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 September 30, 2011

[   ]

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

U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

(Exact name of registrant as specified in its charter)

Nevada  

87-0638338

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

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  [  ]

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  [  ]    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

Large accelerated filer

[   ]

Accelerated filer

[   ]

Non-accelerated filer

[   ]

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]

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 November 18, 2011

Common Stock, $0.00001 par value                     19,808,717

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TABLE OF CONTENTS

Heading

Page  

PART  I    —   FINANCIAL INFORMATION

Item 1.

Unaudited Consolidated Financial Statements

3

Item 2.

Management's Discussion and Analysis of Financial Condition and Results

of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

Item 4(T).

Controls and Procedures

18

PART II   —   OTHER INFORMATION

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.

Removed and Reserved

20

Item 5.

Other Information

20

Item 6.

Exhibits

20

Signatures

21

2

PART  I   —   FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Financial Statements

3

4

5

6

U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited balance sheets of U.S. Rare Earths, Inc. (f.k.a. Colorado Rare Earths, Inc.) at September 30, 2011 and related unaudited statements of operations, stockholders' equity and cash flows for the nine months ended September 30, 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 financial statements be read in conjunction with the audited financial statements and notes thereto included in our December 31, 2010 annual report on Form 10-K.  Operating results for the period ended September 30, 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.

On July 18, 2011 the Company entered into an agreement to acquire U.S. Rare Earths, Inc., a Delaware corporation (“USRE”) and the acquisition closed on August 22, 2011.  In connection with the acquisition, the Company changed its corporate name to U.S. Rare Earths, Inc.  See Note 3 for additional information.

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. Significant estimates include those with respect to the valuation and recoverability of mineral claims, stock-based compensation, the valuation of the Company’s warrant derivative liability and the valuation allowance applicable to the Company’s deferred tax assets.  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 September 30, 2011, on a non-recurring basis:

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U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

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. See Note 4 for a description of the valuation methodology used to measure fair value.

The method described in Note 4 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 set forth a reconciliation of changes in the fair value of financial liabilities classified as Level 3 instruments in the fair value hierarchy:

U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Mineral Property Acquisition Costs

The costs of acquiring mineral properties are capitalized and amortized over the estimated units of production following the commencement of production, or expensed if it is determined that the mineral property has no future economic value or the properties are sold or abandoned. Cost includes cash consideration and the fair market value of shares issued on the acquisition of mineral properties. Properties acquired under option agreements, whereby payments are made at the discretion of the Company, are recorded at such time as the payments are made.

The recoverable amounts for mineral properties is dependent upon the existence of economically recoverable reserves; the acquisition and maintenance of appropriate permits, licenses and rights; the ability of the Company to obtain financing to complete the exploration and development of the properties; and upon future profitable production or alternatively upon the Company’s ability to recover its spent costs from the sale of its interests. The amounts recorded as mineral properties reflect actual costs incurred and are not intended to express present or future values.

The capitalized amounts may be written down if potential future cash flows, including potential sales proceeds, related to property are estimated to be less than the carrying value of the property. Management of the Company reviews the carrying value of each mineral property interest quarterly, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If indicated, reductions in the carrying value of each property would be recorded to mark the carrying value to estimated fair value.

Exploration and Development Costs

Exploration costs are expensed as incurred. When it is determined that a mining deposit can be economically and legally extracted or produced based on established proven and probable reserves, further exploration costs and development costs incurred after such determination will be capitalized. The establishment of proven and probable reserves is based on results of final feasibility studies which indicate whether a property is economically feasible. Upon commencement of commercial production, capitalized costs will be transferred to the appropriate asset category and amortized over the estimated units of production.

Earnings per share

Basic loss per common share has been computed by dividing net loss by the weighted average number of shares of common stock outstanding during each period and after any preferred stock dividend requirements. In period of earnings, diluted earnings per common share are calculated by dividing net income available to common shareholders by weighted-average common shares outstanding during the period plus weighted-average dilutive potential common shares. Diluted earnings per share calculations assume, as of the beginning of the period, exercise of stock options and warrants using the treasury stock method. Convertible securities are included in the calculation during the time period they are outstanding using the if-converted method.

All potential dilutive securities, including potentially dilutive options, warrants and convertible securities, if any, were excluded from the computation of dilutive net loss per common share for the three and nine months ended September 30, 2011 and 2010, respectively, as their effects are antidilutive due to our net loss for those periods.

