Attached files
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EX-31.1 - CERT 302 - CEO, CFO - U.S. RARE EARTHS, INC | ex31-1.htm |
EX-32.1 - CERT 906 - CEO, CFO - U.S. RARE EARTHS, INC | ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2011
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 000-31199
COLORADO RARE EARTHS, INC.
(Exact name of registrant as specified in its charter)
Nevada
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87-0638338
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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Incorporation or organization)
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12 North Washington Street, Montoursville, Pennsylvania 17754
(Address of principal executive offices)
(570) 368-7633
(Registrant’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 past 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.Yes x No o
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).Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company
Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.
Class | Outstanding as of May 19, 2011 | ||
Common Stock, $0.00001 par value | 12,954,762 | ||
TABLE OF CONTENTS
Heading
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Page
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PART I - FINANCIAL INFORMATION
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||
Item 1. |
Financial Statements
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3
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Item 2. | Management's Discussion and Analysis of Financial Condition | 14 |
and Results of Operations | ||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk
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15 |
Item 4(T). |
Controls and Procedures
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15
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PART II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings |
16
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Item 1A. |
Risk Factors
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16 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
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16 |
Item 3. |
Defaults Upon Senior Securities
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17
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Item 4. |
(Removed and Reserved)
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17
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Item 5. | Other Information |
17
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Item 6. | Exhibits | 17 |
Signatures | 18 |
- 2 -
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements
Unaudited Consolidated Balance Sheets – March 31, 2011 and December 31, 2010
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4
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Unaudited Consolidated Statements of operations – Three Months Ended March 31, 2011
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5
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and 2010
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Unaudited Consolidated Statements of Stockholders’ Equity
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6
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Unaudited Consolidated Statements of Cash Flows – three Months Ended March 31, 2011
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and 2010
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7
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Notes to Unaudited Consolidated Financial Statements
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8
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- 3 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Consolidated Balance Sheets
ASSETS
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||||||||
March 31,
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December 31,
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|||||||
2011
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2010
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|||||||
CURRENT ASSETS
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||||||||
Cash
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$ | 423,070 | $ | 61,574 | ||||
Accounts receivable, less allowance for doubtful accounts
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||||||||
of $22,596 and $64,734, respectively
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432,510 | 710,411 | ||||||
Other current receivables
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1,633 | 51,730 | ||||||
Total Current Assets
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857,213 | 823,715 | ||||||
PROPERTY AND EQUIPMENT
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||||||||
Property and equipment, net
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49,532 | 49,807 | ||||||
Mineral properties
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326,000 | 326,000 | ||||||
Total Property and Equipment
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375,532 | 375,807 | ||||||
TOTAL ASSETS
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$ | 1,232,745 | $ | 1,199,522 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
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||||||||
CURRENT LIABILITIES
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||||||||
Trade accounts payable
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$ | 297,958 | $ | 408,099 | ||||
Warrant derivative liability
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2,584,867 | - | ||||||
Total Current Liabilities
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2,882,825 | 408,099 | ||||||
STOCKHOLDERS' EQUITY
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||||||||
Preferred stock; 10,000,000 shares authorized,
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||||||||
at $0.001 par value, no shares issued and
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||||||||
outstanding, respectively
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- | - | ||||||
Common stock; 100,000,000 shares authorized,
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||||||||
at $0.00001 par value, 12,700,374 and 12,300,000
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||||||||
shares issued and outstanding, respectively
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127 | 123 | ||||||
Stock subscription receivable
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(30,000 | ) | - | |||||
Additional paid-in capital
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5,476,593 | 4,109,847 | ||||||
Accumulated deficit
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(7,096,800 | ) | (3,318,547 | ) | ||||
Total Stockholders' Equity (deficit)
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(1,650,080 | ) | 791,423 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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$ | 1,232,745 | $ | 1,199,522 |
The accompanying notes are an integral part of these consolidated financial statements.
