WESTWATER RESOURCES, INC. - Quarter Report: 2008 September (Form 10-Q)

Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

 

For the transition period from             to             

 

Commission file number 0-17171

 

URANIUM RESOURCES, INC.

(Exact Name of Issuer as Specified in Its Charter)

 

 

405 State Highway 121 Bypass, Building A, Suite 110, Lewisville, Texas 75067

(Address of Principal Executive Offices)

 

(972) 219-3330

(Issuer’s Telephone Number, Including Area Code)

 

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 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. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b2 of the Exchange Act).

o  Yes    x  No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

Table of Contents

 

URANIUM RESOURCES, INC.

 

2008 THIRD QUARTERLY REPORT ON FORM 10-Q

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets–September 30, 2008 (Unaudited) and December 31, 2007		3
		Condensed Consolidated Statements of Operations–three and nine months ended September 30, 2008 and 2007 (Unaudited)		4
		Condensed Consolidated Statements of Cash Flows–nine months ended September 30, 2008 and 2007 (Unaudited)		5
		Notes to Condensed Consolidated Financial Statements–September 30, 2008 (Unaudited)		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		18
Item 4.		Controls and Procedures		19
PART II—OTHER INFORMATION				19
Item 1.		Legal Proceedings		19
Item 1A.		Risk Factors		19
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3.		Defaults Upon Senior Securities		20
Item 4.		Submission of Matters to a Vote of Security Holders		20
Item 5.		Other Information		20
Item 6.		Exhibits and Reports on Form 8–K		20
SIGNATURES				21
Index to Exhibits				E-1

 

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URANIUM RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

(Unaudited)

 

		September 30, 2008			December 31, 2007
Current assets:
Cash and cash equivalents		$	13,002,026		$	9,284,270
Receivables, net		1,976,979			2,652,574
Uranium inventory		1,928,640			748,452
Prepaid and other current assets		301,531			720,357
Total current assets		17,209,176			13,405,653
Property, plant and equipment, at cost:
Uranium properties		83,228,817			85,525,808
Other property, plant and equipment		966,317			821,811
Less-accumulated depreciation, depletion and impairment		(62,942,204		)	(55,736,530		)
Net property, plant and equipment		21,252,930			30,611,089
Other assets		4,275,543			2,837,064
Long-term investment:
Certificates of deposit, restricted		6,591,323			6,083,076
		$	49,328,972		$	52,936,882

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

(Unaudited)

 

Current liabilities:
Accounts and short term notes payable		$	1,320,273		$	2,157,475
Current portion of restoration reserve		1,438,187			1,124,504
Royalties and commissions payable		861,149			1,131,636
Accrued interest and other accrued liabilities		647,274			709,400
Current portion of long-term debt		172,795			210,616
Total current liabilities		4,439,678			5,333,631
Other long-term liabilities and deferred credits		5,236,294			4,097,327
Long term capital leases, less current portion		355,288			178,665
Long-term debt, less current portion		450,000			450,000
Commitments and contingencies (Notes 1, 2, 5 and 13)
Shareholders’ equity:
Common stock, $.001 par value, shares authorized: 200,000,000; shares issued and outstanding (net of treasury shares): 2008—55,885,549; 2007—52,305,129		55,924			52,343
Paid-in capital		146,212,708			131,282,687
Accumulated deficit		(107,411,502		)	(88,448,353		)
Less: Treasury stock (38,125 shares), at cost		(9,418		)	(9,418		)
Total shareholders’ equity		38,847,712			42,877,259
		$	49,328,972		$	52,936,882

 

The accompanying notes to financial statements are an integral part of these condensed consolidated statements.

 

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URANIUM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Revenues:
Uranium sales		$	4,024,558		$	10,387,408		$	16,354,497		$	22,924,284
Total revenue		4,024,558			10,387,408			16,354,497			22,924,284
Costs and expenses:
Cost of uranium sales
Royalties and commissions		368,880			1,296,644			1,505,637			2,717,586
Operating expenses		1,751,642			1,998,220			5,689,674			5,341,294
Accretion/amortization of restoration reserve		203,876			126,119			588,504			433,320
Depreciation and depletion		1,874,281			1,428,387			6,119,106			4,726,400
Impairment of uranium properties		10,935,498			—			11,231,615			—
Exploration expenses		961,717			—			1,220,056			—
Total cost of uranium sales		16,095,894			4,849,370			26,354,592			13,218,600
Earnings (loss) from operations before corporate expenses		(12,071,336		)	5,538,038			(10,000,095		)	9,705,684
Corporate expenses—
General and administrative		2,041,836			3,575,420			7,831,654			8,266,664
Write-off of target acquisition costs (Note 12)		—			—			1,437,410			—
Depreciation		39,204			23,506			110,251			69,690
Total corporate expenses		2,081,040			3,598,926			9,379,315			8,336,354
Earnings (loss) from operations		(14,152,376		)	1,939,112			(19,379,410		)	1,369,330
Other income (expense):
Interest expense		(13,663		)	(6,372		)	(31,480		)	(18,738		)
Interest and other income, net		149,685			221,949			447,741			566,890
Net earnings (loss)		$	(14,016,354	)	$	2,154,689		$	(18,963,149	)	$	1,917,482
Net earnings (loss) per common share:
Basic		$	(0.25	)	$	0.04		$	(0.35	)	$	0.04
Diluted		$	(0.25	)	$	0.04		$	(0.35	)	$	0.03
Weighted average common shares and common equivalent shares per share data:
Basic		55,818,343			52,266,199			54,050,106			52,059,849
Diluted		55,818,343			56,020,832			54,050,106			55,867,860

 

The accompanying notes to financial statements are an integral part of these condensed consolidated statements.

 

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URANIUM RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine Months Ended September 30,
		2008			2007
Net earnings (loss)		$	(18,963,149	)	$	1,917,482
Reconciliation of net loss to cash provided by operations—
Accretion/amortization of restoration reserve		588,504			433,320
Depreciation and depletion		6,229,357			4,796,090
Impairment of uranium properties		11,231,615			—
Decrease in restoration and reclamation accrual		(497,554		)	(982,220		)
Stock compensation expense		1,846,990			3,191,867
Write-off of target acquisition costs		1,437,410			—
Other non-cash items, net		19,258			637,050
Effect of changes in operating working capital items—
(Increase) decrease in receivables		675,595			(1,701,457		)
(Increase) decrease in inventories		(340,572		)	177,357
(Increase) decrease in prepaid and other current assets		168,373			(681,566		)
Increase (decrease) in payables, accrued liabilities and deferred credits		(1,130,440		)	2,491,431
Net cash provided by operations		1,265,387			10,279,354
Investing activities:
Increase in certificates of deposit, restricted		(508,247		)	(2,921,961		)
Additions to property, plant and equipment—
Kingsville Dome		(3,362,839		)	(5,658,840		)
Rosita		(4,384,647		)	(3,943,074		)
Vasquez		(225,696		)	(541,432		)
Rosita South		(424,521		)	(1,330,794		)
Churchrock		(377,952		)	(463,953		)
Crownpoint		(102,473		)	(127,726		)
Other property and other assets		(1,035,908		)	(2,246,267		)
Net cash used in investing activities		(10,422,283		)	(17,234,047		)
Financing activities:
Payments on borrowings		(211,960		)	(195,700		)
Issuance of common stock, net		13,086,612			889,228
Net cash from financing activities		12,874,652			693,528
Net increase (decrease) in cash and cash equivalents		3,717,756			(6,261,165		)
Cash and cash equivalents, beginning of period		9,284,270			20,176,771
Cash and cash equivalents, end of period		$	13,002,026		$	13,915,606

 

The accompanying notes to financial statements are an integral part of these condensed consolidated statements.

