UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015 | ||
OR | ||
o |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-34852
![[rer10qnov415v1002.gif]](rer10qnov415v1002.gif)
RARE ELEMENT RESOURCES LTD.
(Exact Name of Registrant as Specified in its Charter)
BRITISH COLUMBIA |
| N/A |
(State of other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
|
|
|
225 Union Blvd., Suite 250 |
|
|
Lakewood, Colorado |
| 80228 |
(Address of Principal Executive Offices) |
| (Zip Code) |
(720) 278-2460
(Registrant’s Telephone Number, including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
o Yes x No
Number of issuer’s common shares outstanding as of November 6, 2015: 52,941,880
1
Page
PART I – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
2
Reporting Currency, Financial and Other Information
All amounts in this report are expressed in thousands of United States (“U.S.”) dollars, unless otherwise indicated.
Financial information is presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
References to “Rare Element,” the “Company,” “we,” “our,” and “us” mean Rare Element Resources Ltd., our predecessors and consolidated subsidiaries, or any one or more of them, as the context requires.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking information” within the meaning of Canadian securities legislation and “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking statements”). Such forward-looking statements concern our development plans for the Bear Lodge Rare Earth Element Project (“Bear Lodge REE Project” or the “Project”), anticipated timing and outcome of metallurgical and process test work, plans to complete a demonstration-scale pilot plant, completion of a feasibility study (“FS”), projected timing for Project commissioning, future expenditures to comply with environmental and other laws and regulations, the impact of changes in foreign currency exchange rates on our financial statements, the viability and cost of proposed technology, our ability to continue as a going concern, and future capital and financing needs and our ability to meet these needs. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and the reasonable 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” “anticipates,” “plans,” “estimates” or “intends” (including negative or grammatical variations thereof), 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 are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from our expectations and include, among others, the factors referenced in the “Risk Factors” section of our Annual Report on Form 10-K for the period ended December 31, 2014, including, without limitation, risks associated with:
·
our history of losses and need for additional financing;
·
our ability to continue as a going concern without further financing;
·
our lack of production from our mineral properties, including the Bear Lodge REE Project;
·
numerous uncertainties that could affect the profitability or feasibility of the Bear Lodge REE Project;
·
the potential outcome of the planned FS that may indicate Bear Lodge REE Project economics are less favorable than is expected;
·
the exploration, development and operation of our Bear Lodge REE Project;
·
increased costs affecting the Bear Lodge REE Project and our financial condition;
·
volatile rare earth markets, including fluctuations in demand for, and prices of, rare earth products;
·
the establishment of adequate distribution channels to place our entire future product suite;
·
competition in the mining and rare earths industries, including an increase in global supplies or predatory pricing and dumping by our competitors;
·
technological advancements and the establishment of substitutes for rare earth products;
·
the specific product(s) from the Bear Lodge REE Project possibly having a limited number of customers, which could reduce our bargaining power, product pricing, and profitability;
·
our proprietary, patent-pending, processing technology that could encounter unforeseen problems, unexpected costs or both in scaling up to commercial application;
·
mineral reserve and mineral resource estimation;
·
the permitting, licensing and regulatory approval processes for our planned operations;
·
continued compliance with current environmental regulations and the possibility of new legislation, environmental regulations or permit requirements adverse to the mining industry, including measures regarding the mining industry and climate change;
·
our dependence on and the potential difficulty of attracting and retaining key personnel and qualified management;
·
a shortage of equipment and supplies;
3
·
mining, chemical processing and resource exploration and development being potentially hazardous activities;
·
operating in the resource industry, which can be highly speculative and subject to forces, including market forces, outside of our control;
·
title to our properties or mining claims;
·
insurance for our operations that could become unavailable, unaffordable or commercially unreasonable or exclude from coverage certain exposures of our business;
·
increased competition affecting our ability to raise capital or acquire additional properties;
·
negative impacts to our business or operations from market factors;
·
our land reclamation and remediation requirements;
·
information technology system disruptions, damage or failures;
·
effects of proposed legislation on the mining industry and our business;
·
foreign currency fluctuations;
·
our executive officers, directors and consultants being engaged in other businesses;
·
costs associated with any unforeseen litigation;
·
enforcement of civil liabilities in the United States and elsewhere;
·
our common shares continuing not to pay cash dividends;
·
our securities, including in relation to both company performance and general security market conditions;
·
the requirements of the NYSE MKT for continued listing and the “penny stock” rules;
·
tax consequences to U.S. shareholders related to our potential status as a “passive foreign investment company”; and
·
other factors, many of which are beyond our control.
