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EXCEL - IDEA: XBRL DOCUMENT - U.S. RARE EARTHS, INCFinancial_Report.xls
EX-31.2 - U.S. RARE EARTHS, INCuree_ex312.htm
EX-32.1 - U.S. RARE EARTHS, INCuree_ex321.htm
EX-10.4 - U.S. RARE EARTHS, INCuree_ex104.htm
EX-31.1 - U.S. RARE EARTHS, INCuree_ex311.htm
EX-32.2 - U.S. RARE EARTHS, INCuree_ex322.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 30, 2013
 
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

U.S. RARE EARTHS, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
87-0638338
(State or other jurisdiction of incorporation)
 
(IRS Employer File Number)

5600 Tennyson Parkway, Suite 190, Plano, Texas
 
75024
(Address of principal executive offices)
 
(zip code)
 
(972)-294-7116
(Registrant's telephone number, including area code)

12 Gunnebo Drive, Lonoke, Arkansas 72086
 (Former name or former address, if changed since last report)
 
Securities registered pursuant to Section 12 (b) of the Exchange Act: 
 
None
 
None
(Title of each class)
 
(Name of each exchange on which registered)
 
Securities registered pursuant to Section 12 (g) of the Exchange Act:
 
Common
(Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes  þ No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. o Yes  þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. þ Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
(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).  o Yes  þ No
 
As of August 19, 2013, the Company had 28,746,439 shares of common stock granted, subject to adjustment based on the terms of the Settlement Agreement discussed in Item 1, Legal Proceedings.
 


 
 

 
 
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Signatures     23  
 
 

 
 
CONSOLIDATED BALANCE SHEETS
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
ASSETS
       
(Audited)
 
             
CURRENT ASSETS:
           
             
Cash
  $ 277,794     $ 166,939  
Accounts receivable, less allowance for doubtful accounts
               
of $14,729 and $47,255, respectively
    223,943       189,544  
Other current assets
    7,858       -  
                 
Total current assets
    509,595       356,483  
                 
EQUIPMENT, NET
    97,802       113,383  
                 
OTHER ASSETS:
               
Mineral properties
    326,000       326,000  
                 
TOTAL ASSETS
  $ 933,397     $ 795,866  
   
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
CURRENT LIABILITIES:
               
                 
Accounts payable and accrued expenses
  $ 1,586,219     $ 1,354,752  
Accounts payable and accrued expenses-related party
    6,391       506,391  
Accrued compensation-officers
    3,294,192       367,466  
Accrued interest
    548       11,109  
Note payable
    100,000       -  
Derivative liability - warrant
    806,000       -  
                 
Total current liabilities
    5,793,350       2,239,718  
                 
LONG-TERM DEBT:
               
                 
Note payable-related party
    -       250,000  
Convertible debentures- related party
    -       650,000  
                 
Total liabilities
    5,793,350       3,139,718  
                 
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
STOCKHOLDERS' DEFICIT:
               
                 
Preferred stock; 10,000,000 shares authorized,
               
outstanding, respectively
    -       -  
                 
Common stock; 100,000,000 shares authorized,
               
at $0.00001 par value, 28,546,439 and 27,628,366
               
shares issued and outstanding, respectively
    286       276  
Additional paid-in capital
    50,240,443       46,453,342  
Accumulated deficit
    (55,100,682 )     (48,797,470 )
                 
Total stockholders' deficit
    (4,859,953 )     (2,343,852 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 933,397     $ 795,866  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Three Months Ended,
   
Six Months Ended,
 
   
June 30, 2013
   
June 30, 2012
   
June 30, 2013
   
June 30, 2012
 
REVENUES
                       
                         
Advertising revenues
  $ 575,912     $ 646,681     $ 1,019,599     $ 1,220,205  
                                 
Total revenue
    575,912       646,681       1,019,599       1,220,205  
                                 
Cost of revenues
    558,161       242,368       781,335       595,169  
                                 
Gross margin
    17,751       404,313       238,264       625,036  
                                 
OPERATING EXPENSES
                               
                                 
Selling, general and administrative expenses
    269,338       1,295,682       1,227,256       4,182,347  
Exploration expense
    207,422       102,062       257,161       133,915  
                                 
Total operating expenses
    476,760       1,397,744       1,484,417       4,316,262  
                                 
(Loss) from operations
    (459,009 )     (993,431 )     (1,246,153 )     (3,691,226 )
                                 
OTHER INCOME (EXPENSE)
                               
                                 
Interest income
    -       55       -       205  
Interest expense
    (13,563 )     (17,797 )     (25,789 )     (37,897 )
Loss on debt settlement
    (4,225,983 )     -       (4,225,983 )     -  
Loss on derivative liability warrants
    (806,000 )     -       (806,000 )     -  
Other income (expense)
    (18 )     700       713       700  
                                 
Total other income (expense)
    (5,045,564 )     (17,042 )     (5,057,059 )     (36,992 )
                                 
(LOSS) BEFORE INCOME TAXES
    (5,504,573 )     (1,010,473 )     (6,303,212 )     (3,728,218 )
INCOME TAX EXPENSE
    -       -       -       -  
                                 
Net (loss)
  $ (5,504,573 )   $ (1,010,473 )   $ (6,303,212 )   $ (3,728,218 )
                                 
PER SHARE DATA:
                               
                                 
BASIC AND DILUTED (LOSS) PER SHARE
  $ (0.20 )   $ (0.05 )   $ (0.23 )   $ (0.17 )
                                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
    27,903,213       21,376,805       27,790,751       21,338,312  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Six Months Ended,
 
   
June 30, 2013
   
June 30, 2012
 
OPERATING ACTIVITIES:
           
Net loss
  $ (6,303,212 )   $ (3,728,218 )
Adjustments to Reconcile Net Loss to
               
Net Cash Used by Operating Activities:
               
Depreciation and amortization
    15,581       18,520  
Common stock and warrants issued for services
    300,000       3,170,628  
Common stock and warrants issued for liabilities
    536,128       -  
Loss on derivative liability- warrant
    806,000       -  
Loss on debt settlement
    4,225,983       -  
Changes in Operating Assets and Liabilities:
    -          
Accounts receivable
    (34,399 )     6,350  
Other current receivables
    (7,858 )     644  
Accounts payable and accrued expenses
    (268,536 )     252,788  
Accrued compensation - officers
    (73,271 )     -  
Accrued interest
    (10,561 )     -  
Net cash (used in) operating activities
    (814,145 )     (279,288 )
                 
INVESTING ACTIVITIES:
               
                 
Net cash (used in) investing activities
    -       -  
                 
FINANCING ACTIVITIES:
               
                 
Proceeds from the sale of common stock and warrants
    675,000       -  
Proceeds from note payable- related party
    250,000       -  
Repayment note payable- related party
    -       (130,653 )
                 
Net cash provided by (used in) financing activities
    925,000       (130,653 )
                 
(DECREASE) IN CASH
    110,855       (409,941 )
CASH AT BEGINNING OF PERIOD
    166,939       521,553  
                 
CASH AT END OF PERIOD
  $ 277,794     $ 111,612  
                 
Supplemental Cash Flow Disclosures:
               
                 
Cash paid for:
               
Interest expense
  $ -     $ 37,897  
Income taxes
  $ -     $ -  
                 
Non cash investing and financing activities:
               
Loss on debt settlement
  $ 4,050,000     $ -  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
 
NOTE 1. ORGANIZATION

The Company and Our Business
U.S. Rare Earths, Inc. (“USRE”, “U.S. Rare Earths” or the “Company”) is a mineral exploration, mining and claims acquisition company based in Lonoke, AR. Formerly Colorado Rare Earths, Inc., the Company holds over 12,000 acres of mining claims for rare-earth elements in Colorado, Idaho and Montana. In Colorado, these claims include the Powderhorn property in Gunnison County, and Wet Mountain property in Fremont and Custer Counties. Additional claims include the Lemhi Pass property in Lemhi County, Idaho and Beaverhead County, Montana; Diamond Creek and North Fork properties in Lemhi County, Idaho and the Sheep Creek property in Ravalli County, Montana (the “properties”).

The Company has budgeted expenditures for the next twelve months of approximately $4,000,000, depending on additional financing, for general and administrative expenses and exploration and development to implement the business plan as described. For further details see “Cash Requirements” below. USRE believes that it will have to raise substantial additional capital in order to fully implement the business plan. If economic reserves of rare-earth elements and/or other minerals are proven, additional capital will be needed to actually develop and mine those reserves.
 
The Company’s principal source of liquidity for the next several years will need to be the continued raising of capital through the issuance of equity or debt and the exercise of warrants. USRE plans to raise funds for each step of the project and as each step is successfully completed, raise the capital for the next phase. USRE believes this will reduce the cost of capital as compared to trying to raise all the anticipated capital at once up front. However, since USRE’s ability to raise additional capital will be affected by many factors, most of which are not within our control (see “Risk Factors”), no assurance can be given that USRE will in fact be able to raise the additional capital as it is needed.
 
The Company’s primary activity will be to proceed with the development of the rare-earth properties and other mining opportunities that may present themselves from time to time. The Company cannot guarantee that the rare-earth properties will be successful or that any project that we embark upon will be successful. Our goal is to build our Company into a successful mineral exploration and development company.

The Company continues to operate through its subsidiaries, Media Depot and Media Max, media businesses specializing in co-op advertising. The Company’s 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 electronic commercials. The Company also offers a full line of advertising services to manufacturers, distributors and dealers.

The Company incorporated in the State of Delaware on July 27, 1999 and changed its domicile to the State of Nevada in December 2007. The Company’s principal executive offices are located at 5600 Tennyson Parkway, Suite 190, Plano, Texas 75024. The telephone number is 972-294-7116. The Company maintains offices at 12 Gunnebo Drive, Lonoke, Arkansas 72086 and 12 North Washington Street, Montoursville, Pennsylvania 17754. The telephone number 570-368-7633. The Company’s principal website address is located at www.usrareearths.com. The information on our website is not incorporated as a part of this Form 10-Q. 
 
Liquidity and Going Concern
During the fiscal years ended December 31, 2012 and 2011, the Company had no revenues from our rare-earth elements properties. 