- 4 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
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||||||||
March 31,
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||||||||
2011
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2010
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|||||||
REVENUES
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||||||||
Advertising revenue
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$ | 487,726 | $ | 526,614 | ||||
Total Revenue
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487,726 | 526,614 | ||||||
Cost of revenues
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360,917 | 260,462 | ||||||
Gross Margin
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126,809 | 266,152 | ||||||
OPERATING EXPENSES
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||||||||
General and administrative
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4,201,601 | 280,289 | ||||||
Depreciation and amortization
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5,529 | 6,427 | ||||||
Total Operating Expenses
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4,207,130 | 286,716 | ||||||
Loss from Operations
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(4,080,321 | ) | (20,564 | ) | ||||
OTHER INCOME
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||||||||
Unrealized gain on derivative liability
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301,883 | - | ||||||
Interest income
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185 | 155 | ||||||
Total Other Income
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302,068 | 155 | ||||||
LOSS BEFORE INCOME TAXES
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(3,778,253 | ) | (20,409 | ) | ||||
INCOME TAX EXPENSE (BENEFIT)
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- | (3,860 | ) | |||||
Net Loss
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$ | (3,778,253 | ) | $ | (16,549 | ) | ||
PER SHARE DATA:
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||||||||
BASIC AND DILUTED LOSS
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||||||||
PER SHARE
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$ | (0.30 | ) | $ | (0.00 | ) | ||
WEIGHTED AVERAGE NUMBER
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||||||||
OF SHARES OUTSTANDING – BASIC AND DILUTED
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12,516,328 | 5,000,000 |
The accompanying notes are an integral part of these consolidated financial statements.
- 5 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Consolidated Statements of Stockholders' Equity
(Unaudited)
Retained
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||||||||||||||||||||||||
Additional
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Stock
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Earnings
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Common Stock
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Paid-in
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Subscription
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(Accumulated
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||||||||||||||||||||
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Shares
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Amount
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Capital
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Receivable
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Deficit)
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Total
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||||||||||||||||||
Balance, December 31, 2008
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5,000,000 | $ | 50 | $ | 19,920 | $ | - | $ | 502,003 | $ | 521,973 | |||||||||||||
Net loss for the year
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||||||||||||||||||||||||
ended December 31, 2009
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- | - | - | - | (21,199 | ) | (21,199 | ) | ||||||||||||||||
Balance, December 31, 2009
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5,000,000 | 50 | 19,920 | - | 480,804 | 500,774 | ||||||||||||||||||
Common stock issued
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||||||||||||||||||||||||
in acquisition of subsidiary
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5,900,000 | 59 | 2,949,941 | - | - | 2,950,000 | ||||||||||||||||||
Common stock issued for services
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1,400,000 | 14 | 1,139,986 | - | - | 1,140,000 | ||||||||||||||||||
Net loss for the year
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||||||||||||||||||||||||
ended December 31, 2010
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- | - | - | - | (3,799,351 | ) | (3,799,351 | ) | ||||||||||||||||
Balance, December 31, 2010
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12,300,000 | 123 | 4,109,847 | - | (3,318,547 | ) | 791,423 | |||||||||||||||||
Common stock issued for services
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267,250 | 3 | 941,747 | - | - | 941,750 | ||||||||||||||||||
Cancellation of common stock
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(16,000 | ) | - | - | - | - | - | |||||||||||||||||
Common stock issued for cash
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149,124 | 1 | 424,999 | (30,000 | ) | - | 395,000 | |||||||||||||||||
Net loss for the three months
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||||||||||||||||||||||||
ended March 31, 2011
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- | - | - | - | (3,778,253 | ) | (3,778,253 | ) | ||||||||||||||||
Balance, March 31, 2011
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12,700,374 | $ | 127 | $ | 5,476,593 | $ | (30,000 | ) | $ | (7,096,800 | ) | $ | (1,650,080 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
- 6 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
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||||||||
March 31,
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||||||||
2011
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2010
|
|||||||
OPERATING ACTIVITIES
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||||||||
Net loss
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$ | (3,778,253 | ) | $ | (16,549 | ) | ||
Adjustments to Reconcile Net Loss to
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||||||||
Net Cash Used by Operating Activities:
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||||||||
Depreciation and amortization