This list is not exhaustive of the factors that may affect our forward-looking statements. 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, possibly 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 to revise or update 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 of the forward-looking statements contained in this Quarterly Report on Form 10-Q by the foregoing cautionary statements. We advise you to carefully review the reports and documents we file from time to time with the United States Securities and Exchange Commission (the “SEC”), particularly our Annual Report on Form 10-K. The reports and documents filed by us with the SEC are available at www.sec.gov.
4
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RARE ELEMENT RESOURCES LTD. | ||||
|
| September 30, 2015 |
| December 31, 2014 |
|
| (unaudited) |
| (audited) |
ASSETS: |
|
|
|
|
CURRENT ASSETS |
|
|
|
|
Cash and cash equivalents |
| $ 6,163 |
| $ 10,139 |
Interest receivable |
| 26 |
| 6 |
Accounts receivable |
| 16 |
| 21 |
Prepaid expenses |
| 210 |
| 315 |
Total Current Assets |
| 6,415 |
| 10,481 |
|
|
|
|
|
Equipment, net |
| 245 |
| 344 |
Land |
| 980 |
| 980 |
Mineral properties |
| 27 |
| 27 |
Total Assets |
| $ 7,667 |
| $ 11,832 |
|
|
|
|
|
LIABILITIES: |
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
Accounts payable and accrued liabilities |
| $ 815 |
| $ 1,098 |
Asset retirement obligation, current portion |
| 151 |
| 164 |
Total Current Liabilities |
| 966 |
| 1,262 |
|
|
|
|
|
Asset retirement obligation, non-current portion |
| 199 |
| 202 |
Total Liabilities |
| 1,165 |
| 1,464 |
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY: |
|
|
|
|
Common shares, no par value - unlimited shares authorized; shares outstanding September 30, 2015 - 52,941,880, December 31, 2014 - 47,707,216 |
| 103,639 |
| 100,652 |
Additional paid-in capital |
| 23,477 |
| 23,186 |
Accumulated deficit |
| (120,614) |
| (113,470) |
Total Shareholders' Equity |
| 6,502 |
| 10,368 |
|
|
|
|
|
Total Liabilities and Shareholders' Equity |
| $ 7,667 |
| $ 11,832 |
See accompanying notes to consolidated interim financial statements
5
RARE ELEMENT RESOURCES LTD. CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Expressed in thousands of U.S. dollars, except share and per share amounts) | ||||||||||
|
|
| Three months ended September 30, |
| Nine months ended September 30, | |||||
|
|
| 2015 |
| 2014 |
| 2015 |
| 2014 | |
|
|
|
|
|
|
|
|
|
| |
Operating expenses: |
|
|
|
|
|
|
|
|
| |
Exploration and evaluation |
|
| $ (1,517) |
| $ (2,305) |
| $ (3,834) |
| $ (7,164) | |
Corporate administration |
|
| (850) |
| (1,038) |
| (2,779) |
| (3,585) | |
Depreciation |
|
| (24) |
| (60) |
| (99) |
| (163) | |
Total operating expenses |
|
| (2,391) |
| (3,403) |
| (6,712) |
| (10,912) | |
|
|
|
|
|
|
|
|
|
| |
Non-operating income/(expenses): |
|
|
|
|
|
|
|
|
| |
Interest income |
|
| 8 |
| 14 |
| 26 |
| 65 | |
Loss on currency translation |
|
| (189) |
| (212) |
| (458) |
| (361) | |
Gain on derivatives |
|
| - |
| - |
| - |
| 116 | |
Total non-operating income/(expenses) |
|
| (181) |
| (198) |
| (432) |
| (180) | |
|
|
|
|
|
|
|
|
|
| |
Net loss |
|
| $ (2,572) |
| $ (3,601) |
| $ (7,144) |
| $ (11,092) | |
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income/(loss) |
|
|
|
|
|
|
|
|
| |
Realized loss on available-for-sale securities |
|
| $ - |
| $ - |
| $ - |
| $ - | |
Unrealized gain/(loss) on available-for-sale securities |
|
| - |
| - |
| - |
| - | |
Total other comprehensive income/(loss) |
|
| - |
| - |
| - |
| - | |
|
|
|
|
|
|
|
|
|
| |
COMPREHENSIVE LOSS |
|
| $ (2,572) |
| $ (3,601) |
| $ (7,144) |
| $ (11,092) | |
|
|
|
|
|
|
|
|
|
| |
LOSS PER SHARE - BASIC AND DILUTED |
|
| $ (0.05) |
| $ (0.08) |
| $ (0.14) |
| $ (0.23) | |
|
|
|
|
|
|
|
|
|
| |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |
|
| 52,941,393 |
| 47,707,216 |
| 50,659,421 |
| 47,706,337 | |
See accompanying notes to consolidated interim financial statements
6
RARE ELEMENT RESOURCES LTD. | |||||
|
| For the nine months ended Sept 30, | |||
|
| 2015 |
| 2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
| |
Net loss for the period |
| $ (7,144) |
| $ (11,092) | |
Adjustments to reconcile net loss for the period to net cash and cash equivalents used in operating activities: |
|
|
|
| |
Depreciation |
| 99 |
| 163 | |
Asset retirement obligation |
| (16) |
| 17 | |