The Company incurred net losses of $6,303,000 and $6,761,000 for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. The net loss for the six months ended June 30, 2013 and year ended December 31, 2012 included approximately $5,884,000 and $4,060,000, respectively, of non-cash expenses. Our net cash used in operating activities was $814,000 and $923,000 for the six months ended June 30, 2013 and year ended December 31, 2012, respectively.

The Company’s current operating funds are less than necessary to complete all intended exploration of the properties, and therefore it needs to obtain additional financing in order to complete our business plan. As of June 30, 2013, the Company had cash of $278,000 and a working capital deficit of $1,478,000 (excluding derivative liability- warrant of $806,000 and accrued compensation officers of $3,000,000).
 
 
The Company’s business plan calls for significant expenses in connection with the exploration of the properties. The Company does not currently have sufficient funds to conduct continued exploration on the properties and require additional financing in order to determine whether the properties contain economic mineralization. The Company will also require additional financing if the costs of the exploration of the properties are greater than anticipated.
 
The Company will require additional financing to sustain our business operations if we are not successful in earning revenues once exploration is complete. The Company’s recent efforts to generate additional liquidity, including through sales of its common stock and the issuance of secured convertible debentures, are described in more detail in the financial statement notes set forth in this Form 10-Q. Obtaining additional financing would be subject to a number of factors, including the market prices for rare-earth elements, investor acceptance of our properties and general market conditions. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us.

The most likely source of future funds presently available to the Company is through the sale of equity capital or the issuance of convertible debentures. Any sale of share capital or the issuance of convertible debentures will result in dilution to existing shareholders. The only other anticipated alternative for the financing of further exploration would be our sale of a partial interest in the properties to a third party in exchange for cash or exploration expenditures, which is not presently contemplated.

The Company’s accountants have expressed doubt about its ability to continue as a going concern as a result of the Company’s history of net losses. The Company’s ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to successfully execute the above plans. The outcome of these matters cannot be predicted at this time. These consolidated financial statements do not include any adjustments to the amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue its business.

Unaudited Financial Statements
The accompanying unaudited financial statements of U.S. Rare Earths, Inc. have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The financial statements for the periods ended June 30, 2013 and 2012 are unaudited and include all adjustments necessary to a fair statement of the results of operations for the periods then ended. All such adjustments are of a normal, recurring nature. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for a full fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (the “SEC”) on April 8, 2013.
 
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the consolidated financial statements.

Accounting Method
The Company’s consolidated financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

Principles of Consolidation
These consolidated financial statements include the Company’s consolidated financial position, results of operations, and cash flows. All material intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.
 

Cash and Cash Equivalents
The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit. As of June 30, 2013, the Company had no uninsured cash amounts.

Accounts Receivable
The Company’s accounts receivable are net of the allowance for estimated doubtful accounts. The allowance for doubtful accounts reflects managements’ best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. The allowance totaled $14,729 and $47,255 as of June 30, 2013 and December 31, 2012, respectively.

Property and Equipment
Equipment consists of machinery, furniture and fixtures and software, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 5-7 years. 
 
Mineral Properties
Costs of acquiring mineral properties are capitalized by project area upon purchase of the associated claims. Costs to maintain the mineral rights and leases are expensed as incurred. When a property reaches the production stage, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves.

Long-Lived Assets
The Company reviews its long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
 
Value Measurements and Financial Instruments
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1 – Quoted prices in active markets for identical assets and liabilities;

Level 2 – Inputs other than level one inputs that are either directly or indirectly observable; and

Level 3 – Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.
 
 
                     
Carrying
 
   
Fair Value Measurements Using Inputs
   
Amount at
 
Financial Instruments
 
Level 1
   
Level 2
   
Level 3
   
June 30, 2013
 
                         
Liabilities:
                       
Derivative Instruments - Warrant
  $ -     $ 806,000     $ -     $ 806,000  
                                 
Total
  $ -     $ 806,000     $ -     $ 806,000  
  
Liabilities measured at fair value on a recurring basis are summarized as follows:

   
June 30, 2013
 
Market price and estimated fair value of common stock:
  $ 1.8500  
Exercise price
  $ 1.420  
Expected term days
    224  
Divident yield
    -  
Expected volatility
    225 %
Risk-free interest rate
    1.30 %
 
The risk-free rate of return reflects the interest rate for the United States Treasury Note with similar time-to-maturity to that of the warrants.
 
The recorded value of other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, and accounts payable and accrued expenses approximate the fair value of the respective assets and liabilities at June 30, 2013 and 2012 based upon the short-term nature of the assets and liabilities.
 
Derivative Instruments - Warrant
On May 20, 2013, the Company entered into an Option Agreement with Poststrictum Ventures whereby the Company agreed to issue 650,000 shares of common stock at the higher of 75% of the ten day closing average or $2.00 per share through December 30, 2013. The Company valued the option at $1.24 using Black Scholes. This option was not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation.  Therefore, the fair value of these warrants were recorded as a liability in the consolidated balance sheet and are marked to market each reporting period until they are exercised or expire or otherwise extinguished.

The option value as of June 30, 2013 of $806,000 was recorded as derivative liability- warrant and during the six months ended June 30, 2013, the Company recognized $806,000 of other expense.

Revenue Recognition
The Company recognizes revenue when products are fully delivered or services have been provided and collection is reasonably assured. Furthermore, if an actual measurement of revenue cannot be determined, it defers all revenue recognition until such time that an actual measurement can be determined. If during the course of a contract management determines that losses are expected to be incurred, such costs are charged to operations in the period such losses are determined. Revenues are deferred when cash has been received from the customer but the revenue has not been earned. The Company had no deferred revenue as of June 30, 2013 and December 31, 2012.
 
 
Mineral Exploration and Development Costs
All exploration expenditures are expensed as incurred. Significant property acquisition payments for active exploration properties are capitalized. If no minable ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned. Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a unit of production basis over proven and probable reserves.

Should a property be abandoned, its capitalized costs are charged to operations. The Company charges to operations the allocable portion of capitalized costs attributable to properties abandoned. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.
 
Stock Based Compensation
The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit. Grants of stock options and stock to non-employees and other parties are accounted for in accordance with the ASC 505.

Provision for Income Taxes
Income taxes are provided based upon the liability method of accounting. Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

Net Loss Per Share
Basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. As of June 30, 2013, the Company had warrants for the purchase of 3,070,626 common shares that was not included in the computation of loss per share at June 30, 2013 because they would have been anti-dilutive. As of June 30, 2012, the Company had warrants for the purchase of 3,320,626 common shares that were not included in the computation of loss per share at June 30, 2012 because they would have been anti-dilutive.
 
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements. 
 
 
NOTE 3. ACQUISITIONS

Seaglass Holding Corp. Acquisition
On December 15, 2010, the Company entered into Agreement of Plan and Merger with Seaglass Holding Corp. Seaglass owned certain mining and/or mineral leases and/or claims located in Gunnison County, Colorado, Freemont County, Colorado and Custer County, Colorado. The acquisition was structured as a triangular merger whereby Seaglass merged with Calypso Merger, Inc., a newly formed, wholly-owned subsidiary of the Company created solely for the purpose of facilitating the acquisition. Seaglass became the surviving corporate entity as a wholly-owned subsidiary of the Company and Calypso Merger, Inc. was dissolved. The acquisition resulted in a change in control.

As part of the acquisition of Seaglass, 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.
 
U.S. Rare Earths, Inc. Acquisition
On July 18, 2011, the Company entered into an Agreement of Plan and Merger to acquire U.S. Rare Earths, Inc., a Delaware corporation (“USRE-Delaware”), and the acquisition closed on August 22, 2011. In connection with the acquisition, the Company changed its corporate name to U.S. Rare Earths. As part of the acquisition of USRE-Delaware, the Company acquired rights to mineral claims on approximately 12,000 acres on, near, or adjacent to anomalous values of rare-earth elements, including thorium, uranium, niobium and tantalum. The acquisition resulted in a change in control.

NOTE 4. ACCOUNTS RECEIVABLE/ CUSTOMER CONCENTRATION

Accounts receivable were $223,943 and $189,544, net of allowance, as of June 30, 2013 and December 31, 2012, respectively. The Company had four customers (15.7%, 15.2%, 13.3% and 10.8%) in excess of 10% of our consolidated revenues for the six months ended June 30, 2013. The Company had two customers (27.2 % and 13.4%) with accounts receivable in excess of 10% as of June 30, 2013. The Company does expect to have customers with revenues or a receivable balance of 10% of total accounts receivable in the foreseeable future. 
 
NOTE 5. EQUIPMENT, NET

Equipment, net consists of the following: 

   
Estimated
Useful Lives
   
June 30,
2013
   
December 31,
2012
 
                   
Office equipment
 
5 years
    $ 258,157     $ 258,157  
Mining and other equipment
 
5-7 years
      111,710       111,710  
Less: accumulated depreciation
            (272,065 )     (256,484 )
            $ 97,802     $ 113,383  
 
Depreciation expense for the six months ended June 30, 2013 and 2012 was $15,581 and $18,520 respectively.
 

NOTE 6. RELATED PARTY TRANSACTIONS

The following transactions are with relationships parties:
 
Properties
The Company’s principal executive offices are located at 5600 Tennyson Parkway, Suite 190, Plano, Texas 75024. This office is shared with John Victor Lattimore, Jr., Chairman of the Company’s Board of Directors, and entities affiliated with Mr. Lattimore. Currently, the Company does not pay any rent on this office.

The Company maintains an office in Montoursville, Pennsylvania which is leased from the Hoff Family Limited Partnership, an entity controlled by Mathew Hoff, a former officer. This agreement was entered into before the Company acquired Media Depot and has been continued following the acquisition. Lease payments are $2,000 per month and renew monthly.
 
The Company’s maintains an officer located in Lonoke, Arkansas which is leased from the J.S. Parnell Trust, of which our former CEO and current National Account Director, Michael D. Parnell is trustee. This agreement was entered into before the Company acquired Media Depot and has been continued following the acquisition. Lease payments are $916 per month and renew monthly.