Warrants to purchase 2,785,096 common shares at an average exercise price of $2.38 and were outstanding at September 30, 2011. Using the treasury stock method, had we had net income, approximately 1,751,863 common shares attributable to our outstanding warrants to purchase common shares would have been included in the fully diluted earnings per share calculation for the three month period ended September 30, 2011, while approximately 614,647 common shares attributable to our outstanding warrants to purchase common shares would have been included in the fully diluted earnings per share calculation for the nine month period ended September 30, 2011.

No warrants were outstanding as of September 30, 2010.

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U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 statements.

NOTE 3 – MINERAL PROPERTIES

As part of the acquisition of Seaglass Holding Corp. on December 15, 2010, the Company acquired rights to mineral claims on approximately 704 acres on, near, or adjacent to anomalous values of Rare Earth metals, including thorium, uranium, niobium and tantalum. The Company had an independent evaluation performed by a licensed processing engineer to estimate the fair market value of the claims on the date of acquisition. Based on this report, the Company assigned a fair value to the claims of $326,000.

During the nine months ended September 30, 2011, the Company incurred $745,507 in costs relating to the staking of approximately 1,358 additional claims.  The Company capitalized these costs during the nine months ended

September 30, 2011, which include costs to survey and stake the individual claims as well as filing and other registration fees.  All of these fees were paid or are due to a related party (see Note 8).

U.S. Rare Earths, Inc. Acquisition

On July 18, 2011, the Company acquired USRE by issuing 5,000,000 shares of the Company’s common stock to the shareholders of USRE.  A significant factor leading to the Company’s purchase of USRE was the mineral properties owned by USRE.  At the time the Company acquired USRE, these mineral properties were re-valued to their market value of $43,930,766

The acquisition closed on August 22, 2011.  Pursuant to the terms of the agreement, USRE’s stockholders exchanged 100% of their outstanding common stock for 5,000,000 unregistered shares of the Company’s common stock valued at the market price of the Company’s common stock on the date the agreement was entered into of $8.50 per share or a total of $42,500,000.  The 5,000,000 shares represent approximately 25% of the Company’s total outstanding shares immediately following the transaction. As part of the acquisition price, the Company also assumed a note payable in the amount of $1,418,719 and certain other accounts payable totaling $12,047.  

The assets and liabilities of USRE as of the acquisition date will be recorded at their estimated fair value. A preliminary allocation of the purchase price is as follows:

The allocation of the purchase price was based on preliminary estimates and is provisional. Estimates and assumptions are subject to change upon the receipt of final tax returns as well as any other information that existed as of the purchase date but is unknown as of the date of this filing. This final evaluation of net assets acquired is expected to be completed as soon as a final accounting is performed, but no later than one year from the acquisition date. Any future changes in the value of the net assets acquired will be offset by a corresponding change in mineral properties or possibly goodwill.

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U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 3 – MINERAL PROPERTIES (CONTINUED)

Pro forma presentation

The unaudited pro forma information below for the three and nine months ended September 30, 2011 and 2010, are presented as if the acquisition of USRE had taken place on the first day of each period by combining the unaudited historical results of the Company and USRE:

NOTE 4 – WARRANT DERIVATIVE LIABILITY

On March 10, 2011, the Company issued 1,300,000 warrants with an exercise price of $0.50 to a related party in exchange for services. The Company evaluated these warrants pursuant to ASC Topic No. 815-40 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. 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 these warrants will be reduced.  Additionally, the warrants have a provision wherein additional warrants may be issued if the Company issues new securities or increased 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 compound embedded derivatives based on future projections of the various potential outcomes. The assumptions that were analyzed and incorporated into the model included the conversion feature with the full ratchet and weighted average anti-dilution reset, expectations of future stock price performance and expectations of future issuances 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 stock-based compensation and included within general and administrative expense in the accompanying income statement.  Additionally, the Company recorded a derivative liability on the date of issuance with 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 September 30, 2011, the Company revalued the warrants and determined that, during the three months ended September 30, 2011, the Company’s warrant derivative liability decreased by $14,779 and during the nine months ended September 30, 2011, the Company’s derivative liability increased by $3,651,335 to $6,538,085.  The Company recognized a corresponding gain or loss on derivative liability in conjunction with these revaluations.

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U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 4 – WARRANT DERIVATIVE LIABILITY (CONTINUED)

The fair value of the derivative warrant instruments is estimated using the lattice valuation model with the following assumptions as of September 30, 2011:

NOTE 5 – COMMITMENTS AND CONTINGENCIES

The Company’s executive officer and business manager each entered into a three year employment agreement that provides for an annual base salary of $125,000 in year one, $137,500 in year two, and $151,000 in year three.  In July 2011, these employment agreements extended for two additional years. The Company agreed to pay $166,100 and 182,710 in year four and five, respectively, to each of these employees.  The Company also agreed to issue 125,000 shares per year to each of these two employees in year four and five, provided they are still employed by the Company.  In the event of a change in control of the Company by merger, acquisition, takeover or otherwise, the share amounts due in years four and five would become immediately due and payable.

