace period for the Company to regain compliance with the minimum bid price requirement of $1.00 under the rules of the OTCQX U.S. Premier expired on November 13, 2012. Starting on November 14, 2012, the quotations for the Company's shares of common stock moved from the OTCQX U.S. Premier to the OTCQX U.S. for continued quotations.

On November 23, 2012, we announced that we had learned that the Texas General Land Office (the "GLO") had filed a lawsuit against the Southwest Range & Wildlife Foundation, Inc. (the "Foundation") seeking a declaratory judgment that the restrictions on mining in Section 5.06(1) (no mining during hunting season),
Section 5.06(2) (no mining after dark or before dawn), and Section 5.06(4) (no lights) of the grazing and agricultural lease (Surface Lease SL 20040002, known as the "West Lease") are legally void and unenforceable in violation of the public policy of the State of Texas.

On March 6, 2013, we entered into a lease assignment with the Foundation, pursuant to which the Foundation agreed to assign to us the West Lease. In exchange for the West Lease, we agreed to: (i) pay the Foundation $500,000 in cash; (ii) issue 1,063,830 of our common shares, par value $0.01; and (iii) make ten (10) payments to the Foundation of $45,000 each, with the first such payment due on or before June 1, 2013, and the nine (9) subsequent payments due on or before June 1 of each of the following years, such payments to be used by the Foundation to support conservation efforts within the Rio Grande Basin. The lease assignment closed on March 8, 2013. This lease assignment has rendered the lawsuit between the Foundation and the GLO moot. See "Part II - Item 1. Legal Proceedings" below for more details.

On December 12, 2012, the Board authorized, on recommendation of the Compensation Committee, that all of the Company's issued and outstanding stock options, issued to directors of the Company be exercisable on a cashless basis by permitting the Company to withhold shares of common stock with a fair market value equal to the exercise price as determined on the date of exercise.

On December 19, 2012, the Board re-priced Mr. Cecil Wall's five year options to purchase up to 90,000 shares at a price of $4.70 and Mr. Anthony Marchese's five year options to purchase up to 45,000 shares of common stock at an exercise price of $2.60, five year option to purchase up to 175,000 shares of common stock at an exercise price of $4.15, five year option to purchase up to 150,000 shares of common stock at an exercise price of $2.50 per share, and ten year option to purchase up to 100,000 shares of common stock at an exercise price of $1.51 per share, such that all such options are now exercisable at a price of $1.00 per share. The other terms and conditions of these options remain the same. The Black-Scholes pricing model was used to estimate the fair value of the 460,000 options issued during the period to these directors, using the assumptions of a risk free interest rate of 1.1%, dividend yield of 0%, volatility of 324%, and an expected life ranging from 3.5 to 10 years. The Company has determined that the expense associated with the repricing of these options to be immaterial.


On December 27, 2012, we repurchased 576,923 shares of our common stock from a private investor, representing approximately 1.58% of the Company's issued and outstanding shares of common stock, at a price of $0.23 per share for an aggregate purchase amount of $132,692. Following the repurchase, we intend to cancel the entire amount of shares from treasury, resulting in the Company having 35,973,086 shares of common stock issued and outstanding. The repurchase was made pursuant to a privately negotiated stock repurchase agreement. The per share repurchase price for the shares repurchased was determined through arms-length negotiations with the private investor. The stock repurchase agreement and the related transactions were approved by our board of directors. The repurchase price was paid through cash on hand from the Company's available surplus. Other than this private transaction as described in this report, our board of directors has not authorized any stock repurchase program or plan, and we have no current plans to effect any open-market purchases of our common stock or other repurchases of our common stock.

On January 22, 2013, we engaged a representative to assist in locating possible strategic investment alternatives for our Round Top project from investors in Asia. We agreed to compensate the representative in relation to any non-securities related transactions as follows:

1. For any transactions in which the net aggregate consideration received by us is equal to or greater than $100 million, the representative shall receive
(a) one million options, issued at closing and exercisable for one year, to purchase shares of common stock of the Company at $1.00 per share and (b) a cash fee equal to 2% of the net aggregate consideration received by us.

2. For any transactions in which the net aggregate consideration received by us is equal to or greater than $200 million, the representative shall receive
(a) two million options, issued at closing and exercisable for one year, to purchase shares of common stock of the Company at $1.00 per share and (b) a cash fee equal to 2% of the net aggregate consideration received by us.

3. For any transactions in which the net aggregate consideration received by us is less than $100 million, the representative shall receive (a) 500,000 options, issued at closing and exercisable for one year, to purchase shares of common stock of the Company at $1.00 per share and (b) a cash fee equal to 2% of the net aggregate consideration received by us.

On February 15, 2013, the Company held its annual general meeting of stockholders at the Wyndham El Paso Airport Hotel, 2027 Airway Boulevard, El Paso, Texas 79925 at 10:00 a.m. local time. Stockholders representing 29,550,506 shares or 80.85% of the shares of common stock authorized to vote (36,550,009) were present in person or by proxy, representing a quorum for the purposes of the annual general meeting. The complete results of our annual meeting were filed on Form 8-K on February 15, 2013 and are hereby incorporated by reference in their entirety.