Accrued Compensation- Officers
Accrued compensation- officers was $3,294,192 and $367,466 as of June 30, 2013 and December 31, 2012, respectively. This amount consisted of unpaid payroll to officers and consultants and $3,000,000 due to Logic International Consulting Group LLC related to the legal settlement.

Service Agreement
On March 11, 2011, the Company signed an exclusive Services Agreement with Logic. At the time the Logic Agreement was signed, the president of Logic was also a board member of the Company; currently, he is a board member and the Chief Executive Officer. Under the Logic Agreement, Logic agreed to provide certain advisory services to the Company. The Logic Agreement was automatically extended to December 11, 2013 and can be renewed for additional terms of 12 month periods unless either party gives the other 45 days written notice of termination. The Logic Agreement can be cancelled with ninety days written notice. The Logic Agreement requires a monthly payment of $50,000. See Notes 7 and 8 for additional details.
 
Convertible Secured Promissory Note with Unique Materials LLC
On September 13, 2012, the Company entered into a Convertible Secured Promissory Note with Unique Materials LLC, a Texas LLC affiliated with John Victor Lattimore, Jr., Chairman of the Company’s Board of Directors pursuant to which the Company agreed to issue a Note for $650,000 at 5%.
 
Under the terms of the Note, the principal and unpaid accrued interest is due the earlier of September 15, 2015 or conversion into the Company’s common stock at the demand of the Holder. The Note includes a demand payment if the Chairman of the Board, President or Vice President or 20% or more of the Company’s Board of Directors is changed after September 13, 2012. The Company is not required to file a registration statement. The Note is secured by all mineral claims, real properties, fixed assets, inventory and accounts receivable and the proceeds were primarily used to repay the USRE Note discussed above.

See Note 7 for additional detail on the conversion of this Note.

Private Placement with Lattimore Properties, Inc.
On September 12, 2012, the Company closed a private placement with Lattimore Properties, Inc., a Texas company affiliated with John Victor Lattimore, Jr., Chairman of the Company’s Board of Directors. The private placement consisted of the sale of an aggregate of 2,045,450 shares of the Company’s common stock for $550,000 at a price of $0.27 per share. The shares issued under the private placement are restricted under applicable securities laws and are not freely tradable. The Company is not required to file a registration statement.

See Note 7 for additional detail on the conversion of this Note.
 
 
Unsecured Promissory Note with Unique Materials LLC
On November 20, 2012, the Company entered into a unsecured Promissory Note with Unique Materials LLC, a Texas LLC affiliated with John Victor Lattimore, Jr., Chairman of the Company’s Board of Directors pursuant to which the Company agreed to issue a Note for $250,000 at 5%.
 
Under the terms of the Note, the principal and unpaid accrued interest is due November 20, 2015.

See Note 7 for additional detail on the conversion of this Note.

Unsecured Promissory Note with Unique Materials LLC
On February 4, 2013, the Company entered into a unsecured Promissory Note with Unique Materials LLC, a Texas LLC affiliated with John Victor Lattimore, Jr., Chairman of the Company’s Board of Directors pursuant to which the Company agreed to issue a Note for $150,000 at 5%.

Under the terms of the Note, the principal and unpaid accrued interest is due February 4, 2016.

See Note 7 for additional detail on the conversion of this Note.

Security Promissory Note with John and Mark Family Limited Partnership
On May 21, 2013, the Company entered into a unsecured Promissory Note with John and Mark Family Limited Partnership, a Texas Limited Partnership affiliated John Victor Lattimore, Jr., Chairman of the Company’s Board of Directors pursuant to which the Company agreed to issue a Note for $100,000 at 5%. The Note was due June 30, 2013 and on June 30, 2013, the maturity was extended to December 31, 2013.

NOTE 7 – COMMON STOCK

Unless otherwise indicated, all of the following private placements of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, as noted below). All of the shares issued were issued in private placements not involving a public offering, are considered to be “restricted stock” as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect.

On March 21, 2013, Diane Cassidy, an unaccredited investor, exercised a warrant on a cashless basis that granted by the Company on December 31, 2011 for the purchase of 194,445 shares of the Company’s common stock. The warrant price was $0.50 per share. The warrant was valued at $0.27 per April 11, 2013 with regard to this stock issuance. A notice filing under Regulation D was filed with the SEC on April 11, 2013 with regard to this stock issuance.

During the three months ended June 30, 2013, the Company issued 337,500 shares of restricted common stock to five accredited investors (Burton Koffman for 12,500 shares, Daniel and Carol Kondos for 100,000 shares, Robert Lavinsky for 25,000 and Postscriptum Ventures Ltd for 200,000 shares) for $675,000 or $2.00 per share. A notice filing under Regulation D was filed with the SEC on August 19, 2013 with regard to these stock issuances.

The Company has entered into Repurchase Option Agreements whereby the Company can acquire 2,431,000 and 765,000 or a total of 3,196,000 shares of common stock from existing shareholders at $1.00 per share as of September 30, 2013 and December 31, 2013, respectively. Most shares were placed in escrow at the Company’s transfer agent. Michael Parnell, our former CEO, entered into a Repurchase Option Agreements for 200,000 shares.
 

Convertible Secured Promissory Note with Unique Materials LLC
On September 13, 2012, the Company entered into a Convertible Secured Promissory Note with Unique Materials LLC, a Texas LLC affiliated with John Victor Lattimore, Jr., Chairman of the Company’s Board of Directors, pursuant to which the Company agreed to issue a Note for $650,000 at 5%.

On June 28, 2013, Unique Materials converted this Note and interest of $25,644 into 675,644 of the Company’s restricted common shares at $1.00 per share. The fair value of the stock on the date of conversion was $1.65 and the Company recorded the difference between the conversion price and the fair value as loss on settlement of debt. A notice filing under Regulation D was filed with the SEC on July 3, 2013 with regard to this stock issuance.
 
Unsecured Promissory Note with Unique Materials LLC
On November 20, 2012, the Company entered into an unsecured Promissory Note with Unique Materials, pursuant to which the Company agreed to issue a Note for $250,000 at 5%.
 
On June 28, 2013, Unique Materials converted this Note and interest of $7,534 into 257,534 of the Company’s restricted common shares at $1.00 per share. The fair value of the stock on the date of conversion was $1.65 and the Company recorded the difference between the conversion price and the fair value as loss on settlement of debt. A notice filing under Regulation D was filed with the SEC on July 3, 2013 with regard to this stock issuance.

Unsecured Promissory Note with Unique Materials LLC
On February 4, 2013, the Company entered into a unsecured Promissory Note with Unique Materials, pursuant to which the Company agreed to issue a Note for $150,000 at 5%.

On June 28, 2013, Unique Materials converted this Note and interest of $2,950 into 152,950 of the Company’s restricted common shares at $1.00 per share. The fair value of the stock on the date of conversion was $1.65 and the Company recorded the difference between the conversion price and the fair value as loss on settlement of deb.t A notice filing under Regulation D was filed with the SEC on July 3, 2013 with regard to this stock issuance.

Conversion of Liability with Logic International Consulting Group, LLC
On June 28, 2013, Logic International Consulting Group LLC, a New York LLC affiliated with Kevin Cassidy, the Company’s CEO, converted liabilities of $800,000 into 800,000 of the Company’s restricted common shares at $1.00 per share. The fair value of the stock on the date of conversion was $1.65 and the Company recorded the difference between the conversion price and the fair value as loss on settlement of debt A notice filing under Regulation D was filed with the SEC on July 3, 2013 with regard to this stock issuance.

Forfeiture of Shares
On July 26, 2011, the Company entered into an Addendum to a Revised Employment Agreements with Michael Parnell and Matthew Hoff. Under these Agreement, the Company approved the issuance of 1,250,000 shares of common stock to each of Mr. Parnell and Mr. Hoff related to (i) $500,000 in severance at $.50 per share for the change in control effected on December 15, 2010: and (ii) 125,000 shares related to each of years 4 and 5 for the change in control effected on August 22, 2011, each as outlined in the Agreements.

On June 28, 2013, Mr. Parnell and Mr. Hoff each forfeited 750,000 shares of the 1,250,000 issuance discussed above. This 1,500,000 forfeiture is part of the retrieval or “claw back” not less than 2.1 million shares of the Company’s common stock that were authorized for issuance to certain individuals on August 27, 2012 for non-cash consideration and future services that was included in the Settlement Agreement and General Release approved on June 5, 2013.
 

A summary of the warrants issued as of June 30, 2013 were as follows:

   
June 30, 2013
 
         
Weighted
 
         
Average
 
         
Exercise
 
   
Shares
   
Price
 
Outstanding at 12/31/12
    3,320,626     $ 2.46  
Issued
    -     $ -  
Exercised
    -     $ -  
Forfeited
    (250,000 )   $ (0.50 )
Expired
    -     $ -  
Outstanding at end of period
    3,070,626     $ 2.62  
Exerciseable at end of period
    3,070,626          
 
A summary of the status of the warrants outstanding as of June 30, 2013 is presented below:
 
     
June 30, 2013
 
     
Weighted
   
Weighted
         
Weighted
 
     
Average
   
Average
         
Average
 
Number of
   
Remaining
   
Exercise
   
Shares
   
Exercise
 
Warrants
   
Life
   
Price
   
Exerciseable
   
Price
 
                           
  1,575,000       4.19     $ 0.50       1,575,000          
  1,495,626       2.91     $ 4.85       1,495,626          
  3,070,626             $ 2.62       3,070,626     $ 2.62  
 
At June 30, 2013, vested warrants totaling 1,575,000 shares had an aggregate intrinsic value of $2,709,000.

NOTE 8. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS

Except as disclosed, there are no pending legal proceedings against the Company that are expected to have a material adverse effect on cash flows, financial condition or results of operations.

Legal Proceedings

On June 5, 2013, the Company received notice that the Eighth Judicial District Court, Clark County, Nevada (Case No. A668230-B, Dept. Thirteen, Las Vegas NV 89155) had approved the Settlement Agreement and General Release (the “Settlement Agreement”) between the Company and H. Deworth Williams, Edward Cowle, Geoff Williams and Blue Cap Development Corp. This Settlement Agreement resolved all legal matters between the parties.