 

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Uranium Resources, Inc.

Notes to Condensed Consolidated Financial Statements September 30, 2008 (Unaudited)

 

1.             BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Item 310(b) of Regulation S-K.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  The accompanying statements should be read in conjunction with the audited financial statements included in the Company’s 2007 Annual Report on Form 10-K/A.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the full calendar year ending December 31, 2008.

 

2.             DESCRIPTION OF BUSINESS

 

URI was organized in 1977 to mine uranium in the United States using the in situ recovery (“ISR”) mining process. From 1988 through 1999 we produced about 6.1 million pounds of uranium from two South Texas properties, 3.5 million pounds from Kingsville Dome and 2.6 million pounds from Rosita.  In 1999, we shut-in our production because of depressed uranium prices.  When uranium prices reached a level where it was prudent to commence operations, the Company began producing at its Vasquez property in South Texas in the fourth quarter of 2004.  Production at Kingsville Dome began in the second quarter of 2006.  Our production since the fourth quarter of 2004 has been 1,321,600 pounds of which 663,600 pounds were from Vasquez, 650,300 were produced from Kingsville Dome and 7,700 from Rosita.  We began injecting oxygen into our production wells at Rosita at the end of June 2008 and had our first finished production in August 2008.  Uranium prices dramatically declined since early September and in October we stopped production from three of our five operating well-fields, including Vasquez and Rosita.

 

The financial statements of the Company have been prepared on the basis of accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  Management believes that the cash balance of $13.0 million at September 30, 2008 and the cash expected to be provided through operations over the next year will be sufficient to maintain its liquidity for the next year.

 

3.             DISCLOSURE OF NON-CASH TRANSACTIONS

 

During the first nine months of 2007, the Company entered into capital leases to acquire property, plant and equipment items including logging trucks and office computers and equipment totaling $211,000.  Additions to capital leases for modular office buildings at our Kingsville dome and Rosita projects and resin transport trailers of $301,000 were made in the first nine months of 2008.  The outstanding balance of the capital leases was $528,000 at September 30, 2008.

 

4.             URANIUM PROPERTIES

 

Kingsville Dome Project

 

Production from Kingsville Dome for the first nine months of 2008 and 2007 was 218,100 and 278,300 pounds, respectively.  Total capital expenditures for Kingsville Dome for the first nine months of 2008 were $3.4 million for wellfield development, the construction of additional satellite plants and for wellfield evaluation and delineation of future wellfields.  Two new wellfields were brought on line in the first nine months of this year to replace wellfields brought on line in 2007 that have since depleted.  As of October 2008, there are only two remaining wellfields producing at Kingsville Dome.  As production from depleted wellfields at Kingsville Dome ceases, restoration activities in those wellfields are conducted.  We are conducting ongoing restoration activities at this project and incurred $248,000 in costs for the nine months ended September 30, 2008.

 

Rosita

 

We began injecting oxygen into our production wells at Rosita at the end of June 2008 and had our first finished production in August 2008.  Our production from Rosita totaled 7,700 pounds for August and September of 2008.  Due to poor economics driven by technical challenges and lower uranium prices, this wellfield was shut-in in October 2008.  Capital expenditures for our Rosita project totaled $4.4 million in the first nine months of 2008.  These expenditures were made for wellfield delineation and development, upgrading the Rosita plant and elution circuit, the addition of another satellite plant and the construction of a drying facility at Rosita.  We are conducting ongoing restoration activities at this project and incurred $256,000 in costs for the nine months ended September 30, 2008.

 

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Vasquez Project

 

In the first nine months of 2008, Vasquez production was 33,800 pounds compared with 70,300 pounds produced from Vasquez in the first nine months of 2007.  This wellfield was shutdown during October 2008 and the Vasquez project has been depleted of economically recoverable reserves.  In the first nine months of 2008, we incurred wellfield development and other expenditures of $227,000, primarily for development of new wellfields to bring on new production at Vasquez.  Such new production commenced in March 2008.  As production from depleted wellfields at Vasquez ceases, restoration activities in those wellfields are conducted.  We are conducting ongoing restoration activities at this project and incurred $45,000 in costs for the nine months ended September 30, 2008.

 

Impairment of Uranium Properties

 

At September 30, 2008, we determined the carrying value of our project assets at each of our South Texas production locations exceeded their fair value as provided in SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”.  A decline in the current and projected market price of uranium and an increase in the estimated production costs for each of our South Texas projects resulted in a decrease in the estimated future cash flow to be generated from each site.  Such determination resulted in an impairment provision of approximately $11.2 million for the first nine months of 2008, $10.9 million of which was recorded in the third quarter.  The impairment provision recorded in the third quarter was approximately $4.6 million for the Kingsville Dome project and $6.3 million for the Rosita project.  The impairment provision recorded for the Vasquez project was approximately $298,000 for the nine months ended September 30, 2008.  The net carrying value of the Kingsville Dome, Rosita and Vasquez projects are approximately $6.6 million, $5.5 million and $891,000 at September 30, 2008.

 

5.             CONTRACT COMMITMENTS

 

Amendment to Uranium Sales Contracts

 

In March 2006, we entered into a new contract with Itochu Corporation (“Itochu”) and a new contract with UG U.S.A., Inc. (“UG”) that superseded the previously existing contracts.  Each of the new contracts provides for delivery of one-half of our actual production from our Vasquez property and other properties in Texas currently owned or hereafter acquired by the Company (excluding certain large potential exploration plays). The terms of such contracts are summarized below.

 

The Itochu Contract. Under the Itochu contract, all production from the Vasquez property will be sold at a price equal to the average spot price for the eight weeks prior to the date of delivery less $6.50 per pound, with a floor for the spot price of $37 and a ceiling of $46.50. Other Texas production will be sold at a price equal to the average spot price for the eight weeks prior to the date of delivery less $7.50 per pound, with a floor for the spot price of $37 and a ceiling of $43. On non-Vasquez production the price paid will be increased by 30% of the difference between actual spot price and the $43 ceiling up to and including $50 per pound. If the spot price is over $50 per pound the price on all Texas production will be increased by 50% of such excess. The floor and ceiling and sharing arrangement over the ceiling applies to 3.65 million pounds of deliveries, after which there is no floor or ceiling. Itochu has the right to cancel any deliveries on six-month’s notice.  As of September 30, 2008, we have delivered 443,000 pounds to Itochu since the effective date of this contract.

 

In December 2005, we entered into a joint venture with Itochu to develop our Churchrock property in New Mexico.  Under the terms of the joint venture, both parties must make an investment decision after the completion of a feasibility study, which was completed at the end of 2006. The parties have extended the preliminary investment decision until February 1, 2009.  If Itochu should terminate the venture at that time, we would no longer receive the additional price of 30% of the excess between $43 and $50 per pound outlined above. If we should terminate the venture at that time, the original contract terms will be reinstated from that time forward.