The Company entered into an investor relations agreement with Logic International Consulting Group, LLC (a related party) on March 11, 2011, whereby the Company is required to make a monthly retainer in the amount $50,000 until December 11, 2011.

Due to the change in control of the Company caused by the acquisition of U.S Rare Earths, Inc. as described in Note 3, the Company has accrued the severance compensation due to its principal officers under their employment contracts. Pursuant to the terms of the employment contracts, the Company is obligated to pay to the two employees, at their discretion, the sum of $500,000 in cash or $500,000 in the Company’s common shares or a combination thereof. The closing price of $0.50 per share is to be used in calculating the number of severance shares.  As of September 30, 2011, the Company has accrued $1,000,000 as Accrued compensation – officers, in the accompanying balance sheet.

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U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 6 – COMMON STOCK

During the nine months ended September 30, 2011, the Company issued 1,122,250 shares of common stock to consultants, 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 $3.18 per share based on the quoted market price of the stock on the grant date.  

Of the 1,122,250 shares issued, 800,000 were issued to non-employees in advance for services.  The Company is expensing the shares monthly as services are provided and the shares will be valued based on the fair market value of the shares when services are rendered over the life of each agreement, which range from 12 to 36 months.  As of September 30, 2011, the Company has recognized $734,025 as stock-based compensation related to these shares.  

During the nine months ended September 30, 2011, the Company sold 75.95 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. A total of 1,332,467 shares of common stock and warrants were issued in connection with these unit sales. Each unit was offered at a subscription price of $50,000.  Through September 30, 2011, the Company has received $3,787,500 of the total $3,797,500 to be received and has thus recorded a stock subscription receivable of $10,000.  Each warrant is immediately exercisable for a period of five years at $4.85 per share.  The warrants were valued using the Black-Scholes Option Pricing model using the following assumptions:  Five-year term, $2.80-$3.50 stock price, $4.85 exercise price, 351-237% volatility, 1.87-2.24% risk free rate.  The Company has allocated $2,143,750 of the total $4,287,500 proceeds to the value of the warrants.

NOTE 7 - WARRANTS

Except for the warrants described in Note 4 above, the Company has determined the estimated value of the warrants granted to employees and non-employees in exchange for services and financing expenses using the Black-Scholes pricing model and the following assumptions: stock price at valuation, $4.96-4.99; expected term of five years, exercise price of $0.50, a risk free interest rate of 1.81%, a dividend yield of 0% and volatility of 360%.

In addition to the warrants described above in Note 6, during the nine months ended September 30, 2011, the Company also issued 320,000 warrants that vested immediately to consultants for services rendered to the Company.  The warrants were valued at $1,589,288 based on the Black-Scholes option pricing model and assumption described above.  The Company recognized the expense associated with these warrants as general and administrative expense during the nine months ended September 30, 2011.

At September 30, 2011, the Company had 2,965,801 warrants outstanding, all of which were exercisable, with a weighted average remaining life of 4.75 years and an intrinsic value of $8,256,154.

NOTE 8 – RELATED PARTY TRANSACTIONS

During the nine months ended September 30, 2011, the Company has used the services of a related party to perform work related to the staking of additional claims and filing required paperwork for the maintenance of its claims.  An executive of the Company is the president of the firm engaged to perform this work.  As of September 30, 2011, the Company has incurred $745,507 in mineral exploration related costs, of which $175,150 remains unpaid at period end.  The Company is not paying any premium for work performed.  Rates charged to the Company are equal to those the firm charges to its other third party clients.

The Company entered into an investor relations agreement with Logic International Consulting Group, LLC on March 11, 2011. The president of Logic is also a board member of the Company.  Under the agreement, the Company is required to make a monthly retainer in the amount $50,000 until December 11, 2011.  The Company also issued 1,300,000 warrants with an exercise price of $0.50 in connection with this agreement.  See Note 4 above for discussion of the accounting for these warrants.