The Settlement Agreement approved by the court is the same Settlement Agreement in all material respects that was described in detail in the Company’s Form 8-K dated April 25, 2013 and filed with the SEC on April 29, 2013 and the Quarterly Report on 10-Q dated March 31, 2013 and filed with the SEC on May 20, 2013.
 

Employment Agreements

Michael Parnell

On December 10, 2010, the Company entered into a Revised Employment Agreement (“Parnell Agreement”) with Michael Parnell, the Company’s former Chief Executive Officer. On June 26, 2013, Mr. Parnell accepted the position of National Accounts Director.

Under the terms of the Parnell Agreement, Mr. Parnell’s salary was $125,000 in year one, $137,500 in year two and $151,000 in year three. Mr. Parnell was awarded 300,000 shares of restricted common stock. In the event the Company is sold or merged or there is a change in control, Mr. Parnell is to receive at his discretion, severance of $500,000 in cash or restricted common stock at $0.50 per share. Mr. Parnell is eligible for vacation of six weeks, benefit programs and incentive bonuses as approved by the Board of Directors. The Parnell Agreement had a three year term and was automatically renewable for additional one year periods unless ninety days’ notice is provided by either party.

On July 26, 2011, the Company entered into an Addendum to a Revised Employment Agreement (“Parnell Agreement Addendum”). The Parnell Agreement Addendum extended the term by two years to five years from December 10, 2010. Mr. Parnell’s salary was $125,000 in year one, $137,500 in year two, $151,000 in year three, $166,100 in year four and $182,710 in year five. The Company also agreed to issue 125,000 shares per year to Mr. Parnell in year four and five, provided Mr. Parnell is 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.

See Note 7 for the issuance and forfeiture of common stock under this Addendum to Revised Employment Agreement.

Daniel McGroarty

On November 29, 2011, Daniel McGroarty was appointed President of the Company. On January 1, 2012, the Company entered into an Employment Agreement with Mr. McGroarty. Under the terms of the McGroarty Agreement, Mr. McGroarty’s salary was $120,000 in year one and is to be negotiated in years 2 and 3. Mr. McGroarty was issued 650,000 shares of restricted common stock. The McGroarty Agreement has a three year term and is automatically renewable for additional one year periods unless ninety days’ notice is provided by either party.

Consulting Agreements

Logic International Consulting Group LLC

On March 11, 2011, the Company signed an exclusive Services Agreement with Logic International Consulting Group LLC. Under the Logic Agreement, Logic agreed to provide certain advisory services to the Company. The Logic Agreement was automatically extended to December 11, 2013 and can be renewed for additional terms of 12 month periods unless either party gives the other 45 days written notice of termination. The Logic Agreement can be cancelled with ninety days written notice. The Logic Agreement requires a monthly payment of $50,000. On June 28, 2013, Logic converted unpaid fees of $800,000 into 800,000 shares of common stock at $1.00 per share. See Note 7 for additional details on this conversion.

Mark Scott

Mr. Scott’s Consulting Agreement expired December 31, 2012 and he is currently paid $5,000 per month on a month to month basis.
 
Leases
 
The Company is obligated under various non-cancelable operating leases for their various facilities.
 
 
The aggregate unaudited future minimum lease payments, to the extent the leases have early cancellation options and excluding escalation charges, are as follows:

Years Ended June 30,
 
Total
 
2014
  $ 2,916  
2015
    -  
2016
    -  
2017
    -  
2018
    -  
Beyond
    -  
Total
  $ 2,916  
 
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 two principal operating and reportable segments, which are (1) the corporate operations which offer a full line of advertising services to manufacturers, distributors and dealers across the United States and Canada; and (2) the acquisition and exploration of mineral properties. These operating segments were determined based on the nature of the products and services offered. The Company operates solely in the United States.
 
The following table presents revenues, operating income (loss) and total assets by reportable segment for the three and six months ended June 30, 2013 and 2012:
 
(dollars in thousands)

   
Advertising
   
Mineral
       
Company
 
Services
   
Exploration
   
Total
 
Three Months Ended June 30, 2013
                 
Revenues
  $ 576     $ -     $ 576  
Income (Loss) from operations
    (200 )     (259 )     (459 )
Total assets
    245       688       933  
                         
Three Months Ended June 30, 2012
                       
Revenues
  $ 647     $ -     $ 647  
(Loss) from operations
    415       (1,408 )   $ (993 )
Total assets
    555       547     $ 1,102  
                         
Six Months Ended June 30, 2013
                       
Revenues
  $ 1,020     $ -     $ 1,020  
Income (loss) from operations
    (112 )     (1,134 )     (1,246 )
Total assets
    245       688       933  
                         
Six Months Ended June 30, 2012
                       
Revenues
  $ 1,220     $ -     $ 1,220  
(Loss) from operations
    192       (3,883 )     (3,691 )
Total assets
    555       547       1,102  
 
 
The following table reconciles operating loss to net loss:

(dollars in thousands)
                       
   
Three Months
   
Three Months
   
Six Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
   
Ended June 30,
   
Ended June 30,
 
   
2013
   
2012
   
2013
   
2012
 
(Loss) from operations
  $ (459 )   $ (993 )   $ (1,246 )   $ (3,691 )
Other (expense)
    (5,046 )     (17 )     (5,057 )     (37 )
(Loss) before income taxes
    (5,505 )     (1,010 )     (6,303 )     (3,728 )
Income tax (benefit)
    -       -       -       -  
Net (loss)
  $ (5,505 )   $ (1,010 )   $ (6,303 )   $ (3,728 )
 
NOTE 10 – SUBSEQUENT EVENTS

The Company evaluates subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements are available.

During the period since June 30, 2013, the Company issued 200,000 shares of restricted common stock to three accredited investors (Gregg Anigian for 50,000 shares, Jeffrey Stone for 25,000 shares, and Joe and Beverly Rushing for 125,000 shares) for $400,000 or $2.00 per share. A notice filing under Regulation D was filed with the SEC on August 19, 2013 with regard to these stock issuances.
 

 
Forward-looking statements in this report reflect the good-faith judgment of our management and the statements are based on facts and factors as we currently know them. Forward-looking statements are subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, but are not limited to, those discussed below as well as those discussed elsewhere in this report (including in Part II, Item 1A (Risk Factors)). Readers are urged not to place undue reliance on these forward-looking statements because they speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report.

We are a mineral exploration, mining and claims acquisition company based in Lonoke, Arkansas. Formerly Colorado Rare Earths, Inc., the Company holds over 12,000 acres of mining claims for rare-earth elements in Colorado, Idaho and Montana. In Colorado, these claims include the Powderhorn property in Gunnison County, and Wet Mountain property in Fremont and Custer Counties. Additional claims include the Lemhi Pass property in Lemhi County, Idaho and Beaverhead County, Montana; Diamond Creek and North Fork properties in Lemhi County, Idaho and the Sheep Creek properties in Ravalli County, Montana.
 
We have budgeted expenditures for the next twelve months of approximately $4,000,000, depending on additional financing, for general and administrative expenses and exploration and development to implement the business plan as described. For further details see “Cash Requirements” below. USRE believes that it will have to raise substantial additional capital in order to fully implement the business plan. If economic reserves of rare-earth elements and/or other minerals are proven, additional capital will be needed to actually develop and mine those reserves.

The drill permits application and plan of operation for drilling at the USRE Idaho properties was approved October 18, 2012 and the required reclamation bond was posted on October 23, 2012. We expect to drill at the Diamond Creek and North Fork Properties sites in Idaho 2013, subject to addition financing.
 
Our principal source of liquidity for the next several years will need to be the continued raising of capital through the issuance of equity or debt and the exercise of warrants. USRE plans to raise funds for each step of the project and as each step is successfully completed, raise the capital for the next phase. USRE believes this will reduce the cost of capital as compared to trying to raise all the anticipated capital at once up front. However, since USRE’s ability to raise additional capital will be affected by many factors, most of which are not within our control (see “Risk Factors”), no assurance can be given that USRE will in fact be able to raise the additional capital as is needed.

Our primary activity will be to proceed with the exploration and development of the rare-earth properties and other mining opportunities that may present themselves from time to time. We cannot guarantee that the rare-earth properties will be successful or that any project that we embark upon will be successful. Our goal is to build our Company into a successful mineral exploration and development company.

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

On July 18, 2011, we entered into an agreement to acquire U.S. Rare Earths, Inc., a Delaware corporation, and the acquisition closed on August 22, 2011. In connection with the acquisition, we changed our corporate name to U.S. Rare Earths.

On December 15, 2010, we entered into an agreement to acquire Seaglass Holding Corp., a Nevada corporation. Seaglass owns certain mining and/or mineral leases and/or claims located in Gunnison County, Colorado, Freemont County, Colorado and Custer County, Colorado. The acquisition was structured as a triangular merger whereby Seaglass merged with Calypso Merger, Inc., a newly formed, wholly-owned subsidiary of Calypso Media Services Group, Inc. created solely for the purpose of facilitating the acquisition. Seaglass became the surviving corporate entity as a wholly-owned subsidiary of the Company and Calypso Merger, Inc. was dissolved.
 
 
RESULTS OF OPERATIONS

The following table presents certain consolidated statement of operations information and presentation of that data as a percentage of change from year-to-year.

THREE MONTHS ENDED JUNE 30, 2013 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2012

(dollars in thousands)

     
Three Months Ended June 30,
 
     
2013
   
2012
   
$ Variance
   
% Variance
 
                           
Advertising revenues
  $ 576     $ 647     $ (71 )     -11 %
Cost of revenues
    558       242       316       -131 %
Gross margin
    18       405       (387 )     -96 %
Operating expenses-
                               
Selling, general and administrative expenses
    269       1,296       (1,027 )     79 %
Exploration expense
    208       102       106       -104 %
Total operating expenses
    477       1,398       (921 )     66 %
(Loss) from operations
    (459 )     (993 )     534       54 %
Other income (expense):
                               
 
Interest expense
    (14 )     (18 )     4       22 %
 
Loss on debt settlement
    (4,226 )     -       (4,226 )     -100 %
 
Loss on derivative liability- warrant
    (806 )     1       (807 )     -100 %
Total other (expense)
    (5,046 )     (17 )     (5,029 )     -29582 %
(Loss) before income taxes
    (5,505 )     (1,010 )     (4,495 )     -445 %
Income tax expense
    -       -       -       0 %
Net (loss)
  $ (5,505 )   $ (1,010 )   $ (4,495 )     -445 %
 
Advertising Revenue

Advertising revenues for the three months ended June 30, 2013 decreased $71,000 to $576,000 as compared to $647,000 for the three months ended June 30, 2012. The decrease was due to a focus on higher margin customers and the loss of customers.