 

The UG Contract. Under the UG contract all production from the Vasquez property and other Texas production will be sold at a price equal to the month-end long-term contract price for the second month prior to the month of delivery less $6 per pound until (i) 600,000 pounds have been sold in a particular delivery year and (ii) an aggregate of 3 million pounds of uranium has been sold. After the 600,000 pounds in any year and 3 million pounds total have been sold, UG will have a right of first refusal to purchase other Texas production at a price equal to the average spot price for a period prior to the date of delivery less 4%. In consideration of UG’s agreement to restructure its previously existing contract, we paid UG $12 million in cash with funds raised in our equity offering completed in April 2006.  As of September 30, 2008, we have delivered 415,000 pounds to UG since the effective date of this contract.

 

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6.             STOCK BASED COMPENSATION

 

Our stock based compensation programs consist of stock options granted to employees and directors and restricted stock grants made employees.

 

Stock Compensation Expense - SFAS 123(R)

 

Stock compensation expense for the three months ended September 30, 2008 and 2007 was $297,000 and $1,636,000, respectively. Stock compensation expense for the nine months ended September 30, 2008 and 2007 was $1,847,000 and $3,192,000, respectively.  Stock compensation expense is recorded as a component of general and administrative expenses for each period. The Company did not recognize a tax benefit from the stock compensation expense because the Company considers it is more likely than not that the related deferred tax assets, which have been reduced by a full valuation allowance, will not be realized.

 

The Black-Scholes option pricing model was used to estimate the stock option fair values. The option pricing model requires a number of assumptions, of which the most significant are, expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term (the amount of time from the grant date until the option or restricted shares are exercised, vest or expire). Expected volatility was calculated based upon actual historical stock price movements through the measurement date of the stock option grant. Expected pre-vesting forfeitures were estimated based on actual historical pre-vesting forfeitures over the most recent periods ending September 30, 2008 for the expected term. The expected term was estimated based on historical averages over the most recent periods ending September 30, 2008.

 

At the June 2008 annual meeting of the stockholders, each of the non-employee directors of the Company was granted an option under the 2004 Directors’ Plan to purchase 50,000 shares of the Company’s common stock at an exercise price of $4.10 per share.  The non-employee directors held options covering 581,250 shares under the 2004 Directors’ Plan at September 30, 2008. At September 30, 2008, 531,250 shares were available for future grants under the 2004 Directors’ Plan.

 

A total of 70,000 shares of restricted stock were granted in the first quarter of 2008.  Restricted share grants for 60,000 shares were made to a total of three non-executive employees on March 6, 2008. 30,000 of these shares vest ratably over five years and 30,000 shares vest ratably over four years.  Another 10,000 restricted share grant was made to an executive of the Company on March 24, 2008.  These shares vest ratably over 5 years.  Restricted stock grants are valued using the fair market value of the stock on the date of grant. The Company recognized stock compensation cost for the restricted share grants of approximately $31,000 and $69,000 during the three and nine months ended September 30, 2008, respectively.  The total estimated unrecognized compensation cost from the unvested restricted shares was approximately $477,000 at September 30, 2008.

 

Stock Options for the Nine Months Ended September 30, 2008

 

The following table summarizes stock options outstanding and changes during the nine month period ended September 30, 2008:

 

		Outstanding Options
		Number of Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
							(in years)
Options outstanding at January 1, 2008		4,452,844		$	2.88
Granted		200,000		4.10
Exercised		(144,250	)	1.12
Canceled or forfeited		(230,020	)	6.29
Options outstanding at September 30, 2008		4,278,574		$	2.81		6.68		$	2,252,000
Options exercisable at September 30, 2008		3,507,844		$	2.36		6.30		$	1,067,000

 

Shares available for grant under the Stock Option Plans as of September 30, 2008 were 605,895.

 

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Stock options outstanding and currently exercisable at September 30, 2008 are as follows:

 

		Options Outstanding							Options Exercisable
Stock Option Plan		Number of Options Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise price			Number of Options Exercisable		Weighted Average Exercise Price
		(in years)
1995 Stock Incentive Plan		2,156,447		5.64		$	1.38		2,106,134		$	1.34
2004 Stock Incentive Plan		1,540,814		7.44		3.37			1,164,147		3.29
Directors’ Stock Option Plan		63		4.75		0.16			63		0.16
2004 Directors’ Plan		581,250		8.56		6.62			237,500		6.93
		4,278,574		6.68		$	2.81		3,507,844		$	2.36

 

Total estimated unrecognized compensation cost from unvested stock options at September 30, 2008 was approximately $1.858 million, which is expected to be recognized over a weighted average period of approximately 2-4 years.

 

Total estimated unrecognized compensation cost from unvested restricted stock grants at September 30, 2008 was approximately $477,000, which is expected to be recognized over a weighted average period of approximately 4-5 years.

 

7.             ASSET RETIREMENT OBLIGATIONS

 

The following table shows the change in the balance of the restoration and reclamation liability during the nine months ended September 30, 2008:

 

Reserve for future restoration and reclamation costs beginning of period		$	3,932,603
Additions and changes in cash flow estimates		1,970,466
Costs incurred		(548,094		)
Accretion expense		122,478
Reserve for future restoration and reclamation costs at end of period		$	5,477,453

 

8.             SHAREHOLDERS’ EQUITY

 

Equity Infusion — Private Placement

 

In May 2008, the Company completed the sale of 3,295,920 shares of common stock to accredited investors at a price of $4.34 per share, which represented a 10 percent discount to the last sale price on May 13, 2008; and warrants to purchase 988,771 additional shares of common stock, at a price of $5.78, which represented a 20 percent premium to the last sale price of the Company’s common stock on May 13, 2008.  These warrants expire 60 months after issuance and are exercisable immediately.  In addition, ratchet warrants to purchase shares of common stock at $0.01 per share were issued as part of the private placement.  The ratchet warrants are triggered and become immediately exercisable in the event that the Company should issue shares of Common Stock at a price below $4.34 per share.  The number of shares that may be purchased upon the exercise of the ratchet warrants is determined by a formula that results in the effective price paid by the investors in this offering being equal to the price paid in a subsequent below $4.34 per share offering. The ratchet warrants expire on the earlier of 12 months following issuance, or ten days after the consummation of the sale of shares of the Company’s common stock which raises in one or more transactions at least $80 million in gross proceeds.

 

The sale raised proceeds of approximately $12.9 million net of expenses of the offering.  The Company has filed a registration statement under the Securities Act of 1933, as amended, to register the resale of the shares.  Such shares are subject to certain resale registration rights that include penalties (1% per month) in the event the registration statement failed to become effective in a timely manner or if the registration statement fails to remain effective.  On July 18, 2008, such registration statement was made effective and as a result the Company met its initial obligation with regard to this registration requirement.  The placement agent in connection with the offering received a cash fee equal to 5.5% of the gross proceeds.