Realized gain on derivatives |
| - |
| (14) | |
Unrealized gain on derivatives |
| - |
| (103) | |
Stock-based compensation |
| 202 |
| 439 | |
|
| (6,859) |
| (10,590) | |
Changes in working capital: |
|
|
|
| |
Accounts receivable |
| 5 |
| 7 | |
Interest receivable |
| (20) |
| 4 | |
Prepaid expenses |
| 105 |
| 1 | |
Accounts payable and accrued liabilities |
| (283) |
| (362) | |
Net cash and cash equivalents used in operating activities |
| (7,052) |
| (10,940) | |
|
|
|
|
| |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
| |
Purchases of equipment |
| (2) |
| (33) | |
Proceeds from sale of equipment |
| 2 |
| - | |
Net cash and cash equivalents used in investing activities |
| - |
| (33) | |
|
|
|
|
| |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
| |
Cash received for common shares, net of share issuance costs |
| 3,076 |
| (42) | |
Net cash and cash equivalents provided by (used in) financing activities |
| 3,076 |
| (42) | |
|
|
|
|
| |
Decrease in cash and cash equivalents |
| (3,976) |
| (11,015) | |
Cash and cash equivalents - beginning of the period |
| 10,139 |
| 23,902 | |
Cash and cash equivalents - end of the period |
| $ 6,163 |
| $ 12,887 | |
|
|
|
|
| |
See accompanying notes to consolidated interim financial statements
7
Rare Element Resources Ltd.
Notes to Financial Statements
September 30, 2015
1.
NATURE OF OPERATIONS
Rare Element Resources Ltd. (collectively, “we,” “Rare Element” or the “Company”) was incorporated under the laws of the Province of British Columbia, Canada, on June 3, 1999.
We are focused on advancing the Bear Lodge Rare Earth Element (“REE”) Project located near the town of Sundance in northeast Wyoming. The Bear Lodge REE Project consists of several large, disseminated REE deposits and a proposed hydrometallurgical plant to be located near Upton, Wyoming. The Bear Lodge REE Project is one of the highest-grade REE deposits identified in North America and one of the highest-grade europium deposits in the world. In addition, the Bear Lodge REE Project has a favorable distribution of the remaining critical rare earth elements, which the Company defines as neodymium, praseodymium, dysprosium, europium, terbium and yttrium. At present, we are undertaking elemental separation test work and technical studies while working toward obtaining the necessary permits and licenses to enable us to develop the Bear Lodge REE Project. Based on review of current permitting timetables and other factors, the Company anticipates receiving its permits in the fourth quarter of 2016. The Company is working in parallel (with permitting activities) to advance engineering in preparation for the feasibility study, to gain strategic partners and off-take customers, to complete design and engineer a larger-scale demonstration plant and to scale up its REE separation test work in pilot plant testing. The Company’s ability to begin construction activities on the Project will be subject to (i) the availability of adequate capital, (ii) a positive FS, (iii) securing off-take customers, (iv) obtaining necessary permits, (v) board approval, and (vi) other factors.
Our continuing operations and the recoverability of the carrying values of our mineral property interests are dependent upon the development, mining and processing of economic mineral reserves at the Bear Lodge REE Project, our ability to obtain the necessary permits and licenses to mine and process these mineral reserves, and on the future profitable production of these mineral reserves.
As of September 30, 2015, the Company had working capital of $5,449. These unaudited consolidated financial statements do not reflect any adjustments regarding the recoverability and classification of assets or the amount and classification of liabilities or any other adjustments that might be necessary if we were unable to continue as a going concern at some future date. The Company’s ability to continue to progress development and initiate production of the Bear Lodge REE Project on our preferred timeline is dependent upon our ability to obtain further financing. Although we have been successful in raising capital in the past, current market conditions may not allow for timely additional financing to allow us to advance along our planned development schedule. Furthermore, there can be no assurance that we will be able to obtain additional financing in the future and remain a going concern.