Cost of Sales

Cost of sales for the three months ended June 30, 2013 increased $316,000 to $558,000 as compared to $242,000 for the three months ended June 30, 2012. The increase was due to product mix.
 

Expenses

Selling, general and administrative expenses for the three months ended June 30, 2013 decreased $1,027,000 to $269,000 as compared to $1,296,000 for the three months ended June 30, 2012. During the three months ended June 30, 2013 and 2012, we recorded $7,000 and $897,000, respectively, in non-cash expenses, Exploration expenses for the three months ended June 30, 2013 increased $106,000 to $208,000 as compared to $102,000 for the three months ended June 30, 2012. The increase was due to increased drilling and exploration expenses.

Selling, general and administrative expenses for the three months ended June 30, 2013 and 2012 consisted primarily of employee and independent contractor expenses, warrant expenses, expenses related to share issuances, rent, audit, overhead, amortization and depreciation, professional and consulting fees, sales and marketing costs, investor relations, legal, and other general and administrative costs and exploration expenses. Exploration expenses for the three months ended June 30, 2013 and 2012 consisted of drilling, permits and other exploration expenses.
 
Net (Loss)

Net loss for the three months ended June 30, 2013 was $5,505,000 as compared to $1,010,000 for the three months ended June 30, 2012. We acquired USRE-Delaware on August 22, 2011 and Seaglass on December 15, 2010. The net loss for the three months ended June 30, 2013 included $5,875,000 in non-cash expenses. The net loss for the three months ended June 30, 2012 included $897,000 in non-cash expenses.

SIX MONTHS ENDED JUNE 30, 2013 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2012

(dollars in thousands)

   
Six Months Ended June 30,
 
   
2013
   
2012
   
$ Variance
   
% Variance
 
                         
Advertising revenues
  $ 1,020     $ 1,220     $ (200 )     -16 %
Cost of revenues
    782       595       187       -31 %
Gross margin
    238       625       (387 )     -62 %
Operating expenses-
                               
Selling, general and administrative expenses
    1,227       4,183       (2,956 )     71 %
Exploration expense
    257       133       124       -93 %
Total operating expenses
    1,484       4,316       (2,832 )     66 %
(Loss) from operations
    (1,246 )     (3,691 )     2,445       66 %
Other income (expense):
                               
Interest expense
    (25 )     (38 )     13       34 %
Loss on debt settlement
    (4,226 )     -       (4,226 )     -100 %
Loss on derivative liability- warrant
    (806 )     1       (807 )     -100 %
Total other (expense)
    (5,057 )     (37 )     (5,020 )     -13568 %
(Loss) before income taxes
    (6,303 )     (3,728 )     (2,575 )     -69 %
Income tax expense
    -       -       -       0 %
Net (loss)
  $ (6,303 )   $ (3,728 )   $ (2,575 )     -69 %
Advertising Revenue

Advertising revenues for the six months ended June 30, 2013 decreased $200,000 to $1,020,000 as compared to $1,220,000 for the six months ended June 30, 2012. The decrease was due to a focus on higher margin customers and the loss of customers.
 

Cost of Sales

Cost of sales for the six months ended June 30, 2013 increased $187,000 to $782,000 as compared to $595,000 for the six months ended June 30, 2012. The increase was due to product mix.

Expenses

Selling, general and administrative expenses for the six months ended June 30, 2013 decreased $2,956,000 to $1,227,000 as compared to $4,183,000 for the six months ended June 30, 2012. During the six months ended June 30, 2013 and 2012, we recorded $16,000 and $3,170,000, respectively, in non-cash expenses, Exploration expenses for the six months ended June 30, 2013 increased $124,000 to $257,000 as compared to $133,000 for the six months ended June 30, 2012. The increase was due to increased drilling and exploration expenses.

Selling, general and administrative expenses for the six months ended June 30, 2013 and 2012 consisted primarily of employee and independent contractor expenses, warrant expenses, expenses related to share issuances, rent, audit, overhead, amortization and depreciation, professional and consulting fees, sales and marketing costs, investor relations, legal, and other general and administrative costs and exploration expenses. Exploration expenses for the six months ended June 30, 2013 and 2012 consisted of drilling, permits and other exploration expenses.
 
Net (Loss)

Net loss for the six months ended June 30, 2013 was $6,303,000 as compared to $3,728,000 for the six months ended June 30, 2012. We acquired USRE-Delaware on August 22, 2011 and Seaglass on December 15, 2010. The net loss for the six months ended June 30, 2013 included $5,884,000 in non-cash expenses. The net loss for the six months ended June 30, 2012 included $3,189,000 in non-cash expenses.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2013, the Company had cash of $278,000 and a working capital deficit of $1,478,000 (excluding derivative liability- warrant of $806,000 and accrued compensation officers of $3,000,000).

During the three months ended June 30, 2013, we issued 337,500 shares of restricted common stock to five accredited investors for $675,000 or $2.00 per share. During the period since June 30, 2013, we issued 200,000 shares of restricted common stock to three accredited investors for $400,000 or $2.00 per share.

Our business plan calls for significant expenses in connection with the exploration of the properties. We do not currently have sufficient funds to conduct continued exploration on the properties and require additional financing in order to determine whether the properties contain economic mineralization. We will also require additional financing if the costs of the exploration of the properties are greater than anticipated.

We will require additional financing to sustain our business operations if we are not successful in earning revenues once exploration is complete. Our recent efforts to generate additional liquidity, including through sales of our common stock and the issuance of secured convertible debentures, are described in more detail in the financial statement notes set forth in this Form 10-Q. Obtaining additional financing would be subject to a number of factors, including the market prices for rare-earth elements, investor acceptance of our properties and general market conditions. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us.

The most likely source of future funds presently available to us is through the sale of equity capital or the issuance of convertible debentures. Any sale of share capital or the issuance of convertible debentures will result in dilution to existing shareholders. The only other anticipated alternative for the financing of further exploration would be our sale of a partial interest in the properties to a third party in exchange for cash or exploration expenditures, which is not presently contemplated.
 

We have budgeted expenditures for the next twelve months of approximately $4,000,000, depending on additional financing, for general and administrative expenses and exploration and development. We may choose to scale back operations to operate at break-even with a smaller level of business activity, while adjusting overhead depending on the availability of additional financing. In addition, we expect that we will need to raise additional funds if it decides to pursue more rapid expansion, the development of new or enhanced services or products, appropriate responses to competitive pressures, or the acquisition of complementary businesses or technologies, or if it must respond to unanticipated events that require it to make additional investments. We cannot assure that additional financing will be available when needed on favorable terms, or at all.

If economic reserves of rare earth elements are proven, additional capital will be needed to actually develop and mine those reserves. Even if economic reserves are found, if we are unable to raise this capital, we will not be able to complete our project.

We have budgeted the following expenditures for the next twelve months, depending on additional financing, for general and administrative expenses and exploration and development to implement the business plan as described above:

Expenditures
  $  
Exploration costs
  $ 2,900,000  
Property payments
    200,000  
Future property acquisitions
    100,000  
    Total mining
    3,200,000  
General and administrative
    800,000  
    Total
  $ 4,000,000  
 
Operating Activities

Net cash used in operating activities for the six months ended June 30, 2013 was $814,000. This amount was primarily related to a net loss of $6,303,000 and an increase in accounts payable and accrued expenses of $352,000, offset by depreciation and amortization and non-cash expenses of $5,884,000.
 
Investing Activities
 
Net cash used by investing activities for the six months ended June 30, 2013 was $0.
 
Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2013 was $925,000. This amount was related to the sale of common stock of $675,000 and proceeds from note payable – related party of $250,000.

Our unaudited contractual cash obligations as of June 30, 2013 are summarized in the table below: 
 
         
Less Than
               
Greater Than
 
Contractual Cash Obligations
 
Total
   
1 Year
   
1-3 Years
   
3-5 Years
   
5 Years
 
Operating leases
  $ 2,916     $ 2,916     $ -     $ -     $ -  
Capital lease obligations
    -       -       -       -       -  
Note payable
    100,000       100,000       -       -       -  
Mining expenditures
    3,200,000       3,200,000       -       -       -  
Payments under Stock Repurchase Option Agreements
    3,196,000       3,196,000       -       -       -  
    $ 6,498,916     $ 6,498,916     $ -     $ -     $ -  
 
The Company has entered into Repurchase Option Agreements whereby the Company can acquire 2,431,000 and 765,000 or a total of 3,196,000 shares of common stock from existing shareholders at $1.00 per share as of September 30, 2013 and December 31, 2013, respectively. Most shares were placed in escrow at the Company’s transfer agent. Michael Parnell, our former CEO, entered into a Repurchase Option Agreements for 200,000 shares.
 
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
 
Critical Accounting Policies and Estimates
 
The application of GAAP involves the exercise of varying degrees of judgment. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that of our significant accounting policies (see summary of significant accounting policies more fully described in Note 2 to the financial statements set forth in this report), the following policies involve a higher degree of judgment and/or complexity:

Cash and Cash Equivalents
We classify highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit. As of June 30, 2013, we had no uninsured cash amounts.

Property and Equipment
Equipment consists of machinery, furniture and fixtures and software, which are stated at cost less accumulated depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives or lease period of the relevant asset, generally 5-7 years.
 
 
Mineral Properties
Costs of acquiring mineral properties are capitalized by project area upon purchase of the associated claims. Costs to maintain the mineral rights and leases are expensed as incurred. When a property reaches the production stage, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves.

Long-Lived Assets
We review our long-lived assets for impairment annually or when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.
 