 

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The following table details the changes in shareholders equity for the nine months ended September 30, 2008:

 

		Common Stock					Paid-In			Accumulated
		Shares		Amount			Capital			Deficit			Treasury Stock
Balances, December 31, 2007		52,305,129		$	52,343		$	131,282,687		$	(88,448,353	)	$	(9,418	)
Net loss		—		—			—			(18,963,149		)	—
Common stock issuance		3,295,920		3,296			12,808,075			—			—
Common stock issued for stock option exercise		169,250		169			182,871			—			—
Common stock issued for deferred compensation		115,250		116			92,085			—			—
Stock compensation expense		—		—			1,846,990			—			—
Balances, September 30, 2008		55,885,549		$	55,924		$	146,212,708		$	(107,411,502	)	$	(9,418	)

 

10.          IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

Impact of Recent Accounting Pronouncements

 

Fair Value Measurements.    In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which provides a common definition for the measurement of fair value for use in applying generally accepted accounting principles in the United States of America and in preparing financial statement disclosures. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS No. 157, on January 1, 2008, and did not have a material impact on our financial condition, results of operations or cash flows. On February 8, 2008, the FASB issued Staff Position 157-2, “Effective Date of FASB 157” (FSP 157-2) which partially deferred the provisions of FAS 157 to annual periods beginning after November 15, 2008 for non-financial assets and liabilities.  Non-financial assets include fair value measurements associated with business acquisitions and impairment testing of tangible and intangible assets.  We do not believe the adoption of SFAS 157 will have a material effect on our non-financial assets and liabilities in our consolidated financial statements.

 

Fair Value Option for Financial Assets and Liabilities.    In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have adopted SFAS 159 and we do not plan to implement the fair value option provided in SFAS No. 159.

 

Business Combinations.    In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which changes how business acquisitions are accounted for. SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. SFAS No. 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008.

 

Noncontrolling Interests in Consolidated Financial Statements.    In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” which establishes new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decrease in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. SFAS No. 160 is effective beginning January 1, 2009. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. The Company does not expect the future impacts and disclosures of this standard to have a material effect on its financial statements or disclosures.

 

Derivative Instruments and Hedging Activities.    In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133”. The new standard requires additional disclosures regarding a company’s derivative instruments and hedging activities by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. The standard is effective for our fiscal year and interim periods within such

 

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year, beginning January 1, 2009, with early application encouraged. The impact from this standard is not expected to have a material impact on our current disclosures.

 

11.          EARNINGS PER SHARE

 

Basic earnings per share include no dilution and are computed by dividing income or loss attributed to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if stock options were exercised or converted into common stock.  Potentially dilutive shares of 6,517,162 and 5,950,262 were excluded from the calculation of earnings per share for the three and nine months ended September 30, 2008, respectively, because they were anti-dilutive due to our net loss position for these periods.

 

12.          TERMINATION OF AGREEMENT TO PURCHASE RIO ALGOM MINING LLC

 

In June 2008, we decided along with Billiton Investment 15 B.V. to terminate our agreement to purchase Rio Algom Mining, LLC, which was entered into on October 12, 2007.  In connection with the targeted acquisition, we incurred costs of $1.437 million dollars which were originally recorded as a pre-acquisition cost asset.  Upon the termination of the agreement these pre-acquisition costs were expensed in the second quarter of 2008.

 

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13.          COMMITMENTS AND CONTINGENCIES

 

In June 2008, a suit for declaratory judgment titled, Saenz v. URI Inc., was filed in the 105th Judicial District Court, Kleberg County, Texas by the owners of the mineral estate of property in Kleberg County, Texas leased to the Company, seeking a declaratory judgment that a certain lease is limited to one specific lot only and does not encompass other adjacent lands.  The Company has a lease on the adjacent lands from the same mineral owners and has produced over 340,000 pounds of uranium from those lands in 2007 and 2008.  The Company entered a general denial of the claims.  On September 24, 2008 the mineral owners amended their suit to include a declaration that the lease held by the Company on the adjacent lands was not valid.  The Company has entered a general denial to the amended complaint.  On November 5, 2008, the Company engaged in mediation with the plaintiffs but was unable to resolve the matter.  The Company will defend the case vigorously.  While the Company believes that the lease on the adjacent lands is valid, counsel to the Company is unable to predict the outcome of the litigation.  A determination of invalidity of the lease on the adjacent lands on which the Company has previously produced uranium could have a material adverse affect on the Company’s financial condition.

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and any financial data incorporated herein by reference to the Company’s reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Except for historical information contained in this report, the matters discussed herein contain forward-looking statements, made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including management’s expectations regarding the Company’s reserves and mineralized uranium materials, timing of receipt of mining permits, production capacity of mining operations planned for properties in South Texas and New Mexico and planned dates for commencement of production at such properties. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from management’s expectations. Key factors impacting current and future operations of the Company include the price of uranium, weather conditions, operating conditions at the Company’s mining projects, government regulation of the mining industry and the nuclear power industry, the world-wide supply and demand of uranium, availability of capital, timely receipt of mining and other permits from regulatory agencies and other matters indicated in “Cautionary Statement,” found in the Company’s Annual Report.

 

Overview

 

URI explores for and produces uranium in South Texas where it has three operations:  Kingsville Dome, Vasquez and Rosita.  URI also has 101.2 million pounds of in place mineralized uranium material on 180,000 acres in New Mexico and a Nuclear Regulatory Commission license to mine uranium at our Churchrock project in New Mexico.

 

Our strategy has been comprised of two fronts: advancing our New Mexico assets towards production and rebuilding our reserve base in Texas in order to continue production that provides cash to fund operations.

 

Over the last year we have taken actions to execute our strategy and have had to adjust appropriately as the market for uranium changed.  Our South Texas operations are heavily influenced by the price of uranium both on the spot and long-term markets.  The spot price of uranium, which has fluctuated in the last year from a high of $136.00 to a low of $44.00 in October 2008, has been the primary driver of the strategic decisions of the Company.  Similarly, published long-term contract prices dropped from $82.50 at June 30, 2008 to $75.00 at September 30, 2008 and $70.00 per pound at the end of October 2008.

 

While uranium prices have declined, the more recent wellfields that we have brought on line this year have been of lower grade and had lower levels of recovery than previous wellfields resulting in lower production levels and higher production costs in both dollars spent and on a per pound basis.  Falling prices and rising costs have led to a decline in margins to a level that we believe does not justify further wellfield development at any of our projects and, therefore, have deferred all activities for delineating or developing wellfields until a stronger pricing environment is realized.

 

For the long term, we believe that the strong fundamentals of the uranium market will lead to a substantial recovery of prices over the next several years.  Rising demand and the consumption of inventories will lead to a measurable increase in the demand for primary production in the next 20 years.  To that end, we have adjusted our activities for the near term in order to be in a strong position to achieve our strategic goals in the long term.

 

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South Texas Production:  At September 30, 2008, we had five operating wellfields:  three at Kingsville Dome, one at Vasquez and one at Rosita.  As of the end of October 2008, one wellfield at Kingsville Dome was shutdown after the depletion of reserves; as was the last wellfield at Vasquez.  The Vasquez project has been depleted of economically recoverable reserves.

