ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following managements 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 months ended March 31, 2018, has been prepared based on information available to us as of May 9, 2018. 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 year ended December 31, 2017, 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.
Outlook
During the first quarter of 2016, we placed the Bear Lodge REE Project under care-and-maintenance, and all permitting and licensing activities were suspended as cost-conservation measures. The Company continued these and other cost-conservation measures throughout 2017. Following the receipt of proceeds from the transaction with Synchron on October 2, 2017 (discussed in Note 4 of the unaudited Consolidated Financial Statements), the Company is considering an updated work plan to (i) further progress and enhance our proprietary technology for rare earth processing and separation through pilot plant testing, (ii) progress engineering work to optimize our mine plan, and (iii) determine the timing for the resumption of permitting and licensing efforts. In the quarter ended March 31, 2018, the Company focused on Items (i) and (iii) above by advancing a formal engagement with a lab to continue technology advancement, and by communicating with various agencies having jurisdiction over the Bear Lodge REE Project.
Results of Operations
Summary
Our consolidated net loss for the three months ended March 31, 2018 was $112, or $nil per share, compared with our consolidated net loss of $300, or $0.01 per share, for the same period in 2017. For the three months ended March 31, 2018, the decrease in consolidated net loss of $188 from the prior period was primarily the result of a gain on the revaluation of the Option liability and amortization of intellectual property income, partially offset by an increase in exploration and evaluation costs and corporate administration costs.
Exploration and evaluation
Exploration and evaluation costs were $88 and $18 for the three months ended March 31, 2018 and 2017, respectively. The increase from the prior period was the result of increased activities on the Bear Lodge REE Project as we are evaluating our work plan and maintaining our current permitting and licensing and environmental obligations.
Corporate administration
Corporate administration costs were $326 and $278 for the three months ended March 31, 2018 and 2017, respectively. The increase from the prior period was the result of increased expenses associated with our compliance and regulatory obligations.
Amortization of Intellectual Property Income
During the three months ended March 31, 2018, we amortized $64 of deferred intellectual property income. We incurred deferred intellectual property income due to the intellectual property rights agreement with Synchron (see Financial Position, Liquidity and Capital Resources - Transaction with Synchron discussion below). As Synchron will obtain exclusive rights to the intellectual property if it exercises the Option , the value of the IP Rights Agreement is considered deferred income. We will amortize the deferred income using the straight-line method over the term of the Option agreement. There were no similar transactions for the three months ended March 31, 2017.
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Gain on Revaluation of Option Liability
Gain on the revaluation of the Option liability was $231 for the three months ended March 31, 2018. This gain is directly related to the valuation of the Option agreement with Synchron (see Financial Position, Liquidity and Capital Resources Transaction with Synchron discussion below) and is primarily due to a decrease in the 5-year trailing average of the market prices of rare earth elements, which is utilized for accounting purposes. As the Option agreement is considered a derivative liability, we revalue the Option liability at the end of each reporting period, until the Option is exercised or expires. Any gains or losses from the revaluation are recorded to the Consolidated Statements of Operations. There were no similar transactions for the three months ended March 31, 2017.
Cash Flows, Financial Position, Liquidity and Capital Resources
Cash Flows from Operating Activities
Net cash used in operating activities was $329 for the three months ended March 31, 2018, as compared with $248 for the same period in 2017. The increase of $81 in cash used is primarily the result of increased spending on exploration and evaluation activities and corporate administration expenses.
Financial Position, Liquidity and Capital Resources
At March 31, 2018, our total current assets were $4,047, as compared with $4,401 as of December 31, 2017, which is a decrease of $354. The decrease in total current assets is primarily due to a decrease in the combination of cash and cash equivalents in the amount of $329 due to funding our operations. Our working capital as at March 31, 2018 was $3,975, as compared with $4,349 at December 31, 2017.
We had previously placed the Bear Lodge REE Project under care-and-maintenance, and all permitting activities had been suspended. Additionally, corporate cost containment measures were implemented to preserve remaining cash balances as we pursued additional financings, asset sales and/or strategic alternatives, including joint ventures and the potential sale of all, or a portion of, the Bear Lodge REE Project and/or the Sundance Gold Project. Following the receipt of proceeds from the transaction with Synchron on October 2, 2017 (discussed in Note 4), the Company is considering an updated work plan to (i) further progress and enhance our proprietary technology for rare earth processing and separation through pilot plant testing, (ii) progress engineering work to optimize our mine plan, and (iii) determine the timing for the resumption of permitting and licensing efforts. In the quarter ended March 31, 2018, the Company focused on Items (i) and (iii) above by advancing a formal engagement with a lab to continue technology advancement, and by communicating with various agencies having jurisdiction over the Bear Lodge REE Project
Notwithstanding the transaction with Synchron in October 2017, we do not have sufficient funds to fully complete feasibility studies, permitting, development and construction of the Bear Lodge REE Project. Therefore, the achievement of these activities will be dependent upon future financings, off-take agreements, joint ventures, strategic transactions, or sales of various assets. There is no assurance, however, that we will be successful in completing any such financings or transactions. Ultimately, in the event that we cannot obtain additional financial resources or complete a strategic transaction, we may have to liquidate our business interests, and investors may lose all or part of their investment.
Transaction with Synchron
On October 2, 2017, the Company and Synchron, a subsidiary of General Atomics Technologies Corporation (Synchron), completed a transaction in accordance with the following terms. Pursuant to an investment agreement, the Company (i) issued to Synchron 26,650,000 common shares of the Company, which constituted approximately 33.5% of the issued and outstanding common shares of the Company; (ii) received gross proceeds of $4,752 in cash; and (iii) granted Synchron an option (the Option) to purchase approximately an additional 15.49% of the Companys fully diluted common shares immediately after the exercise for an aggregate exercise price of an additional $5,040. Synchrons ownership percentage, immediately after giving effect to such exercise, is limited to 49.9% of the Companys common shares issued and outstanding. The Option is exercisable for a period of up to four years from the initial investment. Additionally, the parties executed an IP Rights Agreement, whereby Synchron received rights to use and improve the Companys intellectual property relating to our patents-pending and related technical information. For a detailed discussion regarding the transaction with Synchron, see Note 6 to the Companys Consolidated Financial Statements for the year ended December 31, 2017 on Form 10-K as filed with the SEC on March 28, 2018.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Contractual Obligations
During the three months ended March 31, 2018, there were no material changes to the contractual obligations disclosed in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2017.
On April 24, 2018, the Company executed an agreement with Umwelt- und Ingenieurtechnik GmbH Dresden (UIT), an affiliate of General Atomics and Synchron, to validate the Companys rare earth processing technology, as well as progress the Companys intellectual property. As Synchron is significant shareholder of the Company, the two Directors appointed by Synchron abstained and the remaining members of the Board approved the UIT engagement on April 17, 2018. The UIT agreement is for an amount not to exceed $600 and the work is anticipated to be concluded by December 31, 2018.