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U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 8 – RELATED PARTY TRANSACTIONS (CONTINUED)

USRE Note

As part of the acquisition price of USRE, the Company assumed a note in the amount of $1,418,719 payable to an entity owned by one of the Company’s directors and who is also a significant shareholder in the Company.  As part of the USRE purchase agreement, the Company agreed to pay $500,000 against the note and both the Company and the lender agreed to restructure the remaining balance.  The Company made the $500,000 payment and the remaining note balance of $918,719 was restructured to be a non interest bearing note with principal only payments of $28,125 due at the first of each month commencing November 1, 2011 and continuing until the note is repaid, which is expected to occur on or about July 2014.  The restructured note has no prepayment penalty and is secured by the Company’s mineral claims in and around the Lemhi Mining District in Idaho and the Montana Beaverhead District.

The restructured note is noninterest bearing and therefore, the Company is required to impute interest on the principal.  Using its estimated incremental borrowing rate, the Company recorded $149,866 as a discount against the restructured note, representing an estimated incremental borrowing rate of 10% per annum.  The discount will be accreted to interest expense over the term of the restructured note.  The Company recorded $4,090 of interest expense during the three and nine months ended September 30, 2011 related to the amortization of the discount.

NOTE 9 – 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 nine-month periods ended September 30, 2011 and 2010:

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U.S. RARE EARTHS, INC.

(Formerly Colorado Rare Earths, Inc.)

Notes to the Unaudited Consolidated Financial Statements

September 30, 2011

NOTE 9 – SEGMENT DISCLOSURES (Continued)

For the nine months ended September 30, 2011, operating expenses for the Company’s Mineral Exploration segment include stock-based compensation of $3,574,050.

NOTE 10 – SUBSEQUENT EVENTS

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.

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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.

Recent Events

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.

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.

On July 18, 2011, we entered into an agreement to acquire U.S. Rare Earths, Inc., a Delaware corporation (“U.S. Rare Earths”).  U.S. Rare Earths owns certain mining and/or mineral claims and/or leases located in and around the Lemhi Mining District of Idaho and the Montana / Beaverhead District.  The acquisition was structured as a triangular merger whereby U.S. Rare Earths merged with and into Seaglass Holding Corp. (“Seaglass”), our wholly owned subsidiary, with Seaglass being the surviving corporate entity.  The agreement was completed on August 22, 2011. The agree provides that the U.S. Rare Earths stockholders exchanged 100% of U.S. Rare Earths’ outstanding common stock for 5,000,000 unregistered shares of our authorized, but previously unissued common stock.  Following the acquisition, we changed our corporate name to U.S. Rare Earths, Inc. on October 5, 2011. We also plan to name two new directors to our Board of Directors, as designated by U.S. Rare Earths.

In additions to the properties acquired pursuant to the acquisition of U.S. Rare Earths, we own a 100% interest in a group of Colorado, unpatented, mineral claims, the Iron Hill Property, located in Gunnison County, and a 100% interest in a group of unpatented mineral claims including the Wet Mountains Property, located in Freemont and Custer Counties. We have created an advisory board and we are actively investigating the possible alternatives of exploiting our mineral assets, including the possibility of acquiring additional claims.  

We continue to operate through our subsidiaries, Media Depot and Media Max, a national agency specializing in co-op advertising.  Our media business offers an array of services ranging from buying and planning media in radio, TV, cable, print or outdoor advertising, to creating print ads and producing

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electronic commercials.  We also offer a full line of advertising services to manufacturers, distributors and dealers.  

Results of Operations

The following table sets forth the percentage relationship to total revenues of principal items contained in the statements of operations for the three and nine-month periods ended September 30, 2011 and 2010.  It should be noted that percentages discussed throughout this analysis are stated on an approximate basis.

Three months ended September 30, 2011 compared to the three months ended September 30, 2010.

Total advertising revenues for the three-month period (“third quarter”) ended September 30, 2011 decreased approximately 19% to $864,053, compared to $1,070,307 for the third quarter of 2010.  This result is attributed to the continued weaknesses in the economy and the general decline in non-Internet advertising revenues throughout the United States. Cost of revenues for the third quarter of 2011 was $429,535, a 48% decrease from $828,817 in the third quarter of 2010, due to decreased sales and normal business fluctuations.

Total operating expenses for the third quarter of 2011 were $2,777,464, a 875% increase when compared to $284,739 during the third quarter of 2010.  This result is attributed to the costs of common stock and warrants issued for services and an accrual of $1,000,000 for severance of two executive officers. The Company has built a reputable advisory board and was able to negotiate that the members be compensated primarily in shares of our common stock.  Total expense recognized for stock issued for services was $641,705 for the third quarter of 2011 as compared to $-0- for the third quarter of 2010.  The remaining increase in operating expenses is primarily due to the cost of entering the rare earths industry, including identifying properties and seeking financing. Total operating expenses as a percentage of total revenues increased to 321% for the third quarter of 2011 compared to 27% for the third quarter of 2010, which reflects the factors mentioned above.  Net loss for the third quarter of 2011 was $2,331,500 [($0.12) per share], compared to the net loss of $18,242 [($0.00) per share] after an income tax benefit of $24,802 in the 2010 period.