 

The Rosita wellfield, where oxygen injection started in June 2008, resulted in low levels of production using our standard in-situ recovery mining techniques.  In late July, URI began employing a series of alternative operational strategies including the use of various oxidants in an attempt to improve recovery levels.  In conjunction with this evaluation, a program of well reversals, where injection and extraction wells are alternated, was utilized.  While these tests did improve production over previous levels, the higher cost of production combined with lower uranium prices did not allow the operation to continue on a positive cash basis and production was suspended in October 2008.  Although technically challenging, we believe the reserves from this wellfield can be produced economically at higher prices.

 

By the end of the first quarter of 2009 we expect all production will cease until there is a recovery in uranium prices.  For the period October 1, 2008 through the end of the first quarter of 2009, we anticipate production will be approximately 45,000 to 60,000 pounds.

 

Reserve development:  A significant portion of the cash on hand at September 30, 2008 was generated from the $12.9 million in net proceeds received from the sale of common stock and warrants in a private placement in May 2008.  The equity was raised to fund the acquisition, exploration, permitting and development of new and existing properties in South Texas to increase our resource base in an effort to extend production at our Texas operations beyond 2009 and for general corporate purposes.  We conducted drilling activities on several of our exploration targets during the last six months, including 280 holes on the Marshall property, 100 holes at the South Rosita property and 13 holes on the Cooke property.  Drilling on Marshall identified two areas of interest in four sands, and we are evaluating the potential uranium resource on this project.  We also have completed some initial drilling on the Mosser property. At Kingsville, we conducted exploration drilling on our potential extension to PAA2 (known as PAA2 extension), but recently suspended drilling due to poor results.  A preliminary program to identify additional ores within PAA3 have had mixed results to-date and will be put on hold.  Due to higher costs combined with the geologic and technical risk and unknown market risk, we have chosen to suspend our exploration activities until the economics justify further activity. We are seeking opportunities for the rights to potential uranium properties in South Texas in geographic areas that have historically held significant uranium resources.  There is no assurance that we will be successful in the acquisition of such properties, or if acquired, that such properties will contain commercially viable uranium deposits.

 

Liquidity -Cash Management:  With the recognition that production and prices were declining during the second quarter of 2008, we began to reduce our cost structure and reduced our employee base while implementing tighter spending controls and reducing public and government relations activities in New Mexico and Texas.  As of mid October, we had reduced hourly and salary employment from 190 in May down to 86.  Some of the effects of this activity were realized in lower general and administrative costs in the third quarter of 2008.  Since September, and the rapid descent of uranium prices, we made the recent decisions to produce out the remaining operating wellfields and further reduce costs.  Our near term plans are to operate with a core group of key employees that will focus on reclamation, maintenance and regulatory requirements.  We will make internal operational changes to be able to move quickly to capitalize on our assets as the uranium market improves.  Our objective is to reduce our cash requirements to a level that allows us to sustain our reclamation activities, continue our asset management and implement structural changes as needed without requiring outside sources of capital over the next eighteen to twenty-four months.

 

Financial Condition and Results of Operations

 

Comparison of Three and Nine Months Ended September 30, 2008 and 2007

 

Uranium Sales.  In the three months ended September 30, 2008, we sold 66,300 pounds generating revenue of $4.025 million ($60.71 per pound), compared with sales of 127,800 pounds in the same period of 2007 for revenue of $10.387 million ($81.25 per pound).  The decrease in sales revenue was the result of both the decrease in pounds sold as well as the reduction in sales prices realized as a result of an overall decrease in uranium spot market prices in 2008 compared with 2007.  In the first nine months of 2008, we sold 246,800 pounds generating revenue of $16.354 million ($66.28 per pound), compared with sales of 321,900 pounds in the same period of 2007 for revenue of $22.924 million ($71.22 per pound).  The decrease in sales revenue resulted from a decrease in the volume of pounds sold as well as a decrease in average sales price realized for our year to date 2008 sales.

 

Production and production costs.  In the three months ended September 30, 2008, we produced 62,700 pounds.  The Kingsville Dome project produced 45,200 pounds, the Vasquez project produced 9,800 pounds and the Rosita project produced 7,700 pounds.  This compares with production in the second quarter of 2008 which was 113,500 pounds.  Production in the third quarter of 2007 totaled 103,800 pounds, of which 98,000 pounds were from Kingsville Dome and 5,800 pounds were from Vasquez.

 

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In the first nine months of 2008, we produced 259,600 pounds.  The Kingsville Dome project produced 218,100 pounds, the Vasquez project produced 33,800 pounds and the Rosita project produced 7,700 pounds.  This compares with production in the first nine months of 2007 which was 348,600 pounds of which 278,300 pounds were from Kingsville Dome and 70,300 pounds were from Vasquez.

 

The third quarter 2008 production downturn was caused by lower levels of production at Kingsville Dome and Vasquez from less prolific wellfields brought on in 2008 to replace depleted wellfields from 2007 coupled with a lack of development of, and production from additional wellfields during the quarter at these projects.  These lower quality wellfields require are also more costly as they require a greater number of operating wells in order to maintain the targeted flow rates for each wellfield.  Typically, production levels for projects are maintained by commencing production from new wellfields at the stage where production from older wellfields are declining as a result of these wellfields being in the latter stages of their production cycle.  The decision was made to defer the commencement of production at new wellfields at Kingsville Dome because of the increased cost of production seen from this project’s most recent wellfields considered with the current and near to mid-term market prices projections for uranium prices.  With our unit production costs increasing and sales prices declining, the decision was made to delay additional capital development necessary to bring on new wellfields until uranium market prices rebound to more profitable levels.

 

In addition, we began injecting oxygen into the production wells at our Rosita project in late June 2008 and based upon the results we determined that the standard ISR production techniques employed at Rosita produced unsatisfactory results.  In an attempt to increase recoveries, we reworked a number of wells to increase the flow rates in the wellfield and conducted a series of alternative operational strategies to increase production efficiencies.  While these techniques have demonstrated an increase in uranium production concentrations, the overall wellfields have shown uranium recoveries that are below originally projected amounts and at increased costs.  As a result of the increase in Rosita production costs and the decreases seen in uranium market prices, the decision has been made to suspend production at Rosita until uranium prices increase and production is economically justified. The timing of additional production and projected quantities from Rosita is currently uncertain.

 

The following table details our production and production cost breakdown for the three and nine months ended September 30, 2008 and 2007.

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Kingsville Dome production		45,200			98,000			218,100			278,300
Vasquez production		9,800			5,800			33,800			70,300
Rosita production		7,700			—			7,700			—
Total production		62,700			103,800			259,600			348,600
Total operating costs		$	2,181,000		$	1,867,000		$	6,030,000		$	5,165,000
Per pound operating costs		$	34.78		$	18.00		$	23.23		$	14.81
Total deprec. and depletion costs		$	2,115,000		$	1,081,000		$	6,959,000		$	5,312,000
Per pound DD&A cost		$	33.74		$	10.42		$	26.81		$	15.24
Total production cost		$	4,296,000		$	2,948,000		$	12,989,000		$	10,477,000
Production cost per pound		$	68.52		$	28.41		$	50.04		$	30.05

 

Total operating costs, total depreciation and depletion costs and total production costs incurred for the periods presented above differ from the cost of uranium sales recorded in consolidated statements of operations because of changes in the amounts recorded to inventory for the same periods.  The cost of uranium sales includes the sales of uranium inventory on hand at the beginning of the period and does not include certain uranium produced during the period that was not sold at period end.

