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TRER > SEC Filings for TRER > Form 10-Q on 15-Jul-2013All Recent SEC Filings




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 Corporation" "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 our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our 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 our 2012-2013 rare-earth exploration plans at our 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 our ability to raise capital and to continue our exploration plans on our 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 our history of losses and need for additional financing;
risks associated with our limited operating history;
risks associated with our properties all being in the exploration stage;
risks associated with our lack of history in producing metals from our properties;
risks associated with a shortage of equipment and supplies;
risks associated with our need for additional financing to develop a producing mine, if warranted;
risks associated with our 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 our financial condition;
risks associated with a shortage of equipment and supplies adversely affecting our 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 our properties;
risks associated with uninsured risks;
risks associated with mineral operations being subject to market forces beyond our 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 our land reclamation requirements;
risks associated with rare earth and beryllium mining presenting potential health risks;
risks related to title in our 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 our dependence on key personnel;
risks related to our Securities and Exchange Commission ("SEC") filing history;
risks and uncertainties related to our self-reporting with the SEC;
risks related to our securities.

This list is not exhaustive of the factors that may affect our 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 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. 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. We caution 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, we disclaim 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. We qualify 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 and our El Paso warehouse located at 11459 Pellicano Dr., El Paso, Texas was 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.

Our 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 on 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 nine months ended May 31, 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's February 15, 2011 Employment Agreement (the "Employment Agreement"), pursuant to which we and Mr. Mathers agreed upon the terms and conditions of Mr. Mathers'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 services for us in accordance with the standards set forth in the Employment Agreement through December 31, 2012.

Upon satisfaction of the terms of his employment pursuant to the standards of the Employment Agreement, pursuant to the Supplemental Agreement, we and Mr. Mathers agreed to terminate the Employment Agreement on January 1, 2013 and pay Mr. Mathers a cash severance of $240,000 under the terms of the Supplemental Agreement. By executing the Supplemental Agreement, Mr. Mathers agreed not to terminate his Employment Agreement for "Good Reason" thereunder as a result of the recent changes to our Board. Mr. Mathers remains as a consultant to us.

The 180 calendar day grace period for the Corporation 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 our 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 December 12, 2012, our Board authorized, on recommendation of the Compensation Committee, that all of our issued and outstanding stock options, issued to our directors be exercisable on a cashless basis by permitting us 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, our Board re-priced Director Cecil Wall's five year options to purchase up to 90,000 shares at a price of $4.70 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. On December 19, 2012, our Board also re-priced Director 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.

On December 27, 2012, we repurchased 576,923 shares of our common stock from a private investor, representing approximately 1.58% of our 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 us 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. The repurchase price was paid through cash on hand from our available surplus. Other than this private transaction as described in this report, our Board 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 Corporation 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 Corporation 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 Corporation 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, we held our 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 25, 2013 and are hereby incorporated by reference in their entirety.

On March 6, 2013, we entered into a lease assignment (the "Lease Assignment Agreement") with Southwest Range & Wildlife Foundation, Inc., a Texas non-profit corporation (the "Foundation"), pursuant to which the Foundation agreed to assign to us a surface lease identified with the State of Texas as Surface Lease SL20040002 (the "West Lease"), which covers 54,990.11 acres in Hudspeth County, Texas. 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 (the "Common Shares"); 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 Agreement contains standard representations, warranties and covenants. The closing of the transaction contemplated by the Lease Assignment Agreement was completed 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 March 20, 2013, we announced 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.

On May 27, 2013, Mr. John Tumazos resigned as a director and non-executive chairman of our Board. Mr. Tumazos resigned from our Board to dedicate more of his time to his own business and personal pursuits. Mr. Tumazos has informed our Board that while he was pleased at the metallurgical progress evident in our press releases between March 20, 2013 and May 8, 2013, his resignation was due to his disagreement with certain policy decisions of our Board regarding the operations of the Corporation and his belief that now is the appropriate time to sell the Corporation to a larger concern.

The Board does not believe that Mr. Tumazos's concerns as expressed to the Board were truly disagreements with the Board's fundamental business strategy for us and our operations. The Board takes its obligation to increase shareholder value seriously and is actively considering all pathways available to the Corporation while also finalizing the Corporation's current technical work to prove out alternative production methodologies from its Preliminary Economic Assessment of June 2012. The Board believes that finalizing these methodologies in a cost efficient manner while simultaneously pursuing alternative strategic arrangements, including the possibility of selling the Corporation, is the best path to maximize shareholder value. The Board has overseen a drastic reduction of the Corporation's use of funds and remains dedicated to using the Corporation's funds in an efficient manner best suited to maximizing the Corporation's value. The Board will continue to consistently, actively consider and pursue all available opportunities for the Corporation and will engage qualified consultants as deemed necessary and appropriate by the Board to effectively assist the Board in evaluating and implementing its strategy, including, if deemed appropriate, selling the Corporation.

On June 4, 2013, we appointed Ms. Laura Lynch to serve as a member of our Board. As of the date of this Quarterly Report on Form 10-Q, Ms. Lynch has not been appointed to serve on any committees of the Board.

Ms. Lynch is a graduate of the University of Texas at Austin. Ms. Lynch is currently a Partner at the CL Ranch, a ranching/farming/mining operation in Hudspeth County. CL ranch is active in the mining and distribution of gypsum. Ms. Lynch has deep ties to the El Paso, Ft. Worth and Austin business communities and currently works as a consultant to us pursuant to a consulting agreement in which Ms. Lynch assists us in community relations and land acquisition.

Ms. Lynch is not related by blood or marriage to any of our directors or executive officers or any persons nominated by us to become directors or executive officers. Outside of her consulting agreement with us, we have not engaged in any transaction in which Ms. Lynch or a person related to Ms. Lynch had a direct or indirect material interest. To our knowledge, there is no arrangement or understanding between any of our directors, officers and Ms. Lynch pursuant to which she was selected to serve as a director of the Corporation.

On June 5, 2013, we entered into a consulting agreement, effective May 1, 2013 (the "Consulting Agreement"), with G.W. "Mike" McDonald, our Chief Financial Officer. The Consulting Agreement provides for a monthly retainer in the amount of $2,000 (the "Retainer"). In addition to the Retainer, we agreed to reimburse Mr. McDonald for reasonable expenses incurred by Mr. McDonald in performance of his duties under the Consulting Agreement. The Consulting Agreement is for an initial term of one year but may be extended by written agreement of us and Mr. McDonald.

Liquidity and Capital Resources

As of May 31, 2013, we had a working capital surplus of approximately $3 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. Our 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 Corporation 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 . . .

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