Mineral Exploration and Development Costs
All exploration expenditures are expensed as incurred. Significant property acquisition payments for active exploration properties are capitalized. If no minable ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned. Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a unit of production basis over proven and probable reserves.

Should a property be abandoned, its capitalized costs are charged to operations. We charge to operations the allocable portion of capitalized costs attributable to properties sold. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.
 

Value Measurements and Financial Instruments
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs).
 
 
We have no investments in any market risk sensitive instruments either held for trading purposes or entered into for other than trading purposes.
 
a) Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive and principal financial officers concluded as of June 30, 2013 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal controls over financial reporting discussed immediately below.

Identified Material Weakness

A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

Management identified the following material weakness during its assessment of internal controls over financial reporting:

Audit Committee: We do not have an audit committee. An audit committee with three independent directors would improve oversight in the establishment and monitoring of required internal controls and procedures. We expect to form an audit committee during 2013.

b) Changes In Internal Control Over Financial Reporting

During the quarter ended June 30, 2013, there were no changes in our internal controls over financial reporting during this fiscal quarter that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.
 
 
 
 
Legal Proceedings

Except as disclosed, there are no pending legal proceedings against us that are expected to have a material adverse effect on cash flows, financial condition or results of operations.

On June 5, 2013, we received notice that the Eighth Judicial District Court, Clark County, Nevada (Case No. A668230-B, Dept. Thirteen, Las Vegas NV 89155) had approved the Settlement Agreement and General Release (the “Settlement Agreement”) between the Company and H. Deworth Williams, Edward Cowle, Geoff Williams and Blue Cap Development Corp. This Settlement Agreement resolved all legal matters between the parties.

The Settlement Agreement approved by the court is the same Settlement Agreement in all material respects that was described in detail in our Form 8-K dated April 25, 2013 and filed with the SEC on April 29, 2013 and the Quarterly Report on 10-Q dated March 31, 2013 and filed with the SEC on May 20, 2013.
 
ITEM 1A. RISK FACTORS.
 
There are certain inherent risks which will have an effect on the Company’s development in the future and the most significant risks and uncertainties known and identified by our management are described below.

The Company has been involved in legal proceedings and the outcome of which impacts the management of the Company and could adversely affect the Company’s financial condition or results of operation.
 
We have been involved in legal proceedings as discussed in Item 1, Legal Proceedings.

The Settlement Agreement approved by the court is the same Settlement Agreement in all material respects that was described in detail in our Form 8-K dated April 25, 2013 and filed with the SEC on April 29, 2013 and the Quarterly Report on 10-Q dated March 31, 2013 and filed with the SEC on May 20, 2013.

We need to comply with the Settlement Agreement or our financial condition or results of operations could be adversely affected.

If we do not obtain additional financing, our business will fail.
 
For the six months ended June 30, 2013 and the year ended December 31, 2012, we had no revenues from our rare-earth elements properties.
 
We incurred net losses of $6,303,000 and $6,761,000 for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. The net loss for the six months ended June 30, 2013 and year ended December 31, 2012 included approximately $5,884,000 and $4,060,000, respectively, of non-cash expenses. Our net cash used in operating activities was $814,000 and $923,000 for the six months ended June 30, 2013 and year ended December 31, 2012, respectively.

Our current operating funds are less than necessary to complete all intended exploration of the properties, and therefore we need to obtain additional financing in order to complete our business plan. As of June 30, 2013, we had cash of $278,000 and a working capital deficit of $1,478,000 (excluding derivative liability- warrant of $806,000 and accrued compensation officers of $3,000,000).
 
 
Our business plan calls for significant expenses in connection with the exploration of the properties. We do not currently have sufficient funds to conduct continued exploration on the properties and require additional financing in order to determine whether the properties contain economic mineralization. We will also require additional financing if the costs of the exploration of the properties are greater than anticipated.
 
We will require additional financing to sustain our business operations if we are not successful in earning revenues once exploration is complete. Our recent efforts to generate additional liquidity, including through sales of our common stock and the issuance of secured convertible debentures, are described in more detail in the financial statement notes set forth in this Form 10-Q. Obtaining additional financing would be subject to a number of factors, including the market prices for rare-earth elements, investor acceptance of our properties and general market conditions. These factors may make the timing, amount, terms or conditions of additional financing unavailable to us.

The most likely source of future funds presently available to us is through the sale of equity capital or the issuance of convertible debentures. Any sale of share capital or the issuance of convertible debentures will result in dilution to existing shareholders. The only other anticipated alternative for the financing of further exploration would be our sale of a partial interest in the properties to a third party in exchange for cash or exploration expenditures, which is not presently contemplated.

Certain shareholders have substantial influence over our company.

As of August 19, 2013, John Victor Lattimore, Jr. and affilitated entities own 4.7 million shares or approximately 16.5% of our issued and outstanding common stock.
 
As of August 19, 2013, the former large shareholders of USRE-Delaware which we acquired on August 22, 2011 and Seaglass which we acquired on December 15, 2010, own 10.2 million shares or approximately 35.3% of the Company’s issued and outstanding common stock. As part of the Settlement Agreement, the parties also agreed to enter into a Voting Shareholder Agreement until March 13, 2015.

These shareholders, in combination with other shareholders, could cause a change of control of our board of directors, approve or disapprove any matter requiring stockholder approval, cause, delay or prevent a change in control or sale of the Company, which in turn could adversely affect the market price of our common stock.

Conflict of interest.
 
Some of our officers and directors are also directors and officers of other companies, and conflicts of interest may arise between their duties as our officers and directors and as directors and officers of other companies. These factors could have a material adverse effect on our business, financial condition and results of operations. The Company has entered into financing and consulting arrangements with entities controlled by directors of the Company. See Note 6, Related Party Transactions.

The volatility of the price of rare-earth elements could adversely affect our future operations and our ability to develop our properties.

The potential for profitability of our operations, the value of our properties and our ability to raise funding to conduct continued exploration and development, if warranted, are directly related to the market price of rare-earth elements. The price of rare-earth elements may also have a significant influence on the market price of our common stock and the value of our properties. Our decision to put a mine into production and to commit the funds necessary for that purpose must be made long before the first revenue from production would be received. A decrease in the price of rare-earth elements may prevent our properties from being economically mined or result in the write-off of assets whose value is impaired as a result of lower rare-earth element prices.
 
The volatility of mineral prices represents a substantial risk, which no amount of planning or technical expertise can fully eliminate. In the event rare-earth element prices decline or remain low for prolonged periods of time, we might be unable to develop our properties, which may adversely affect our results of operations, financial performance and cash flows.
 

Conditions in the rare-earth industry have been, and may continue to be, extremely volatile, which could have a material impact on our company.
 
Conditions in the rare-earth industry have been extremely volatile, and prices, as well as supply and demand, have been significantly impacted by a number of factors, principally (1) changes in economic conditions and demand for rare-earth elements and (2) changes, or perceived changes, in Chinese quotas for export of rare-earth elements. If conditions in our industry remain volatile, our stock price may continue to exhibit volatility as well. In particular, if prices or demand for rare-earth elements were to decline, our stock price would likely decline, and this could also impair our ability to obtain remaining capital needed for development of our properties.

As we face intense competition in the rare-earth industry, we will have to compete with our competitors for financing and for qualified managerial and technical employees.
 
The rare-earths mining and processing markets are capital intensive and competitive. Our Chinese competitors may have greater financial resources, as well as other strategic advantages to maintain, improve and possibly expand their facilities. Additionally, the Chinese producers have historically been able to produce at relatively low costs due to domestic economic factors. As a result of this competition, we may be unable to acquire additional attractive mining claims or financing on terms we consider acceptable. We also compete with other mining companies in the recruitment and retention of qualified managerial and technical employees. If we are unable to successfully compete for financing or for qualified employees, our exploration and development programs may be slowed down or suspended.

The success of our business will depend, in part, on the establishment of new uses and markets for rare-earth elements.

The success of our business will depend, in part, on the establishment of new markets for certain rare-earth elements that may be in low demand. The success of our business depends on creating new markets and successfully commercializing rare-earth elements in existing and emerging markets. Any unexpected costs or delays in the exploration and development of our properties could have a material adverse effect on our financial condition or results of operations.
 
Estimates of mineralized material are based on interpretation and assumptions and may yield less mineral production under actual conditions than is currently estimated.

Unless otherwise indicated, estimates of mineralized material presented in our press releases and regulatory filings are based upon estimates made by our consultants and us. When making determinations about whether to advance any of our projects to development, we must rely upon such estimated calculations as to the mineralized material on our properties. Until mineralized material is actually mined and processed, it must be considered an estimate only. These estimates are imprecise and depend on geological interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be unreliable. We cannot assure you that these mineralized material estimates will be accurate or that this mineralized material can be mined or processed profitably. Any material changes in estimates of mineralized material will affect the economic viability of placing properties into production and such properties’ return on capital. There can be no assurance that minerals recovered in small scale metallurgical tests will be recovered at production scale.
 
The mineralized material estimates have been determined and valued based on assumed future prices, cut-off grades and operating costs that may prove inaccurate. Extended declines in market prices for rare-earth elements may render portions of our mineralized material uneconomic and adversely affect the commercial viability of one or more of our properties and could have a material adverse effect on our results of operations or financial condition.
 
We need to continue as a going concern if our business is to succeed.

Our audited financial statements for the six months ended June 30, 2013 indicates that there are a number of factors that raise substantial doubt about our ability to continue as a going concern. Such factors identified in the report result from our limited history of operations, limited assets, and operating losses since inception. If we are not able to continue as a going concern, it is likely investors will lose their investments.
 

Because of the unique difficulties and uncertainties inherent in mineral exploration ventures, we face a high risk of business failure.

Potential investors should be aware of the difficulties normally encountered by new mineral exploration companies and the high rate of failure of such enterprises. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the exploration of the mineral properties that we plan to undertake. These potential problems include, but are not limited to, unanticipated problems relating to exploration, and additional costs and expenses that may exceed current estimates. The expenditures to be made by us in the exploration of the mineral claim may not result in the discovery of commercial mineral deposits. Problems such as unusual or unexpected formations and other conditions are involved in mineral exploration and often result in unsuccessful exploration efforts. If the results of our exploration do not reveal viable commercial mineralization, we may decide to abandon our claim and acquire new claims for new exploration. The acquisition of additional claims will be dependent upon us possessing capital resources at the time in order to purchase such claims. If no funding is available, we may be forced to abandon our operations.
 