2.
BASIS OF PRESENTATION
In accordance with U.S. GAAP for interim financial statements, these consolidated financial statements do not include certain information and note disclosures that are normally included in annual financial statements prepared in conformity with U.S. GAAP. Accordingly, these unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of December 31, 2014, which were included in our Annual Report on Form 10-K for the period ended December 31, 2014. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal, recurring nature) necessary to present fairly in all material respects our financial position as of September 30, 2015, and the results of our operations and cash flows for the nine months ended September 30, 2015 and 2014 in conformity with U.S. GAAP. Interim results of operations for the nine months ended September 30, 2015 may not be indicative of results that will be realized for the full year ending December 31, 2015.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact that adoption of ASU 2014-15 will have on our financial statements and related disclosures.
8
Rare Element Resources Ltd.
Notes to Financial Statements
September 30, 2015
In June 2014, the FASB issued ASU No. 2014-10, which amended Accounting Standards Codification (“ASC”) Topic 915 Development Stage Entities. The amendment eliminates certain financial reporting requirements surrounding development stage entities, including an amendment to the variable interest entities guidance in ASC Topic 810, Consolidation. The amendment removes the definition of a development stage entity from the ASC, thereby removing the financial reporting distinction between development stage entities and other entities under U.S. GAAP. Consequently, the amendment eliminates the requirements for development stage entities to (1) present inception-to-date information in the statements of income, cash flows and shareholders’ equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose the first year in which the entity is no longer a development stage entity. This amendment is effective for fiscal years beginning after December 15, 2014, and interim periods therein. Early application of each of the amendments is permitted for any annual reporting period or interim period for which the entity’s financial statements have not yet been issued. The Company made the election to early adopt this amendment effective December 31, 2014 and, as a result, the Company is no longer presenting or disclosing the information previously required under Topic 915. The early adoption was made to reduce data maintenance by removing all incremental financial reporting requirements for the Company. The adoption of this amendment alters the disclosure requirements of the Company, but it does not have any impact on the Company’s financial position or results of operations for the current or any prior reporting period.
3.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments can consist of cash and cash equivalents, marketable securities, accounts receivable, restricted cash, accounts payable and accrued liabilities. Included, at times, within cash and cash equivalents is an enhanced yield deposit account that contains an embedded derivative in the form of a foreign currency option. As of September 30, 2015, the Company had no such deposits. U.S. GAAP defines “fair value” as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and establishes a fair-value hierarchy that prioritizes the inputs used to measure fair value using the following definitions (from highest to lowest priority):
·
Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
·
Level 2 — Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data, by correlation or by other means.
·
Level 3 — Prices or valuation techniques requiring inputs that are both significant to the fair-value measurement and unobservable.
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. Periodically throughout the year, the Company has maintained balances in various U.S. operating accounts in excess of U.S. federally insured limits.
The following table presents information about financial instruments recognized at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and indicates the fair value hierarchy:
9
Rare Element Resources Ltd.
Notes to Financial Statements
September 30, 2015
4.
EQUIPMENT
| September 30, 2015 |
| December 31, 2014 | ||||
| Cost | Accumulated Depreciation | Net Book Value |
| Cost | Accumulated Depreciation | Net Book Value |
Computer equipment | $ 186 | $ 176 | $ 10 |
| $ 189 | $ 168 | $ 21 |
Furniture | 106 | 70 | 36 |
| 111 | 64 | 47 |
Geological equipment | 488 | 366 | 122 |
| 488 | 319 | 169 |
Vehicles | 221 | 144 | 77 |
| 221 | 114 | 107 |
| $ 1,001 | $ 756 | $ 245 |
| $ 1,009 | $ 665 | $ 344 |
5.
SHAREHOLDERS’ EQUITY
Common Shares
On April 29, 2015, the Company closed its $3,400 offering of units, consisting of common shares and warrants in a registered direct offering in the United States resulting in net proceeds of $3,076 after expenses. The Company sold an aggregate of 5,230,770 units, each consisting of one common share and one warrant to purchase 0.5 common shares, at a price of $0.65 per unit.