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5,529 | 6,427 | ||||||
Common stock and warrants issued for services
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3,526,619 | - | ||||||
Changes in Operating Assets and Liabilities:
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||||||||
Accounts receivable
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277,901 | 31,309 | ||||||
Other current receivables
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50,097 | - | ||||||
Trade accounts payable
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(110,141 | ) | (25,665 | ) | ||||
Net Cash Used by Operating Activities
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(28,248 | ) | (4,478 | ) | ||||
INVESTING ACTIVITIES
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||||||||
Purchase of fixed assets
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(5,256 | ) | - | |||||
Net Cash Used By Investing Activities
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(5,256 | ) | - | |||||
FINANCING ACTIVITIES
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||||||||
Proceeds from the sale of common stock
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395,000 | - | ||||||
Net Cash Provided By Financing Activities
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395,000 | - | ||||||
INCREASE (DECREASE) IN CASH
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361,496 | (4,478 | ) | |||||
CASH AT BEGINNING OF YEAR
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61,574 | 175,570 | ||||||
CASH AT END OF YEAR
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$ | 423,070 | $ | 171,092 | ||||
Supplemental Cash Flow Disclosures:
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||||||||
Cash paid for:
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||||||||
Interest expense
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$ | - | $ | - | ||||
Income taxes
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- | - | ||||||
Non Cash Investing and Financing Activities:
|
||||||||
Common stock issued for mineral properties
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$ | - | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
- 7 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited balance sheets of Colorado Rare Earths, Inc. (f.k.a. Calypso Media Services Group, Inc.) at March 31, 2011 and related unaudited statements of operations, stockholders' equity and cash flows for the three months ended March 31, 2011 and 2010, have been prepared by management in conformity with United States generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the December 31, 2010 audited financial statements included in our annual report on Form 10-K. Operating results for the period ended March 31, 2011, are not necessarily indicative of the results that can be expected for the fiscal year ending December 31, 2011 or any other subsequent period.
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
In accordance with ASC 820, the carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates fair value due to the short-term maturity of these instruments. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted 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, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.
The carrying amounts reported in the balance sheets for cash, accounts receivable, loans payable, and accounts payable and accrued expenses, approximate their fair market value based on the short-term maturity of these instruments. The following table presents assets and liabilities that are measured and recognized at fair value as of March 31 2011, on a non-recurring basis:
- 8 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments (continued)
Assets and liabilities measured at fair
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||||||||||||||||
value on a recurring and nonrecurring
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Total
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|||||||||||||||
basis at March 31, 2011:
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Carrying
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|||||||||||||||
Nonrecurring:
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Level 1
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Level 2
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Level 3
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Value
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||||||||||||
Warrant derivative liability
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$ | - | $ | - | $ | (2,584,867 | ) | $ | (2,584,867 | ) | ||||||
$ | - | $ | - | $ | (2,584,867 | ) | $ | (2,584,867 | ) |
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
The method described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. If a readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. The Company believes its method of determining fair value is appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.
The following tables present the fair value of financial instruments as of March 31, 2011, by caption on the condensed balance sheet and by ASC 820 valuation hierarchy described above.
Derivative
|
||||
Level 3 Reconciliation:
|
Liability
|
|||
Level 3 assets and liabilities at December 31, 2010:
|
$ | -0- | ||
Purchases, sales, issuances and settlements (net)
|
(2,584,867 | ) | ||
Total level 3 assets and liabilities at March 31, 2011
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$ | (2,584,867 | ) |
Recent Accounting Pronouncements
The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company’s financial position, or results from
- 9 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 3 – DERIVATIVE LIABILITY AND FAIR VALUE MEASUREMENTS
Effective July 31, 2009, the Company adopted ASC Topic No. 815-40 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. On March 10, 2011 the Company issued 1,300,000 warrants with an exercise price of $0.50 in exchange for services.
The exercise price of these warrants are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than $0.50. If these provisions are triggered, the exercise price of all their warrants will be reduced. Additionally, the warrants have a provision wherein additional warrants may be issued if the Company issues new securities or increases the number of its outstanding shares by more than 5%. As a result, the warrants are not considered to be solely indexed to the Company’s own stock and are not afforded equity treatment.