On March 20, 2013, we announce that testing done at an independent lab had identified Yttrofluorite as the primary rare earth element bearing mineral in samples provided by us from our Round Top project. More significantly, this mineral also carries the majority of the potential high commercial value Heavy Rare Earth Elements (HREE). Yttrofluorite, due to its relative ease of dissolution in sulfuric acid as demonstrated in laboratory tests at the independent lab, offers a distinct, possible economic advantage over other less reactive HREE bearing minerals.

On March 27, 2013, we announced that in-house research on the mineralogy, geochemistry, and kinetics of direct acid leaching indicated that a simple leaching process is effective in removing target heavy rare earth elements from coarse grains of Round Top project rock. We believe that these continuing studies are defining the conditions under which approximately 150 grams per liter (15%) strength sulfuric acid successfully penetrates the grains and dissolves the valuable rare earth-containing minerals that are disseminated throughout the rhyolite host rock.

Liquidity and Capital Resources

As of February 28, 2013, we had a working capital surplus of approximately $4.39 million. We will need to raise additional funding to implement our business strategy. Our management believes that based on our current working capital, we will be able to continue operations through the end of calendar year 2014 without raising additional capital. During our fiscal year ending August 31, 2013, we plan to spend over $1,500,000 for metallurgical testing and flow sheer development, additional geologic and resource modeling and compliance costs associated with state governmental agencies and appropriate staff and consulting expenses. The timing of these expenditures is dependent upon a number of factors, including the availability of third party contractors. We estimate that general and administrative expenses during fiscal year ending August 31, 2013 will be approximately $2,200,000 to include payroll, severance payments to ex-employees, investor relations, professional services, travel, and other expenses necessary to conduct our operations. We have reduced our staff, closed the Denver office and plan to reduce all other costs possible in order to accomplish our objectives without the necessity of raising additional capital. The Denver lease expires on May 31, 2014. While we continue to make every effort to sublease the Denver office space, we currently remain obligated for lease payments to the landlord.


We currently do not have sufficient funds to fully complete exploration and development work on any of our properties, which means that we will be required to raise additional capital, enter into joint venture relationships, or find alternative means to finance our properties in order to place them into commercial production, or evaluate the possibility of selling one or more of our projects or the Company in its entirety. Failure to obtain sufficient financing may result in the delay or indefinite postponement of exploration and, if warranted, development or production on one or more of our properties and any properties we may acquire in the future or even a loss of property interests. This includes our leases over claims covering the principal deposits on our properties, which may expire unless we expend minimum levels of expenditures over the terms of such leases. We cannot be certain that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable or acceptable to us. Our ability to arrange additional financing in the future will depend, in part, on the prevailing capital market conditions as well as our business performance.

If we cannot attract investment capital on favorable terms, we will evaluate other potential sources of financing that may include:

(1) early exercise of warrants by shareholders;

(2) sales of royalties on our Macho Silver property, REE or non-REE elements as may be subsequently documented;

(3) sale of our Macho Silver property;

(4) JV or sale of the "Contact Zone" enriched in beryllium and uranium that was the earlier subject of Cyprus Minerals 1988 historical definitive feasibility study; and

(5) based on our experience in operating "narrow vein" deposits, possible participation in other mining ventures as operators for or partners with other investors or companies.

During the six month period ended February 28, 2013, we invested approximately $10,000 for the purchase of land in the surrounding area of Round Top. We also sold furniture and equipment from our Denver office a net book value totaling approximately $12,000 and recognized a loss on the disposal of these assets of approximately $16,991. We donated equipment with a net book value totaling approximately $11,000 of which approximately $8,500.00 was expensed as a charitable contribution.

Results of Operations

Six months ended February 28, 2013 and February 29, 2012

General & Revenue

We had no operating revenues during the six months ended February 28, 2013 and February 29, 2012. We are not currently profitable. As a result of ongoing operating losses, we had an accumulated deficit of approximately $24,708,000 as of February 28, 2013.

Operating expenses and resulting losses from Operations.

We incurred exploration costs for the six months ended February 28, 2013 and February 29, 2012, in the amount of approximately $457,000 and $3,753,000, respectively. Expenditures for the six months ended February 28, 2013 were primarily for metallurgical testing while the expenditures for the six month period ended February 29, 2012 were primarily incurred for drilling and related geological consulting fees at our Round Top Project. Also included in this year's expenses was approximately $231,000 of non-cash stock based compensation for one of our then executive officers.

Our general and administrative expenses for the six months ended February 28, 2013 and February 29, 2012, respectively, were approximately $1,431,000 and $3,152,000. For the six months ended February 28, 2013, this amount included approximately $231,000 in non-cash stock based compensation to one director and one executive officer and cash severance fees of approximately $240,000 paid to our ex-chief financial officer. The remaining expenditures totaling approximately $960,000 were primarily for payroll and related taxes and benefits, professional fees and other general and administrative expenses necessary for our operations. Included in our general and administrative expenses for the six months ended February 29, 2012, were non-cash stock based compensation of approximately $1,455,000 for two of our executive officers and one employee and a one-time charge of approximately $604,000 for 400,000 options granted to four of our Directors as continuing compensation for their service on . . .

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