 

Reconciliation of production costs to cost of uranium sales:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Operating costs		$	2,181,000		$	1,867,000		$	6,030,000		$	5,165,000
Change in uranium inventory		(429,000		)	131,000			(340,000		)	176,000
Operating expense for uranium production sold		$	1,752,000		$	1,998,000		$	5,690,000		$	5,341,000
Depreciation and depletion costs		$	2,115,000		$	1,081,000		$	6,959,000		$	5,312,000
Change in uranium inventory		(241,000		)	347,000			(840,000		)	(585,000		)
Depreciation and depletion for uranium production sold		$	1,874,000		$	1,428,000		$	6,119,000		$	4,727,000
Total production costs		$	4,296,000		$	2,948,000		$	12,989,000		$	10,477,000
Change in uranium inventory		(670,000		)	479,000			(1,180,000		)	(409,000		)
Direct cost of uranium production sold		$	3,626,000		$	3,427,000		$	11,809,000		$	10,068,000

 

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Cost of Uranium Sales.  The total cost of uranium sales in the first nine months of 2008 was $26.4 million compared with $13.2 million in the same period of 2007.  Included in the total costs of uranium sales in the 2008 nine-month period was $11.2 million of impairment charges related to the reduction in value of uranium assets due to the decline in uranium prices.  Total cost of uranium sales includes royalties and commissions related to our uranium sales, production costs, including operating expenses, depreciation and depletion expenses, amortization of our restoration and reclamation cost estimates, costs related to evaluation of the realizability of our uranium properties and exploration costs.

 

The following table details the direct cost of uranium sold and royalties and commissions for the three and nine months ended September 30, 2008 and 2007:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Total pounds sold		66,300			127,800			246,800			321,900
Total operating expenses		$	1,752,000		$	1,998,000		$	5,690,000		$	5,341,000
Per pound operating expense		$	26.42		$	15.63		$	23.06		$	16.60
Depreciation and depletion		$	1,874,000		$	1,428,000		$	6,119,000		$	4,727,000
Per pound DD&A expense		$	28.27		$	11.17		$	24.80		$	14.68
Direct cost of uranium production sold		$	3,626,000		$	3,427,000		$	11,809,000		$	10,068,000
Direct cost of sales per pound		$	54.69		$	26.80		$	47.86		$	31.28
Royalties and commissions		$	369,000		$	1,297,000		$	1,506,000		$	2,718,000
Royalties and commissions per pound		$	5.56		$	10.14		$	6.10		$	8.44

 

We saw an increase in our overall production costs and cost of sales in the third quarter of 2008 compared with the second quarter of 2008 and the third quarter of 2007.  The increased production costs this quarter were caused by continued production at Kingsville Dome and Vasquez from our less prolific wellfields coupled with a lack of development of, and production from, new wellfields during the quarter at these projects.  This increase was seen in both the operating costs and in the depreciation and depletion costs for the quarter.  Additionally, production costs at our Rosita project were very high in relation to the amount of uranium production received during the quarter and was caused by the need to employ a series of alternative operational strategies in an attempt to increase recoveries and reduce production costs.  The implementation and testing of these various techniques cost approximately $575,000 in operating costs in the third quarter of 2008, whereas Rosita production for the quarter was only 7,700 pounds.  Depreciation and depletion production costs at Rosita were higher than similar capital costs at Kingsville Dome and Vasquez which contributed to the increase seen in production costs for the current quarter.

 

Our average cost of pounds sold in the quarter ended September 30, 2008 was $54.70 per pound with Kingsville Dome production contributing approximately 76% of total pounds sold during the quarter and Vasquez and Rosita pounds totaling approximately 19% and 5%, respectively.  Included in the cost of goods sold for the quarter was a lower of cost or market (“LCM”) adjustment to uranium inventories of $283,000 ($4.27 per pound).

 

Average cost of pounds sold in the first nine months of 2008 was $47.86 per pound with Kingsville Dome production contributing approximately 85% of total pounds sold during the period and Vasquez and Rosita pounds totaling approximately 13% and 2%, respectively.  The higher costs in the quarter ended September 30, 2008 and the first nine months of 2008 compared with the same periods in 2007 resulted from the same reasons we saw our increased production costs in the current year.  Included in the cost of goods sold for the period was a LCM adjustment to uranium inventories of $283,000 ($1.15 per pound).

 

Royalties and Commissions.    During the first nine months of 2008, royalties and commissions for Vasquez and Kingsville Dome production sold totaled $1.5 million, representing 9.2% of sales.  During the same period of 2007, royalties and commissions for Vasquez and Kingsville Dome production sold were $2.7 million, or 11.9% of sales.  The decline was directly the result of lower sales volumes and lower sales prices.

 

Operating Expenses.    During the first nine months of 2008, operating expenses for Kingsville Dome, Vasquez and Rosita  production sold were $5.7 million.  This includes approximately $536,000 of pre-production costs related to our Vasquez and Rosita projects.  During the first nine months of 2007, operating expenses for Vasquez and Kingsville Dome production sold was

 

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$5.3 million which includes pre-production costs at the Rosita project of $125,000.  As a result of our efforts to reduce our costs, operating expenses in the third quarter of 2008 were down $247,000 from the 2007 third quarter.

 

Depreciation and Depletion.    During the first nine months of 2008, we incurred depreciation and depletion expense attributable to our Vasquez and Kingsville Dome production of $6.1 million.  During the same period in 2007, we incurred depreciation and depletion expense attributable to our Vasquez and Kingsville Dome production of $4.7 million.  The increase in expense was directly the result of our higher capital costs for production year over year.

 

Accretion and Amortization of Future Restoration Costs.    Accretion and amortization of future restoration costs in the first nine months of 2008 and 2007 was $589,000 and $433,000, respectively and resulted from increases in our estimates for future asset retirement obligations (ARO’s) related to our future restorations and reclamation costs.

 

Impairment of Uranium Properties.    At September 30, 2008, we determined the carrying value of our uranium properties exceeded their fair value as provided in SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. Such determination resulted in an impairment provision of approximately $11.2 million for the first nine months of 2008, $10.9 million of which was recorded in the third quarter.  The impairment provision recorded in the third quarter was approximately $4.6 million for the Kingsville Dome project and $6.3 million for the Rosita project.  The impairment provision recorded for the Vasquez project was approximately $298,000 for the nine months ended September 30, 2008.  (see Note 4.  Uranium Properties – Impairment of Uranium Properties)

 

General and Administrative Charges.    We incurred general and administrative charges and corporate depreciation of $2.1 million and $3.6 million, respectively in the three months ended September 30, 2008 and 2007 and $7.9 million and $8.3 million, respectively in the nine months ended September 30, 2008 and 2007.