The fair value of the derivative liability was calculated using a Lattice Model that values the derivative feature based on future projections of the various potential outcomes. The assumptions that were analyzed and incorporated into the model included the reset feature with the full ratchet and weighted average anti-dilution reset, expectations of future stock price performance and expectations of future issuances of common stock or common stock equivalents based on the Company’s prior stock history, prior issuances of stock, and expected capital requirements. Probabilities were assigned to various scenarios in which the reset provisions would go into effect and weighted accordingly.
The total fair value of the warrants issued on March 10, 2011, amounting to $2,886,750 has been recognized as a derivative liability on the date of issuance and all future changes in the fair value of these warrants being recognized in earnings in the Company’s statement of operations under the caption “Other income (expense) – Gain (loss) on warrant derivative liability” until such time as the warrants are exercised or expire.
ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as another income or expense item. The Company’s only assets or liabilities measured at fair value on a recurring basis are its derivative liabilities associated with the above warrants. At March 31, 2011, the Company revalued the warrants and determined that, during the three months ended March 31, 2011, the Company’s derivative liability decreased by $301,883 to $2,584,867. The Company recognized a corresponding loss on derivative liability in conjunction with this revaluation.
The fair value of the derivative warrant instruments is estimated using the lattice valuation model with the following assumptions as of March 31, 2011:
Common stock issuable upon exercise of warrants | 1,300,000 | |||
Estimated market value of common stock on measurement date | $ | 2.90 | ||
Exercise price | $ | 0.50 | ||
Risk-free interest rate (1) | 2.24 | % | ||
Warrant lives in years | 5.0 | |||
Expected volatility (2) | 509 | % | ||
Expected divdend | None | |||
Probability of reset to conversion price (4) | 12.5 | % |
- 10 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 3 – DERIVATIVE LIABILITY AND FAIR VALUE MEASUREMENTS (CONTINUED)
(1)
|
The risk-free interest rate was determined by reference to the yield of U.S. Treasury securities with a term of five years.
|
(2)
|
The volatility factor is based upon the historical volatility of 22 comparable companies
|
(3)
|
Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends in the near term.
|
(4)
|
This represents management’s estimate of the probability that the Company will issue stock at a price lower than the warrants’ exercise price.
|
At March 31, 2011, the derivative liability associated with the warrants was $2,584,867.
NOTE 4 – COMMITMENTS AND CONTINGENCIES
Colorado’s executive officer and business manger each entered into a three year employment agreement that provides for an annual base salary of $125,00 in year one, $137,500 in year two, and $15,000 in year three.
The Company entered into an investor relations agreement with Logic International Consulting Group, LLC on March 11, 2011, whereby the Company is required to make a monthly retainer in the amount $50,000 until December 11, 2011.
NOTE 5 – COMMON STOCK
During the three months ended March 31, 2011, the Company issued 267,250 shares of common stock to employees and directors for services. In conjunction with these issuances, the Company also cancelled 16,000 shares previously issued to employees. The stock was valued at an average price of $3.52 per share based on the quoted market price of the stock on the grant date. The Company recorded a corresponding expense of $941,750 as general and administrative expense.
During the three months ended March 31, 2011, the Company sold 8.5 units of its securities, each unit consisting of 17,544 shares of its common stock and 17,544 warrants to purchase shares of common stock. Each unit was offered at a subscription price of $50,000. Through March 31, 2011, the Company has received $395,000 of the total $425,000 to be received and has thus recorded a stock subscription receivable of $30,000.
Each warrant is exercisable for a period of 5 years at $4.85 per share. The warrants were valued using the Black-Scholes Option Pricing model using the following assumptions: 5 year term, $2.80-$3.50 stock price, $4.85 exercise price, 237-351% volatility, 1.87-2.24% risk free rate. The Company has allocated $212,497 of the total $425,000 proceeds to the value of the warrants.
- 11 -
COLORADO RARE EARTHS, INC.
COLORADO RARE EARTHS, INC.
Results of Operations
Three months ended March 31, 2011 compared to the three months ended March 31, 2010.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 6 – WARRANTS
During the three months ended March 31, 2011, the Company issued 149,124 warrants in conjunction with the stock offering noted in Note 5. The warrants are exercisable at $0.50 per share and expire five years from issuance.