Warrants
Each outstanding warrant is exercisable for one of the Company’s common shares and was issued to investors in connection with registered direct offerings of the Company that closed on September 27, 2013 and April 29, 2015. In addition, the Company issued warrants to a placement agent in connection with each offering, under the same terms as those issued to investors. The exercise price and exercise period are outlined below:
Financing | Investor Warrants | Placement Agent Warrants | Total Warrants | Exercise Price | Expiration Date |
September 27, 2013 offering | 1,338,688 | 133,869 | 1,472,557 | $4.15 | 9/27/16 |
April 29, 2015 offering | 2,615,385 | 261,539 | 2,876,924 | $0.85 | 4/29/18 |
Total Warrants Outstanding as of September 30, 2015 |
|
| 4,349,481 |
|
|
The value of the warrants issued to the placement agent (non-employee) for its services in connection with the April 29, 2015 offering was offset against the proceeds of the financing. The Company used a Black-Scholes model with inputs including a market price of the Company’s stock of $0.72, an exercise price of $0.85, a 3.0-year term, volatility of 81.0%, a risk-free rate of 0.91% and no assumed dividends. The value of the warrants issued to the placement agent for its services in connection with the April 29, 2015 offering was estimated at $91.
10
Rare Element Resources Ltd.
Notes to Financial Statements
September 30, 2015
6.
ADDITIONAL PAID-IN CAPITAL
Stock-based compensation
We have options outstanding and exercisable that were issued under two plans, the Fixed Stock Option Plan (“FSOP”) and the 10% Rolling Stock Option Plan (“RSOP”).
The FSOP was originally approved by shareholders on December 11, 2002, and subsequently approved by shareholders on December 7, 2009 following certain amendments to the FSOP. The FSOP expired upon the adoption of the RSOP that was approved by shareholders on December 2, 2011, and as such, we may no longer grant options under the FSOP. However, the terms of the FSOP continue to govern all prior awards granted under such plan until such awards have been cancelled, forfeited or exercised in accordance with the terms thereof. As of September 30, 2015, we had 1,290,000 options outstanding under our FSOP, as amended, and 3,289,900 options outstanding under our RSOP.
The fair value of each employee stock option award is estimated at the grant date using a Black-Scholes option pricing model and the price of our common shares on the date of grant. The significant assumptions used to estimate the fair value of stock options awarded during the nine-months ended September 30, 2015 and 2014, using a Black-Scholes model are as follows:
| September 30, | ||
| 2015 |
| 2014 |
Risk-free interest rate | 1.0% - 1.1% |
| 0.93% - 0.99% |
Expected volatility | 73.4% - 79.7% |
| 74.7% - 79.1% |
Expected dividend yield | Nil |
| Nil |
Expected term in years | 3.4 |
| 3.25 – 3.28 |
Estimated forfeiture rate | 3.4% - 3.6% |
| 3.68% - 3.72% |
The compensation expense recognized in our consolidated financial statements for the three and nine months ended September 30, 2015 for stock option awards was $81 and $202, respectively, and $121 and $439 for the same periods in 2014. As of September 30, 2015, there was $121 of total unrecognized compensation cost related to 877,400 unvested stock options that is expected to be recognized over a weighted-average remaining vesting period of 0.77 years.
The following table summarizes our stock option activity for each of the nine-month periods ended September 30, 2015 and 2014:
11
Rare Element Resources Ltd.
Notes to Financial Statements
September 30, 2015
7.
COMMITMENTS AND CONTINGENCIES
Our commitments and contingencies include the following items:
Potential environmental contingency
Our mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment. These laws and regulations are continually changing and generally becoming more restrictive over time. The Company conducts its operations so as to protect public health and the environment and believes its operations are materially in compliance with all applicable laws and regulations. We have made, and expect to make in the future, expenditures to comply with such laws and regulations. The ultimate amount of reclamation and other future site-restoration costs to be incurred for existing mining interests is uncertain.
12
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of the consolidated financial results and condition of Rare Element Resources Ltd. (collectively, “we,” “us,” “our,” “Rare Element” or the “Company”) for the three-month and nine-month periods ended September 30, 2015, has been prepared based on information available to us as of November 6, 2015. This discussion should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto included herewith and the audited Consolidated Financial Statements of Rare Element for the period ended December 31, 2014, and the related notes thereto filed with our Annual Report on Form 10-K, which have been prepared in accordance with U.S. GAAP. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See “Cautionary Note Regarding Forward-Looking Statements.”
All currency amounts are expressed in thousands of U.S. dollars, unless otherwise noted.
Introduction
We are focused on advancing the Bear Lodge REE Project in Wyoming. We completed a pre-feasibility study (“PFS”) on our Bear Lodge REE Project in 2014 and continue to advance the permitting process and plan to develop the Project.