Nine months ended September 30, 2011 compared to nine months ended September 30, 2010.

Total advertising revenues for the nine-month period ended September 30, 2011 were $2,286,273, a 12% decrease from $2,597,496 for the 2010 nine-month period, attribute to the continued weaknesses in the economy and the general decline in non-Internet advertising revenues throughout the United States.   Cost of revenues decreased 17% to $1,412,779 in the first nine months of 2011 from $1,712,387 in the comparable 2010 period, primarily due to, due to decreased sales and normal business fluctuations.

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Total operating expenses for the first nine months of 2011 were $9,614,124, a 1154% increase compared to $766,784 during the same 2010 period.  This result is attributed to the costs of common stock and warrants issued for services and an accrual of $1,000,000 for severance of two executive officers. Total expense recognized for stock issued for services was $3,574,050 in the nine-month period ended September 30, 2011 as compared to $-0- for the same period in 2010.  The remaining increase in operating expenses is primarily due to the unrealized loss on the warrant derivative liability of $3,651,335. Total operating expenses as a percentage of total revenues increased from 30% in 2010 to 421% in 2011, primarily due to the factors listed above.  Net loss for the first nine months of 2011 was $12,394,766 [($0.82) per share] compared to net income of 108,600 [$0.02 per share], after an income tax expense of $10,492 in the 2010 period.

Liquidity and Capital Resources

At September 30, 2011, we had total current assets of $2,104,221, consisting of cash of $1,415,377, accounts receivable of $687,211 and other current assets 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 surplus at September 30, 2011 of $369,946 compared to a working capital surplus of $415,616 at December 31, 2010.  This decrease in working capital is primarily due to the accrual of $1,000,000 as severance compensation for two of our executive officers, partially offset by higher cash on hand due to our private placements of common stock and warrants during the 2011 period.  The decrease in our accounts payable, due to normal fluctuations, has been more than offset by our increased cash balance resulting from proceeds realized from the private sale of securities.  

At September 30, 2011, we had total assets of $47,066,334 and stockholders’ equity of $38,293,205, compared to total assets of $1,199,522 and stockholders' equity of $791,423 at December 31, 2010.  The increase in assets and stockholders’ equity is primarily due to the acquisition of mineral properties during the quarter.  

Net cash used by operating activities was $1,318,051 for the first nine months of 2011, compared to net cash provided of $21,810 for the first nine months of 2010.  The first nine months of 2011 result is primarily attributed to the increased net loss and partially offset by the $6,460,799 in common stock and warrants issued for services and $3,651,335 in changes in derivative liability to related parties. We also realized proceeds of $3,787,500 from the sale of our common stock during the first nine months 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.

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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 September 30, 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.

Changes in Internal Control Over Financial Reporting.  Management has evaluated whether any change in our internal control over financial reporting occurred during the third 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 third 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 third quarter of 2011, we issued 25,000 shares of common stock to employees and directors for services.  The stock was valued at an average price of $6.50 per share based on the quoted market price of the stock on the grant date.  We recorded a corresponding expense of $162,500 as general and administrative expense.  

We commenced a private offering of securities during the first quarter of 2011.  During the third quarter of 2011 we sold 21.95 units of securities (gross proceeds of $1,097,501), each unit consisting of 17,544 shares of its common stock and 17,544 warrants to purchase shares of common stock (the “Units”) offered at a subscription price of $50,000. Each warrant included in the Units is exercisable for a period of five years at $4.85 per share.

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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.  

Item 3.

Defaults Upon Senior Securities

This Item is not applicable.

Item 4.

Removed and Reserved

Item 5.

Other Information

This Item is not applicable.

Item 6.

Exhibits

Exhibit 31.1

Certification of C.E.O. and Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1

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.

Exhibit 101*

Interactive Data File

*

In accordance with Rule 406T of Regulation S-T, these XBRL (eXtensible Business Reporting Language) documents are furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

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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.

U.S. REARE EARTHS, INC.

Date:  November 21, 2011

By:  /S/   MICHAEL D. PARNELL

Michael D. Parnell

C.E.O. and Director

(Principal Accounting Officer)

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