Because we have commenced limited business operations, we face a high risk of business failure.
 
We started exploring our properties in the summer of 2011. Accordingly, we have no way to evaluate the likelihood that our business will be successful. Although we were incorporated in the State of Delaware in 1999 and reincorporated in Nevada in 2007, the Company just acquired our mineral properties with our acquisition of Seaglass in December 2010 and USRE-Delaware in August 2011. We have not earned any revenues from rare-earth elements as of the date of this Form 10-Q.
 
Prior to completion of our exploration stage, we anticipate that we will incur increased operating expenses without realizing any revenues. We therefore expect to incur significant losses into the foreseeable future. We recognize that if we are unable to generate significant revenues from development of the mineral claims and the production of minerals from the claims, we will not be able to earn profits or continue operations.

There is no history upon which to base any assumption as to the likelihood that we will prove successful, and we can provide investors with no assurance that we will generate any operating revenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business will most likely fail.
 
We are dependent on key personnel.

Our success depends to a significant degree upon the continued contributions of key management and other personnel, some of whom could be difficult to replace. We do not maintain key man life insurance covering certain of our officers. Our success will depend on the performance of our officers, our ability to retain and motivate our officers, our ability to integrate new officers into our operations and the ability of all personnel to work together effectively as a team. Our failure to retain and recruit officers and other key personnel could have a material adverse effect on our business, financial condition and results of operations.
 
We lack an operating history and we expect to have losses in the future.
 
Except for our initial exploration efforts as described above, we have not started our proposed business operations or realized any revenues from our rare-earth element properties. Except for our media operations, we have no operating history upon which an evaluation of our future success or failure can be made. Our ability to achieve and maintain profitability and positive cash flow is dependent upon the following:
 
Our ability to locate a profitable mineral properties;
 
Our ability to generate revenues; and
 
Our ability to reduce exploration costs.

Based upon current plans, we expect to incur operating losses in foreseeable future periods. This will happen because there are expenses associated with the research and exploration of our mineral properties. We cannot guarantee that we will be successful in generating revenues in the future. Failure to generate revenues will cause us to go out of business.
 
 
Because of the inherent dangers involved in mineral exploration, there is a risk that we may incur liability or damages as we conduct our business.
 
The search for valuable minerals involves numerous hazards. As a result, we may become subject to liability for such hazards, including pollution, cave-ins and other hazards against which we cannot insure or against which we may elect not to insure. Although we conducted a due diligence investigation prior to entering into the acquisition of Seaglass, risk remains regarding any undisclosed or unknown liabilities associated with this project. The payment of such liabilities may have a material adverse effect on our financial position.
 
Because we are small and do not have sufficient capital, we may have to cease operation even if we have found mineralized material.
 
Because we are small and do not have sufficient capital, we must limit our exploration. Because we may have to limit our exploration, we may be unable to mine mineralized material, even if our mineral claims contain mineralized material. If we cannot mine mineralized material, we may have to cease operations. 

Governmental regulations impose material restrictions on mineral properties exploration and development. Under state laws in Colorado, Idaho and Montana, to engage in exploration will require permits, the posting of bonds, and the performance of remediation work for any physical disturbance to the land. If we proceed to commence drilling operations on the mineral claims, we will incur additional regulatory compliance costs.

In addition, the legal and regulatory environment that pertains to mineral exploration is uncertain and may change. Uncertainty and new regulations could increase our costs of doing business and prevent us from exploring for ore deposits. The growth of demand for ore may also be significantly slowed. This could delay growth in potential demand for and limit our ability to generate revenues. In addition to new laws and regulations being adopted, existing laws may be applied to limit or restrict mining that have not as yet been applied. These new laws may increase our cost of doing business with the result that our financial condition and operating results may be harmed.
 
We may be subject to environmental laws and regulations particular to our operations with which we are unable to comply.
 
Because we are engaged in mineral exploration, we are exposed to environmental risks associated with mineral exploration activity. We are currently in the initial exploration stages on our properties interests and have not determined whether significant site reclamation costs will be required. We anticipate that we would only record liabilities for site reclamation when reasonably determinable and when such costs can be reliably quantified. Compliance with environmental regulations will likely be expensive and burdensome. The expenditure of substantial sums on environmental matters will have a materially negative effect on our ability to implement our business plan and grow our business.

The exploration and mining industry is highly competitive, and we are at a disadvantage since many of our competitors are better funded.
 
Discovering, exploring and exploiting a mineral prospect are highly speculative ventures. There are many companies already established in this industry who are better financed and/or who have closer working relationships with productive mining companies. This places us at a competitive disadvantage. Our goal is to explore our properties with the anticipation of locating one or more commercially viable deposits. If we do not have the requisite funds to further develop a discovered deposit, we may have to find a partner that would assist us in to fully develop the properties. We have not entered into any agreements with any third parties to produce any discovered minerals from our properties, nor have we identified any potential partners in that regards. There are no guarantees that we will have sufficient funds or that we will ever identify and enter in agreement with suitable partners to assist us in realizing production grade minerals from our properties. If cannot realize sufficient funds or we are unable to identify and/or partner with any third parties to assist us in attaining production grade minerals, we will likely be unsuccessful in producing any such minerals, which would likely have a materially adverse effect on our ability to generate revenues.
 
We may not have access to all of the supplies and materials we need to begin exploration that could cause us to delay or suspend operations.

Competition and unforeseen limited sources of supplies in the industry could result in occasional spot shortages of supplies, such as explosives, and certain equipment such as bulldozers and excavators that we might need to conduct exploration. We have not attempted to locate or negotiate with any suppliers of products, equipment or materials. We will attempt to locate products, equipment and materials as we conduct exploration. If we cannot find the products and equipment we need, we will have to suspend our exploration plans until we do find the products and equipment we need.
 
 
Because of the speculative nature of exploration of rare-earth elements, there is no assurance that our exploration activities will result in the discovery of new commercially exploitable quantities of rare-earth elements.
 
We plan to continue to source exploration rare-earth element properties. The search for valuable rare-earth elements as a business is extremely risky. We can provide investors with no assurance that additional exploration on our properties will establish that additional commercially exploitable reserves of rare-earth elements exist on our properties. Problems such as unusual or unexpected geological formations or other variable conditions are involved in exploration and often result in exploration efforts being unsuccessful. The additional potential problems include, but are not limited to, unanticipated problems relating to exploration and attendant additional costs and expenses that may exceed current estimates. These risks may result in us being unable to establish the presence of additional commercial quantities of ore on our mineral claims with the result that our ability to fund future exploration activities may be impeded.
 
Weather and location challenges may restrict and delay our work on our properties.
 
We plan to conduct our exploration on a seasonal basis, it is possible that snow or rain could restrict and delay work on the properties to a significant degree. Our properties are located in relatively remote locations, which create additional transportation and energy costs and challenges.

Trading in the Company’s stock may be restricted by the SEC’s penny stock regulations.

Our stock is categorized as a penny stock. The SEC has adopted Rule 15g-9 which generally defines "penny stock" to be any equity security that has a market price (as defined) less than US$ 5.00 per share or an exercise price of less than US$ 5.00 per share, subject to certain exclusions, none of which apply to our stock (e.g., net tangible assets in excess of $2,000,000 or average revenue of at least $6,000,000 for the last three years). Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Finally, broker-dealers may not handle penny stocks under $0.10 per share.

These disclosure requirements reduce the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock to current and future investors, resulting in limited ability for investors to sell their shares.
 
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sale our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
 
The penny stock rules may discourage investor interest in and limit the marketability of our common stock to current and future investors, resulting in limited ability for investors to sell their shares.
 

The sale of a significant number of our shares of common stock could depress the price of our common stock. 
 
Sales or issuances of a large number of shares of common stock in the public market or the perception that sales may occur could cause the market price of our common stock to decline. As of August 19, 2013, there were 28.7 million shares of common stock issued and outstanding, on a pro-forma basis and subject to adjustment based on the terms of the Settlement Agreement discussed in Item 1, Legal Proceedings. Significant shares of common stock are held by our principal shareholders, other insiders and other large shareholders. As “affiliates” (as defined under Rule 144 of the Securities Act (“Rule 144”)) of the Company, our principal shareholders, other insiders and other large shareholders may only sell their shares of common stock in the public market pursuant to an effective registration statement or in compliance with Rule 144. See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We may engage in acquisitions, mergers, strategic alliances, joint ventures and divestitures that could result in financial results that are different than expected. 
 
In the normal course of business, we may engage in discussions relating to possible acquisitions, equity investments, mergers, strategic alliances, joint ventures and divestitures. All such transactions are accompanied by a number of risks, including:

Use of significant amounts of cash,
 
Potentially dilutive issuances of equity securities on potentially unfavorable terms,
 
Incurrence of debt on potentially unfavorable terms as well as impairment expenses related to goodwill and amortization expenses related to other intangible assets, and
 
The possibility that we may pay too much cash or issue too many of our shares as the purchase price for an acquisition relative to the economic benefits that we ultimately derive from such acquisition.
   
The process of integrating any acquisition may create unforeseen operating difficulties and expenditures. The areas where we may face difficulties in the foreseeable include:
 
Diversion of management time, during the period of negotiation through closing and after closing, from its focus on operating the businesses to issues of integration,
 
The need to integrate each Company's accounting, management information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented,
 
The need to implement controls, procedures and policies appropriate for a public company that may not have been in place in private companies, prior to acquisition,
   
The need to incorporate acquired technology, content or rights into our products and any expenses related to such integration, and
 
The need to successfully develop any acquired in-process technology to realize any value capitalized as intangible assets.
 