Outlook
We have sufficient cash on hand to execute certain development plans for the next twelve months as well as the ability to defer activities and further reduce our rate of expenditures, if market or other conditions dictate. Major planned activities include:
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Continuing to support the United States Forest Service’s efforts to prepare an Environmental Impact Statement (“EIS”) on the Project in accordance with the National Environmental Policy Act. The draft EIS is currently anticipated in December 2015. The final EIS and draft record of decision (“ROD”) are expected in mid-2016, with the final ROD anticipated in late 2016;
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Completing Phase I of elemental separation test programs in larger-scale pilot plant testing directed at creating advanced purification of individual rare earth elements into products that meet end-users’ specific needs and maximize value to the Company;
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Supporting activities related to the applications for the mine permit with the Wyoming Department of Environmental Quality, the license to possess source material with the U.S. Nuclear Regulatory Commission, and other federal and State permits;
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Incorporating the results of the recently completed geotechnical confirmation and condemnation drilling within the proposed Physical Upgrade (“PUG”) plant site into the next phase of engineering for the FS;
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Pursuing strategic relationships and continue discussions with potential off-take partners, including supplying separated product samples and providing Project progress updates; and
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Exercising responsible cash management, while seeking additional funding to progress development of the Project.
Certain planned activities and potential strategic initiatives that could commence in the next twelve months, but are subject to additional financing and other factors, include:
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Completing design and construct the planned larger-scale demonstration plant;
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Initiating engineering studies (including rheology studies) and final geotechnical confirmation of waste rock and tailings characteristics to support the next phase of engineering for the FS; and
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Continuing additional pilot plant separation studies aimed at separating the >99.9% pure concentrate into separate, saleable products.
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Results of Operations
Summary
Our consolidated net loss for the three-month period ended September 30, 2015 was $2,572, or $0.05 per share, compared with our consolidated net loss of $3,601, or $0.08 per share, for the same period in 2014. Our consolidated net loss for the nine-month period ended September 30, 2015 was $7,144, or $0.14 per share, compared with our consolidated net loss of $11,092, or $0.23 per share, for the same period in 2014.
For the three-month period ended September 30, 2015, the decrease in consolidated net loss of $1,029 from the respective prior period was primarily the result of a decrease in exploration and evaluation expenses of $788 and a decrease in corporate administration expenses of $188.
For the nine-month period ended September 30, 2015, the decrease in consolidated net loss of $3,948 from the respective prior period was primarily the result of a decrease in exploration and evaluation expenses of $3,330 and corporate administration expenses of $806. These decreases were offset by unfavorable variances in currency translation and unrealized gains on derivatives of $97 and $116, respectively.
Exploration and evaluation
Exploration and evaluation costs were $1,517 for the three-month period ended September 30, 2015, compared with $2,305 for the same period in 2014. The decrease of $788 from the prior period was mostly the result of decreased activities related to the PFS and permitting of $374 and $468, respectively, partially offset by an increase in metallurgy expense of $122 associated with the Company’s pilot-plant scale separation studies in the third quarter of 2015.
Exploration and evaluation costs were $3,834 for the nine-month period ended September 30, 2015, compared with $7,164 for the same period in 2014. The decrease of $3,330 from the prior period was mostly the result of decreased activities related to the PFS, bench-scale metallurgical work, exploration/geology, permitting and site administration, accounting for reductions of $1,047, $1,197, $237, $442 and $405, respectively, as the Company focuses on ongoing permitting and pilot-plant scale separation studies.
Corporate administration
Corporate administration costs decreased to $850 for the three-month period ended September 30, 2015, compared with $1,038 for the same period in 2014. The decrease of $188 from the prior period was due to the Company’s cost containment efforts, primarily realized by reductions in personnel and consulting services, as well as a decrease in stock-based compensation expense. The decrease in stock-based compensation expense of $40 was primarily the result of historically declining stock prices, which determine the strike price of the grant and are a significant driver of the expense to be incurred (as measured on the grant date).
Corporate administration costs decreased to $2,779 for the nine-month period ended September 30, 2015, compared with $3,585 for the same period in 2014. The decrease of $806 from the prior period was due to the Company’s cost containment efforts, primarily realized by reductions in personnel and consulting services, as well as a decrease in stock-based compensation expense. The decrease in stock-based compensation expense of $237 was primarily the result of historically declining stock prices, which determine the strike price of the grant and are a significant driver of the expense to be incurred (as measured on the grant date).