Summary information regarding common stock warrants issued and outstanding as of March 31, 2011 is as follows:
Weighted
|
||||||||
Average
|
||||||||
Warrants
|
Share Price
|
|||||||
Outstanding at December 31, 2010
|
- | $ | - | |||||
Granted
|
1,449,124 | 0.50 | ||||||
Exercised
|
- | - | ||||||
Expired
|
- | - | ||||||
Outstanding at March 31, 2011
|
1,449,124 | $ | 0.50 |
Summary of warrants outstanding and exercisable as of March 31, 2011 is as follows:
Outstanding
|
Exercisable
|
|||||||||||||
Exercise
|
Number of
|
Remaining
|
Number of
|
|||||||||||
Price
|
Shares
|
Life
|
Shares
|
|||||||||||
$ | 0.50 | 1,449,124 | 5.0 | 1,449,124 |
The outstanding warrants had an intrinsic value of $3,477,898 at March 31, 2011. All of the 149,124 warrants outstanding at March 31, 2011, are exercisable.
NOTE 7 – SEGMENT DISCLOSURES
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company’s chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.
The Company has three principal operating segments, which are (1) the offering a full line of advertising services to manufacturers, distributors and dealers across the United States and Canada, (2) the acquisition and exploration of mineral properties and (3) the corporate operations overseeing each segment and the financial reporting obligations of the combined entity. These operating segments were determined based on the nature of the products and services offered.
The Company has determined that there are two reportable segments: (1) advertising services and (2) mineral exploration. The Company evaluates performance based on several factors, of which the primary financial measure is business segment income before taxes. The accounting policies of the business segments are the same as those described in ‘‘Note 2: Significant Accounting Policies.’’ All significant intercompany transactions and balances have been eliminated. The following tables show the operations of the Company’s reportable segments for the three month periods ended March 31, 2011 and 2010:
- 12 -
COLORADO RARE EARTHS, INC.
(F/K/A CALYPSO MEDIA SERVICES GROUP, INC.)
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 7 – SEGMENT DISCLOSURES (CONTINUED)
Advertising | Mineral | |||||||||||
Services | Exploration | Consolidated | ||||||||||
As of March 31, 2011 | ||||||||||||
Revenues | $ | 487,726 | $ | - | $ | 487,726 | ||||||
Cost of Revenue | 360,917 | - | 360,917 | |||||||||
Operating expenses | 4,121,583 | 85,547 | 4,207,130 | |||||||||
Other income (expense) | 302,065 | 3 | 302,068 | |||||||||
Net loss | (3,692,709 | ) | (85,544 | ) | (3,778,253 | ) | ||||||
Total assets | 623,689 | 609,056 | 1,232,745 | |||||||||
Total liabilities | $ | 2,882,825 | $ | - | $ | 2,882,825 | ||||||
As of March 31, 2010 | ||||||||||||
Revenues | $ | 525,614 | $ | - | $ | 526,614 | ||||||
Cost of revenues | 260,462 | - | 260,462 | |||||||||
Operating expenses | 286,716 | - | 286,716 | |||||||||
Other income (expense) | 155 | - | 155 | |||||||||
Net loss | (16,549 | ) | - | (16,549 | ) | |||||||
Total assets | 550,839 | - | 560,839 | |||||||||
Total liabilities | $ | 66,614 | $ | - | $ | 66,614 | ||||||
NOTE 8 – SUBSEQUENT EVENTS
Subsequent to March 31, 2011, the Company sold 14.5 units of its securities, each unit consisting of 17,544 shares of its common stock and 17,544 warrants to purchase shares of common stock. Each unit was offered at a subscription price of $50,000 for gross proceeds of $725,000.
In accordance with ASC 855-10, the Company’s management reviewed all material events through the date these consolidated financial statements were issued and there are no additional material subsequent events to report other than those reported.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q.
Forward-Looking and Cautionary Statements
This report contains forward-looking statements relating to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will” “should," “expect," "intend," "plan," anticipate," "believe," "estimate," "predict," "potential," "continue," or similar terms, variations of such terms or the negative of such terms. These statements are only predictions and involve known and unknown risks, uncertainties and other factors included in our periodic reports with the SEC. Although forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment, actual results could differ materially from those anticipated in such statements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
On December 15, 2010 we acquired certain mining and/or mineral leases and/or claims located in Gunnison County, Colorado, Freemont County, Colorado and Custer County, Colorado in exchange for 5,900,000 shares of our authorized, but previously unissued common stock. In connection with the acquisition, we changed our corporate name to Colorado Rare Earths, Inc. in December 2010.