 

Significant expenditures for general and administrative expenses for the three and nine months ended September 30, 2008 and 2007 were:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Stock compensation expense		$	297,000		$	1,636,000		$	1,847,000		$	3,192,000
Salaries and payroll burden		747,000			592,000			2,408,000			1,714,000
Legal, accounting, public company expenses		249,000			396,000			1,016,000			1,233,000
Insurance and bank fees		256,000			224,000			544,000			495,000
Consulting and professional services		261,000			485,000			1,201,000			1,010,000
Office, travel and other expenses		232,000			243,000			816,000			623,000
Total		$	2,042,000		$	3,576,000		$	7,832,000		$	8,267,000

 

The non-cash stock compensation expense recorded for the quarter and nine months ended September 30, 2008 and 2007 was from the recognition of expense related to the Company’s stock option and restricted stock grants.  The decline in this expense reflects the timing and number of option grants made in 2007 and the lower price of the Company’s stock relative to the historic periods.

 

Salary and payroll costs increases for the nine months presented resulted primarily from additional salaried positions in South Texas and New Mexico in the first nine months of 2008 compared with the same period in 2007.

 

The reduction in the Company’s legal, accounting and public company expenses in the first nine months of 2008 compared with 2007 resulted primarily from lower audit and consulting fees related to Sarbanes-Oxley compliance for ongoing evaluation activities incurred in 2008 compared with certain early 2007 costs for initial year compliance implementation.

 

The costs for consulting and professional services increased in nine months ended September 30, 2008 compared with 2007 and resulted from work performed in the review and assessment of our New Mexico property data bases to evaluate their potential as conventional mining projects and other costs related to community outreach and information campaigns designed to enhance public awareness of our planned New Mexico operations.  We also incurred increased costs for environmental, health and safety training, investor relations and media relations activities and for human resources and computer networking consultants.  Consulting and professional services fees declined 46%, or $224,000, in the third quarter of 2008 compared with the third quarter of 2009 as a result of our concerted effort to reduce costs.

 

Increased office, travel and other expenses incurred in the nine months ended September 30, 2008 compared with 2007 resulted primarily from the opening of a corporate office location in Albuquerque, New Mexico in October 2007, the move of the

 

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corporate headquarters to larger office space in September 2007 and increases in the South Texas Kingsville Dome operations office resulting from personnel additions.

 

Beginning in June and July 2008, we began implementing an aggressive cost reduction plan in order to lower our overhead cost structure.  Cost reductions included consolidation of our South Texas operations into Kingsville Dome resulting in the closure of our Corpus Christi office, reducing personnel, reducing legal fees and consulting and professional services and instituting tighter cost discipline throughout the organization.

 

Write-off of Target Acquisition Costs.   In June 2008, we decided along with Billiton Investment 15 B.V. to terminate our agreement to purchase Rio Algom Mining, LLC, which was entered into on October 12, 2007.  In connection with the targeted acquisition, we incurred costs of $1.437 million dollars which were originally recorded as a pre-acquisition cost asset.  Upon the termination of the agreement these pre-acquisition costs were expensed in the second quarter of 2008.

 

Net Losses. For the three months ended September 30, 2008 we had a net loss of $14.0 million compared to net income in 2007 of $2.2 million.  For first nine months of 2008 and 2007 we had a net loss of $19.0 million and net income of $1.9 million, respectively.

 

Cash Flow.  At of September 30, 2008 we had a cash balance of approximately $13.0 million compared with $13.9 million at the same date in 2007.

 

In the first nine months of 2008, we had net cash flow provided by operations of $1.3 million.  We used $10.4 million in investing activities during the first nine months of 2008.  We increased the collateral supporting our South Texas financial surety requirements by $508,000 and also made significant additions to our South Texas and New Mexico property, plant and equipment of $9.9 million during the period.  These expenditures were primarily for wellfield development, evaluation drilling and plant and dryer upgrades at Kingsville Dome of $3.4 million and wellfield development, evaluation drilling and plant and dryer upgrades at Rosita of $4.4 million, additional wellfield development at Vasquez of $226,000, New Mexico property additions of $480,000 and other Texas property and other assets of $1,036,000.

 

In the first nine months of 2007, we had positive cash flow provided by operations of $10.3 million, resulting primarily from the higher volume of uranium sold and the increase in sales prices received under our uranium sales contracts that were amended in March 2006.  We used $17.2 million in investing activities during the first nine months of 2007.  These expenditures were primarily for wellfield development, evaluation drilling capital and plant and dryer upgrades at Kingsville Dome of $5.7 million, plant and equipment expenditures for restoration start-up at Vasquez of $541,000, Rosita and Rosita South project expenditures for wellfield development, evaluation drilling capital and plant and dryer upgrades of $5.3 million, other Texas property and other assets of $2.3 million and property additions in New Mexico of $592,000 primarily for license and permitting activities.  We also increased the collateral supporting our South Texas financial surety requirements by $2.9 million during the nine months ended September 30, 2008.

 

Liquidity—Cash Sources and Uses for 2008

 

As of September 30, 2008, the Company had $13.0 million in cash. A significant portion of the cash we had at September 30, 2008 was from the private placement in May 2008 which raised approximately $12.9 million in net proceeds.  As a result of the Company’s aggressive cost reduction activities, changes in wellfield development plans and reduced capital spending, management believes that the cash balance of $13.0 million at September 30, 2008 and the cash expected to be provided through operations in 2008 and early 2009 will be sufficient to maintain its liquidity for the next eighteen to twenty-four months.

 

Contingent Liabilities—Off Balance Sheet Arrangements

 

The Company has obtained financial surety relating to certain of its future restoration and reclamation obligations as required by the State of Texas regulatory agencies. The Company has bank Letters of Credit (the “L/C’s) and performance bonds issued for the benefit of the Company to satisfy such regulatory requirements. The L/C’s were issued by Bank of America and the performance bonds have been issued by United States Fidelity and Guaranty Company (“USF&G”). L/C’s for $5.6 million and $5.4 million were issued at September 30, 2008 and December 31, 2007, respectively, such L/C’s are collateralized in their entirety by certificates of deposit.

 

Performance bonds totaling $2.8 million were issued for the benefit of the Company at September 30, 2008 and December 31, 2007. USF&G has required that the Company deposit funds collateralizing a portion of the bonds. The amount of bonding issued by USF&G exceeded the amount of collateral by $2.5 million at September 30, 2008 and December 31, 2007, respectively. In the event that USF&G is required to perform under its bonds or the bonds are called by the state agencies, the Company would be obligated to pay any expenditure in excess of the collateral.

 

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Critical Accounting Policies

 

Our significant accounting policies are described in Note 2 to the consolidated financial statements included in the Company’s 2007 Annual Report on Form 10-K/A.  We believe our most critical accounting policies involve those requiring the use of significant estimates and assumptions in determining values or projecting future costs.

 

Specifically regarding our uranium properties, significant estimates were utilized in determining the carrying value of these assets. These assets have been recorded at their estimated net realizable value for impairment purposes on a liquidation basis, which is less than our cost. The actual value realized from these assets may vary significantly from these estimates based upon market conditions, financing availability and other factors.

 

Regarding our reserve for future restoration and reclamation costs, significant estimates were utilized in determining the future costs to complete the groundwater restoration and surface reclamation at our mine sites.  The actual cost to conduct these activities may vary significantly from these estimates.

 

Such estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.