Non-operating income and expenses
Gain/(loss) on currency translation
We report our financial statements in U.S. dollars. Therefore, any foreign currencies owned at the end of the period are converted to U.S. dollars at the current exchange rate. We hold Canadian dollars in Canadian and U.S. banks as a result of past financings that were denominated in Canadian dollars. While the majority of our expenses are in U.S. dollars, a significant amount of our metallurgical test work incurs costs in Canadian dollars. We continue to hold Canadian dollars due to higher investment returns and ongoing Canadian expenses. A strengthening Canadian dollar will result in gains and a weakening Canadian dollar will result in losses, as long as we continue to hold Canadian dollars.
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The loss on currency translation was $189 for the three-month period ended September 30, 2015, compared with a loss of $212 for the same period in 2014. The Canadian dollar weakened by 7.9% and 4.4% against the U.S. dollar over the three-month periods ended September 30, 2015 and 2014, respectively. The average Canadian cash and cash equivalent balances during the three-month periods ended September 30, 2015 and 2014 were CAD $3.8 million and CAD $4.7 million, respectively.
The loss on currency translation was $458 for the nine-month period ended September 30, 2015, compared with a loss of $361 for the same period in 2014. The Canadian dollar weakened by 13.3% against the U.S. dollar over the nine-month period ended September 30, 2015. For the comparable period in 2014, the Canadian dollar weakened against the U.S. dollar by 4.1%. The average Canadian cash and cash equivalent balances during the nine-month periods ended September 30, 2015 and 2014 were CAD $4.1 million and CAD $7.5 million, respectively.
Financial Position, Liquidity and Capital Resources
Operating Activities
Net cash used in operating activities was $7,052 for the nine-month period ended September 30, 2015, compared with $10,940 for the same period in 2014. The decrease of $3,888 in cash used is mostly the result of (a) decreased exploration and evaluation activity, accounting for a decreased use of approximately $3,330, (b) the Company’s continual focus on cost containment within corporate administration expenses, accounting for a decreased use of approximately $570, (c) prepaid asset payments timing, accounting for a decreased use of approximately $100, (d) vendor payments timing affecting accounts payable accounting for a decreased use of approximately $80, and (e) foreign currency fluctuations on our bank accounts held in Canadian dollars, which accounted for a negative variance of approximately $100.
Financing Activities
Net cash provided by financing activities was $3,076 for the nine-month period ended September 30, 2015, compared with net cash used of $42 in the same period during 2014. The cash received in 2015 was the result of the Company’s April 29, 2015 registered direct offering. The cash payment in the 2014 period was the result of a cashless stock option exercise where the Company was required to withhold and remit associated taxes on behalf of the exercising participant, a Canadian resident. The participant was issued the remaining net shares upon consideration of the necessary exercise and tax amounts withheld.
Liquidity and Capital Resources
At September 30, 2015, our total current assets were $6,415, compared with $10,481 as of December 31, 2014, which is a decrease of $4,066. The decrease in total current assets is primarily due to a decrease in the combination of cash and cash equivalents of $3,976. A decrease in prepaid assets accounted for an additional $105.
Our working capital as at September 30, 2015 was $5,449, compared with $9,219 at December 31, 2014.
Our plans for the next twelve months are to limit expenditures while we continue moving forward with the EIS permitting, continue testing and evaluation of the feasibility of incorporating downstream separation of rare earths into our Project and pursue strategic relationships and offtake agreements. Additional financing in the near term is necessary to continue the pace of further permitting, evaluation and development.
As of November 6, 2015, we have effective shelf registration statements in the U.S. and Canada, with remaining capacities of $30.0 million in the U.S. and $50.0 million in Canada; however, our ability to access our shelf capacity in the U.S. may be substantially limited by applicable shelf eligibility rules.
We expect that we will require between $5 million and $10 million of additional funding over the next two years to fully support the EIS and permitting processes, advanced metallurgical and elemental separation test work, conduct engineering to inform the FS, and other corporate expenses. Should sufficient financing become available from strategic partners or other sources and subject to a positive FS and board approval, we could quickly advance the Project to the construction phase. The actual amount of the funding required prior to receiving all of the necessary operating approvals will depend on the timing of such approvals as well as the level of expenditures as approved by the Company’s board of directors. There is no assurance that such financing will be available, or available on terms acceptable to the Company.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Contractual Obligations
There were no material changes to the contractual obligations disclosed in Item 7 of Part II in our Form 10-K for the period ended December 31, 2014.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk. Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Our market risk is comprised of various types of risk: interest rate risk, foreign currency exchange rate risk, commodity price risk and other price risk.