As a result of the acquisition, we will continue in the media and advertising business, but will diversify our business to include potential opportunities in the mining and mineral industry. We are primarily interested in the possibility of deposits of rare earth elements in the Seaglass claims and leases.
Rare earth elements, specifically thorium, uranium, niobium and tantalum, are essential for a diverse and expanding array of high-technology applications and for many current and emerging alternative energy technologies, such as electric vehicles, energy-efficient lighting, and wind power. Rare earth elements are also critical for a number of key defense systems and other advanced materials. We have also established an advisory board to explore possible alternatives as to how to make the best use of the properties acquired through Seaglass, including the possibility of acquiring additional claims.
Results of Operations
Three months ended March 31, 2011 compared to the three months ended March 31, 2010.
The following table sets forth the percentage relationship to total revenues of principal items contained in the our statements of operations for the three month periods ended March 31, 2011 and 2010. It should be noted that percentages discussed throughout this analysis are stated on an approximate basis.
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Total revenues | 100 | % | 100 | % | ||||
Cost of revenues | 74 | % | 39 | % | ||||
Gross margin | 26 | % | 51 | % | ||||
Total operating expenses | 863 | % | 54 | % | ||||
(Loss) from operations | (837 | )% | (4 | )% | ||||
Other income | 62 | % | 0 | % | ||||
(Loss) before income taxes | (775 | )% | (4 | )% | ||||
Income tax expense (benefit) | 0 | % | (1 | )% | ||||
Net (loss) | (775 | )% | (3 | )% |
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Total revenues for the three-month period (“first quarter”) ended March 31, 2011 decreased by $38,888 to $487,726, when compared to $526,614 for first quarter of 2010. Cost of revenues increased $100,455 to $360,917 in the first quarter of 2011 from $260,462 in the first quarter of 2010. As a percentage of total revenues, cost of revenues increased from 49% in the first quarter of 2010 to 74% in the first quarter in 2011. These minor changes reflect fluctuations in the normal course of business.
Total operating expenses for the first quarter of 2011 were $4,207,130 compared to $286,716 during the first quarter of 2010. The increase is due primarily to common stock and warrants issued for services valued at $3,828,500. The remaining increase is due to increased legal and accounting fees associated with the closing of the merger. No common stock or warrants were issued in the first quarter of 2010.
Due to the above, we realized a net operating loss for the first quarter of 2011 of $4,080,321 as compared to a net operating loss of $20,564 in 2010. After gain on derivative liability of $301,883 and interest income of $185, our net loss for the first quarter of 2011 was $3,778,253. For the first quarter of 2010, we had interest income of $155 and a net tax benefit of $3,860, resulting in an overall net loss of $16,549.
Liquidity and Capital Resources
At March 31, 2011, we had total current assets of $857,213, consisting of cash of $423,070 and accounts receivable of $432,510 and other current receivables of $1,633. At December 31, 2010, we had total current assets of $823,715, consisting of $61,574 in cash, $710,411 in accounts receivable and $51,730 in other current receivables.
We had a working capital deficit at March 31, 2011 of $2,025,612 compared to a working capital surplus of $415,616 at December 31, 2010. This decrease in working capital is due to $2,584,867 recorded as a derivative liability associated with warrants issued for services as well as a decrease in accounts receivable of $277,901. Accounts receivable decreased due to the collection in the current quarter of sales made during the typically busy fourth quarter. This decrease in working capital was offset by an increased in cash of $361,496, which resulted from proceeds realized from the private sale of securities and a decrease in accounts payable of $110,141. The decrease in accounts payable was due to the utilization of cash to pay down accounts payable.