 

ITEM 3.                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Uranium Price Volatility

 

The Company is subject to market risk related to the market price of uranium. The Company’s cash flow has historically been dependent on the price of uranium, which is determined primarily by global supply and demand, relative to the Company’s costs of production. Historically, uranium prices have been subject to fluctuation, and the price of uranium has been and will continue to be affected by numerous factors beyond the Company’s control, including the demand for nuclear power, political and economic conditions, and governmental legislation in uranium producing and consuming countries and production levels and costs of production of other producing companies.

 

The spot market price for uranium has demonstrated a large range since January 2001. Prices have risen from $7.10 per pound at January 2001 to a high of $138.00 per pound in June 2007 and were $46.00 per pound as of November 4, 2008.

 

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ITEM 4.                                                     CONTROLS AND PROCEDURES

 

During the year ended December 31, 2007 and the nine months ended September 30, 2008, the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).

 

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2007 and September 30, 2008 were effective.

 

Management’s Report on Internal Control over Financial Reporting

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.  In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting in connection with preparation of the annual report on Form 10-K/A for the year ended December 31, 2007. As a result of these assessments management concluded that our internal controls over financial reporting were effective as of December 31, 2007.

 

Changes in Internal Controls

 

During the first nine months of 2008 no material changes have been made in our internal control over financial reporting that may have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1.                             LEGAL PROCEEDINGS

 

In June, 2008 a suit for declaratory judgment titled, Saenz v. URI Inc., was filed in the 105th Judicial District Court, Kleberg County, Texas by the owners of the mineral estate of property in Kleberg County, Texas leased to the Company, seeking a declaratory judgment that a certain lease is limited to one specific lot only and does not encompass other adjacent lands.  The Company has a lease on the adjacent lands from the same mineral owners and has produced over 340,000 pounds of uranium from those lands in 2007 and 2008.  The Company entered a general denial of the claims.  On September 24, 2008 the mineral owners amended their suit to include a declaration that the lease held by the Company on the adjacent lands was not valid.  The Company has entered a general denial to the amended complaint.  On November 5, 2008, the Company engaged in mediation with the plaintiffs but was unable to resolve the matter.  The Company will defend the case vigorously.  While the Company believes that the lease on the adjacent lands is valid, counsel to the Company is unable to predict the outcome of the litigation.  A determination of invalidity of the lease on the adjacent lands on which the Company has previously produced uranium could have a material adverse affect on the Company’s financial condition

 

ITEM 1A.                    RISK FACTORS

 

Over 51.7% of our shares of Common Stock are controlled by Principal Stockholders and Management.

 

Approximately 40.9% of our Common Stock is controlled by four stockholders of record. In addition, our directors and officers are the beneficial owners of about 10.8% of our Common Stock. This includes with respect to both groups shares that may be purchased upon the exercise of outstanding options. Such ownership by the Company’s principal shareholders, executive officers and directors may have the effect of delaying, deferring, preventing or facilitating a sale of the Company or a business combination with a third party.

 

The availability for sale of a large amount of shares may depress the market price for our Common Stock.

 

ITEM 2.                             UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Previously reported on Form 8-K dated May 19, 2008.

 

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ITEM 3.                             DEFAULTS UPON SENIOR SECURITIES.

 

None

 

ITEM 4.                             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

None

 

ITEM 5.                             OTHER INFORMATION.

 

None

 

ITEM 6.                             EXHIBITS

 

See the Index to Exhibits on Page E-1 for a listing of the exhibits that are filed as part of this Quarterly Report.

 

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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.

 

	URANIUM RESOURCES, INC.
Dated: November 10, 2008	By:	/s/ David N. Clark
		David N. Clark
		Director and
		Chief Executive Officer
Dated: November 10,  2008	By:	/s/ Thomas H. Ehrlich
		Thomas H. Ehrlich
		Vice President - Finance and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit Number		Description
3.1*		Restated Certificate of Incorporation of the Company, dated February 15, 2004 (filed with the Company’s Registration Statement on Form SB-2 dated July 26, 2004, SEC File Number 333-117653).
3.1.1*		Certificate of Amendment of Restated Certificate of Incorporation of the Company (filed with the Company’s Form 8-K dated April 11, 2006, SEC File Number 000-17171).
3.2*		Restated Bylaws of the Company (filed with the Company’s Form 8-K on April 14, 2005).
10.1*		Amended and Restated Directors’ Stock Option Plan (filed with the Company’s Form S-8 Registration No. 333- 00349 on January 22, 1996).
10.3*		Amended and restated 1995 Stock Incentive Plan (filed with the Company’s Form SB-2 Registration No. 333-117653 on July 26, 2005).
10.5*		Non-Qualified Stock Option Agreement dated June 19, 2001 between the Company and George R. Ireland (filed with the Company’s 10-QSB dated August 13, 2001, SEC File Number 000-17171).
10.7*		Summary of Supplemental Health Care Plan (filed with Amendment No. 1 to the Company’s Form S-1 Registration Statement (File No. 33-32754) as filed with the Securities and Exchange Commission on February 20, 1990).
10.12*		Compensation Agreement dated June 2, 1997 between the Company and Paul K. Willmott (filed with the Company’s Annual Report on Form 10-K dated June 30, 1998, SEC File Number 000-17171).
10.13*		Compensation Agreement dated June 2, 1997 between the Company and Richard A. Van Horn (filed with the Company’s Annual Report on Form 10-K dated June 30, 1998, SEC File Number 000-17171).
10.14*		Compensation Agreement dated June 2, 1997 between the Company and Thomas H. Ehrlich (filed with the Company’s Annual Report on Form 10-K dated June 30, 1998, SEC File Number 000-17171).
10.15*		Compensation Agreement dated June 2, 1997 between the Company and Mark S. Pelizza (filed with the Company’s Annual Report on Form 10-K dated June 30, 1998, SEC File Number 000-17171).
10.16*		Uranium Resources, Inc. 1999 Deferred Compensation Plan (filed with the Company’s Annual Report on Form 10-K dated June 30, 1999, SEC File Number 000-17171).
10.16.1*		Amendment No. 1 to the Uranium Resources, Inc. 1999 Deferred Compensation Plan (filed with the Company’s Annual Report on Form 10KSB dated March 31, 2006, SEC File Number 000-17171).
10.17*		2000-2001 Deferred Compensation Plan (filed with the Company’s Annual Report on Form 10-K dated December 31, 2004, SEC File Number 000-17171).
10.17.1*		Amendment No. 2 to the Uranium Resources, Inc. Deferred Compensation Plan for 2000-2001 (filed with the Company’s Annual Report on Form 10KSB dated March 31, 2006, SEC File Number 000-17171).
10.22*		Uranium Resources, Inc. Deferred Compensation Plan for 2002 (filed with the Company’s Quarterly Report on Form 10-QSB dated November 13, 2002, SEC File Number 000-17171).
10.23*		Uranium Resources, Inc. Deferred Compensation Plan for 2003 (filed with the Company’s Quarterly Report on Form 10-QSB dated November 13, 2002, SEC File Number 000-17171).
10.24*		Uranium Resources, Inc. Deferred Compensation Plan for 2004 (filed with the Company’s Quarterly Report on Form 10-QSB dated May 14, 2004, SEC File Number 000-17171).

 

E-1