Interest rate risk. Our cash and cash equivalents consist of cash held in bank accounts and, at times, guaranteed investment certificates that earn interest at variable interest rates. Due to the short-term nature of these financial instruments, fluctuations in market rates did not have a significant impact on estimated fair values as of September 30, 2015. Future cash flows from interest income on cash and cash equivalents will be affected by interest rate fluctuations. We manage interest rate risk by maintaining an investment policy that focuses primarily on preservation of capital and liquidity.
Foreign currency exchange rate risk. We are exposed to foreign currency exchange rate risk as certain monetary financial instruments are denominated in Canadian dollars. We have not entered into any foreign currency contracts to mitigate this risk. We attempt to mitigate this risk by holding six to 12 months of U.S.-based spending in U.S. dollars as a natural hedge against currency fluctuations. At September 30, 2015, a 1% increase/decrease in the Canadian dollar to U.S. dollar exchange rate would have decreased/increased our consolidated net loss by $27.
Commodity price risk. We are indirectly exposed to commodity price risk of rare earth products, which are, in turn, influenced by the price of and demand for the end products produced with rare earth mineral resources. A significant decrease in the global demand for these products may have a material adverse effect on our business. None of our mineral properties are in production, and we do not currently hold any commodity derivative positions.
Other price risk. Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices, other than those arising from interest rate risk, foreign currency exchange rate risk or commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision of, and with the participation of, our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the CEO and the CFO have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective in ensuring that: (i) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not aware of any material pending or threatened litigation or of any proceedings known to be contemplated by governmental authorities that are, or would be, likely to have a material adverse effect upon us or our operations, taken as a whole.
ITEM 1A. RISK FACTORS
The risk factor outlined below should be considered along with the risk factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the period ended December 31, 2014.
Market factors outside of the Company’s control could have significant adverse impacts on our business, operations and/or prospects.
Operating in the volatile and cyclical natural resource industry subjects the Company to numerous market factors outside of our control that could have significant and sometimes adverse impacts on our business. Such factors could include significant price declines for key rare earth materials, inflationary impacts on capital and operating costs, poor financial and operating performance of other companies in the same industry sector, environmental incidents from resource projects, major technological advances that reduce demand for key rare earth products, unforeseen regulation or geopolitical factors that broadly impact the industry, etc. To the extent that such factors affect attitudes toward investments in the natural resource sector generally or the rare earths industry specifically, they could affect our ability to raise the additional capital needed to continue to advance our project and business plan.
We have a history of losses and will require additional financing to fund our current activities and, if warranted, future development and production efforts. Failure to obtain additional financing would have a material adverse effect on our financial condition and results of operation and will cast uncertainty on our ability to continue as a going concern.
For the nine months ended September 30, 2015, our net loss was $7.1 million. Our accumulated deficit at September 30, 2015 was $120.6 million. At September 30, 2015, our cash position was $6.2 million, and our working capital position was $5.4 million. We have no revenues from operations, and we anticipate we will have no operating revenues until we place the Bear Lodge REE Project into production.
The Company’s ability to continue to progress development and start-up of the Bear Lodge REE Project on our preferred timeline is dependent upon our ability to obtain further financing. Although we have been successful in raising capital in the past, current market conditions may not allow for timely additional financing to allow us to advance along our planned development schedule. Failure to obtain sufficient financing would result in the delay or indefinite postponement of feasibility studies, process test work, development and/or production at our Bear Lodge REE Project. 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. Future financings may cause dilution to our shareholders. Our ability to arrange additional financing will depend, in part, on the prevailing capital market conditions as well as our business performance and the economic attractiveness of our Bear Lodge REE Project. Furthermore, without additional financing, there can be no assurance that we will be able to remain a going concern.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. MINE SAFETY DISCLOSURES
We consider health, safety and environmental stewardship to be a core value for Rare Element.
Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities under the regulation of the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). During the period ended September 30, 2015, the Bear Lodge REE Project was not yet in production and as such, was not subject to regulation by MSHA under the Mine Act.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Number | Description of Exhibits |
31.1 | |
31.2 | |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| RARE ELEMENT RESOURCES LTD. | |
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| By: | /s/ Randall J. Scott |
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| Randall J. Scott |
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| President, Chief Executive Officer and Director |
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| (Principal Executive Officer ) |
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| Date: | November 6, 2015 |
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| By: | /s/ Paul H. Zink |
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| Paul H. Zink |
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| Senior Vice President and Chief Financial Officer |
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| (Principal Financial Officer |
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| and Principal Accounting Officer) |
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| Date: | November 6, 2015 |
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