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At March 31, 2011, we had total assets of $1,232,745 and stockholders’ deficit of $1,650,080, compared to total assets of $1,199,522 and stockholders' equity of $791,423 at December 31, 2010. Net cash used by operating activities was $28,248 for the first quarter of 2011, compared to net cash used of $4,478 for the first quarter of 2010. The first quarter 2011 result is primarily attributed to net loss of $3,778,253 which included common stock and warrants issued for services valued at $3,526,619 and decrease in account receivable of $277,901 due to the collection of sales made in our typically busy fourth quarter which is partially offset by decrease in accounts payable of $110,141. We also realized proceeds of $395,000 from the sale of our common stock during the first quarter of 2011.
Inflation
In the opinion of management, inflation has not and will not have a material effect on our operations in the immediate future. Management will continue to monitor inflation and evaluate the possible future effects of inflation on our business and operations.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
This item is not required for a smaller reporting company.
Item 4(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure and control procedures are also designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and principal accounting officer, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, management is required to apply its reasonable judgment. Based on the evaluation described above, our management, including our principal executive officer and principal accounting officer, have concluded that, as of March 31, 2011, our disclosure controls and procedures were not effective due to a lack of segregation of duties and no audit committee. As resources become available to our company, we plan to begin to hire sufficient employees to maintain adequate internal controls.
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Changes in Internal Control Over Financial Reporting. Management has evaluated whether any change in our internal control over financial reporting occurred during the first quarter of fiscal 2011. Based on its evaluation, management, including the chief executive officer and principal accounting officer, has concluded that there has been no change in our internal control over financial reporting during the first quarter of fiscal 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which we are a party or to which any of our property is subject and, to the best of our knowledge, no such actions against us are contemplated or threatened.
Item 1A. Risk Factors
This item is not required for a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2011, we issued 267,250 shares of common stock to employees and directors for services. In conjunction with these issuances, we also cancelled 16,000 shares previously issued to employees. The stock was valued at an average price of $3.52 per share based on the quoted market price of the stock on the grant date. We recorded a corresponding expense of $941,750 as general and administrative expense.
Also during the first quarter of 2011, we commenced a private offering whereby we sold 8.5 units of securities, each unit consisting of 17,544 shares of its common stock and 17,544 warrants to purchase shares of common stock (the “Units”). Each Unit was offered at a subscription price of $50,000. We received proceeds of $395,000 of the total $425,000 to be received and, accordingly, recorded a stock subscription receivable of $30,000. Subsequent to March 31, 2011, we sold an additional 6 Units for an aggregate of $300,000. Each warrant included in the Units is exercisable for a period of 5 years at $4.85 per share.
The issuance of shares to employees and directors for services was made pursuant to an exemption from registration under the Securities Act of 1933 under Section 4(2) of that Act. The offer and sale of the Units was made pursuant to a private offering to qualified investors pursuant to the exemptions from registration under the Securities Act of 1933 provided by Section 4(2) and by Regulation D, Rule 506 promulgated under the Act.
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Item 3. Defaults Upon Senior Securities++
This Item is not applicable.
Item 4. Removed and Reserved
Item 5. Other Information
On December 15, 2010 we acquired certain mining and/or mineral leases and/or claims located in Gunnison County, Colorado, Freemont County, Colorado and Custer County, Colorado in exchange for 5,900,000 shares of our authorized, but previously unissued common stock. In connection with the acquisition, we changed our corporate name to Colorado Rare Earths, Inc. in December 2010.
As a result of the acquisition, we will continue in the media and advertising business, but will diversify our business to include potential opportunities in the mining and mineral industry. We are primarily interested in the possibility of deposits of rare earth elements in the Seaglass claims and leases.
Rare earth elements, specifically thorium, uranium, niobium and tantalum, are essential for a diverse and expanding array of high-technology applications and for many current and emerging alternative energy technologies, such as electric vehicles, energy-efficient lighting, and wind power. Rare earth elements are also critical for a number of key defense systems and other advanced materials. We have also established an advisory board to explore possible alternatives as to how to make the best use of the properties acquired through Seaglass, including the possibility of acquiring additional claims.
Item 6. Exhibits
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Exhibit 31.1
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Certification of C.E.O. and Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Exhibit 32.1
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Certification of C.E.O. and Principal Accounting Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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.
COLORADO REARE EARTHS, INC.
May 23, 2011
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By:
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/s/ MICHAEL D. PARNELL
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Michael D. Parnell
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President, C.E.O. and Director
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(Principal Accounting Officer)
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