From time to time, we may engage in discussions with candidates regarding potential divestures. If a divestiture does occur, we cannot be certain that our business, operating results and financial condition will not be materially and adversely affected. A successful divestiture depends on various factors, including our ability to:
 
Effectively transfer liabilities, contracts, facilities and employees to any purchaser,
 
Identify and separate the intellectual properties to be divested from the intellectual properties that we wish to retain,
 
Reduce fixed costs previously associated with the divested assets or business, and
 
Collect the proceeds from any divestitures.
 

In addition, if customers of the divested business do not receive the same level of service from the new owners, this may adversely affect our other businesses to the extent that these customers also purchase other products offered by us. All of these efforts require varying levels of management resources, which may divert our attention from other business operations.

If we do not realize the expected benefits or synergies of any divestiture transaction, our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted.

The market price of our common stock may be volatile. 
 
The market price of our common stock has been and is likely in the future to be volatile. Our common stock price may fluctuate in response to factors such as: 
 
Announcements by us regarding liquidity, legal proceedings, significant acquisitions, equity investments and divestitures, strategic relationships, addition or loss of significant customers and contracts, capital expenditure commitments, loan, note payable and agreement defaults, loss of our subsidiaries and impairment of assets,
   
Issuance of convertible or equity securities for general or merger and acquisition purposes,
   
Issuance or repayment of debt, accounts payable or convertible debt for general or merger and acquisition purposes,
   
Sale of a significant number of shares of our common stock by shareholders,
   
General market and economic conditions,
 
Quarterly variations in our operating results,
   
Investor relation activities,
   
Announcements of technological innovations,
   
New product introductions by us or our competitors,
   
Competitive activities, and
   
Additions or departures of key personnel.
 
These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance. These factors could have a material adverse effect on our business, financial condition and results of operations.
 
 
We have limited insurance. 
 
We have limited director and officer insurance and commercial insurance policies. Any significant insurance claims would have a material adverse effect on our business, financial condition and results of operations.
 
We are subject to corporate governance and internal control requirements, and our costs related to compliance with, or our failure to comply with existing and future requirements, could adversely affect our business.

We must comply with corporate governance requirements under the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, as well as additional rules and regulations currently in place and that may be subsequently adopted by the SEC and the Public Company Accounting Oversight Board. These laws, rules, and regulations continue to evolve and may become increasingly stringent in the future. We are required to include management’s report on internal controls as part of our annual report pursuant to Section 404 of the Sarbanes-Oxley Act. We strive to continuously evaluate and improve our control structure to help ensure that we comply with Section 404 of the Sarbanes-Oxley Act. The financial cost of compliance with these laws, rules, and regulations is expected to remain substantial.
 
Our management has concluded that our disclosure controls and procedures were not effective due to the presence of the following material weaknesses in internal control over financial reporting:
 
We do not have an audit committee. An audit committee with three independent directors would improve oversight in the establishment and monitoring of required internal controls and procedures. We expect to form an audit committee during 2013.
 
Management anticipates that such disclosure controls and procedures will not be effective until the material weaknesses are remediated. We cannot assure you that we will be able to fully comply with these laws, rules, and regulations that address corporate governance, internal control reporting, and similar matters. Failure to comply with these laws, rules and regulations could materially adversely affect our reputation, financial condition, and the value of our securities.

We may issue preferred stock that could have rights that are preferential to the rights of common stock that could discourage potentially beneficial transactions to our common shareholders.

An issuance of additional shares of preferred stock could result in a class of outstanding securities that would have preferences with respect to voting rights and dividends and in liquidation over our common stock and could, upon conversion or otherwise, have all of the rights of our common stock. Our Board of Directors' authority to issue preferred stock could discourage potential takeover attempts or could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making these attempts more difficult or costly to achieve. The issuance of preferred stock could impair the voting, dividend and liquidation rights of common stockholders without their approval.

If the company were to dissolve or wind-up, holders of our common stock may not receive a liquidation distribution.

If we were to wind-up or dissolve the Company and liquidate and distribute our assets, our shareholders would share ratably in our assets only after we satisfy any amounts we owe to our creditors. If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution. Accordingly, we cannot give you any assurance that sufficient assets will remain available after the payment of our creditors to enable you to receive any liquidation distribution with respect to any shares you may hold.
 


During the three months ended June 30, 2013, we had the following unregistered sales of equity securities.

Unless otherwise indicated, all of the following private placements of Company securities were conducted under the exemption from registration as provided under Section 4(2) of the Securities Act of 1933 (and also qualified for exemption under 4(5), formerly 4(6) of the Securities Act of 1933, except as noted below). All of the shares issued were issued in private placements not involving a public offering, are considered to be “restricted stock” as defined in Rule 144 promulgated under the Securities Act of 1933 and stock certificates issued with respect thereto bear legends to that effect.

During the three months ended June 30, 2013, we issued 337,500 shares of restricted common stock to five accredited investors (Burton Koffman for 12,500 shares, Daniel and Carol Kondos for 100,000 shares, Robert Lavinsky for 25,000 and Postscriptum Ventures Ltd for 200,000 shares) for $675,000 or $2.00 per share. A notice filing under Regulation D was filed with the SEC on August 19, 2013 with regard to these stock issuances.

Convertible Secured Promissory Note with Unique Materials LLC
On September 13, 2012, we entered into a Convertible Secured Promissory Note with Unique Materials LLC, a Texas LLC affiliated with John Victor Lattimore, Jr., Chairman of the Company’s Board of Directors, pursuant to which the Company agreed to issue a Note for $650,000 at 5%.

On June 28, 2013, Unique Materials converted this Note and interest of $25,644 into 675,644 of our restricted common shares at $1.00 per share. The fair value of the stock on the date of conversion was $1.65 and the Company recorded the difference between the conversion price and the fair value as loss on settlement of debt A notice filing under Regulation D was filed with the SEC on July 3, 2013 with regard to this stock issuance.
 
Unsecured Promissory Note with Unique Materials LLC
On November 20, 2012, we entered into an unsecured Promissory Note with Unique Materials, pursuant to which we agreed to issue a Note for $250,000 at 5%.
 
On June 28, 2013, Unique Materials converted this Note and interest of $7,534 into 257,534 of our restricted common shares at $1.00 per share. The fair value of the stock on the date of conversion was $1.65 and the Company recorded the difference between the conversion price and the fair value as loss on settlement of debt A notice filing under Regulation D was filed with the SEC on July 3, 2013 with regard to this stock issuance.

Unsecured Promissory Note with Unique Materials LLC
On February 4, 2013, we entered into a unsecured Promissory Note with Unique Materials, pursuant to which the Company agreed to issue a Note for $150,000 at 5%.

On June 28, 2013, Unique Materials converted this Note and interest of $2,950 into 152,950 of the our restricted common shares at $1.00 per share. The fair value of the stock on the date of conversion was $1.65 and the Company recorded the difference between the conversion price and the fair value as loss on settlement of debt A notice filing under Regulation D was filed with the SEC on July 3, 2013 with regard to this stock issuance.
 

Conversion of Liability with Logic International Consulting Group, LLC
On June 28, 2013, Logic International Consulting Group LLC, a New York LLC affiliated with Kevin Cassidy, the Company’s CEO, converted liabilities of $800,000 into 800,000 of the Company’s restricted common shares at $1.00 per share. The fair value of the stock on the date of conversion was $1.65 and the Company recorded the difference between the conversion price and the fair value as loss on settlement of debt. A notice filing under Regulation D was filed with the SEC on July 3, 2013 with regard to this stock issuance.

Forfeiture of Shares
On July 26, 2011, the Company entered into an Addendum to a Revised Employment Agreements with Michael Parnell and Matthew Hoff. Under these Agreement, the Company approved the issuance of 1,250,000 shares of common stock to each of Mr. Parnell and Mr. Hoff related to (i) $500,000 in severance at $.50 per share for the change in control effected on December 15, 2010: and (ii) 125,000 shares related to each of years 4 and 5 for the change in control effected on August 22, 2011, each as outlined in the Agreements.

On June 28, 2013, Mr. Parnell and Mr. Hoff each forfeited 750,000 shares of the 1,250,000 issuance discussed above. This 1,500,000 forfeiture is part of the retrieval or “claw back” not less than 2.1 million shares of the Company’s common stock that were authorized for issuance to certain individuals on August 27, 2012 for non-cash consideration and future services that was included in the Settlement Agreement and General Release approved on June 5, 2013.
 
 
None.
 
 
Not applicable.
 
 
None.
 
 
 
The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
 
No.
 
Description
     
10.1
 
Notice of Proposed Settlement, Settlement Hearing, and Right to Appear dated April 24, 2013 by and between U.S. Rare Earths, Inc. and H. Deworth Williams, Edward Cowle, Geoff Williams and Blue Cap Development Corp. (1)
10.2
 
Form of Notice of Conversion by and between U.S. Rare Earths, Inc. and Unique Materials LLC dated June 28, 2013. (2)
10.3
 
Notice of Conversion by and between U .S. Rare Earths, Inc. and Logic International Consulting Group LLC dated June 28, 2013. (2)
 
Option Agreement dated May 20, 2013 by and between U .S. Rare Earths, Inc. and Postscriptum Ventures Ltd. (3)
 
Certification by Chief Executive Officer pursuant to Rule 13a-14(a). (3)
 
Certification by Chief Financial Officer pursuant to Rule 13a-14(a). (3)
 
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)
 
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)
101   Interactive data files pursuant to Rule 405 of Regulation S-T. (4)
____________________________________
(1)
Attached as an exhibit to the Company’s Form 8-K dated April 25, 2013 and filed with the SEC on April 29, 2013.
(2)
Attached as an exhibit to the Company’s Form 8-K dated June 27, 2013 and filed with the SEC on July 2, 2013.
(3)
Filed herewith.
(4)
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
 
 
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, U.S. Rare Earths, Inc. (the "Registrant") has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
U.S. RARE EARTHS, INC.
 
 
 
 
 
Date: August 19, 2013
By:
/s/ Kevin Cassidy
 
 
 
Kevin Cassidy
 
 
 
Chief Executive Officer and Director
(Principal Executive Officer)
 
 
 
 
 
       
 
By:
/s/ Mark Scott
 
 
 
Mark Scott
 
 
 
Chief Financial Officer
( Principal Financial and Accounting Officer)
 
 
 
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