U.S. Rare Earth Minerals, Inc.
We have audited the accompanying balance
sheets of U.S. Rare Earth Minerals, Inc. (the “Company”) as of December 31, 2017 and 2016, and the related statements
of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December
31, 2017 and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2016 and 2017, and the results
of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017 and 2016, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying financial statements
have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the
Company has negative working capital and has not generated revenues to cover operating expenses. These factors, among others, raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this
matter are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1. FORMATION AND BUSINESS OF THE COMPANY
Basis
of Presentation and Organization
U.S.
Rare Earth Minerals, Inc. was incorporated in the state of Nevada on June 9, 2008. As used in these Notes to the Financial Statements,
the terms the “Company”, “we”, “us”, “our” and similar terms refer to U.S. Rare Earth
Minerals, Inc.
U.S.
Rare Earth Minerals, Inc., formerly known as U.S. Natural Nutrients and Minerals, Inc. is in the business of mining a certain
high quality Calcium Montmorillonite clay which is high in minerals and other nutrients that is used for agricultural purposes
to restore minerals to mineral depleted soil and for mineral supplements for animals and humans.
NOTE
2. SIGNIFICANT ACCOUNTING POLICIES
Cash
and Cash Equivalents
The
Company maintains cash balances at one financial institution. Accounts at that institution are insured by the Federal Deposit
Insurance Corporation up to $250,000. Cash balances may at times exceed the FDIC insured limits. The Company considers all highly
liquid investments with maturity of three months or less when purchased to be cash equivalents.
Uncollectible
Receivables
The
Company requires payment before release of product to preclude uncollectible receivables. If terms are granted to an established
customer and their receivables are open one year past the due date, these open invoices will be reviewed to determine if they
should be charged off at the year end. As of December 31, 2017 and 2016 no balances were charged off.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first out (FIFO) method. As of December 31, 2017 and 2016, all inventory
consisted of finished goods of capsules.
Fixed
Assets
The
Company records fixed assets at cost and calculates depreciation using the straight-line method over the estimated useful life
of the assets, which is estimated to be between five and seven years. Maintenance, repairs and minor renewals are charged to expense
when incurred. Replacements and major renewals are capitalized.
At
December 31, 2017 and December 31, 2016, the value of mining equipment was $280,834, with accumulated depreciation of $273,877
and $256,950 respectively for a net value of $6,957 and $23,884 respectively. The value of office equipment was $10,239 with accumulated
depreciation of $10,024 and $9,416 respectively for a net value of $215 and $823 respectively. At December 31, 2017 and December
31, 2016, the depreciation expense for mining equipment was $16,927 and $25,998 respectively and for office equipment was $608
and $1,630 respectively.
Shipping
and Handling Costs
The
Company charges the customer for shipping and handling and those costs are recorded as cost of sales.
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes”.
Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and
(ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s
financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the
deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes
the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of the
available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be
realized.
ASC
Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification,
interest and penalties, accounting in
interim
periods, disclosure and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Revenue
Recognition
The
Company purchases Calcium Montmorillonite Clay pursuant to an agreement with a related party, who owns the land and mine containing
such clay, and resells the product for agricultural uses. Revenue from the sale of product obtained from our mining contractor
is recognized when ownership passes to the purchaser at which time the following conditions are met:
i)
persuasive evidence that an agreement exists;
ii)
the risks and rewards of ownership pass to the purchaser including delivery of the product;
iii)
the selling price is fixed and determinable; or,
iv)
collectively is reasonably assured.
Stock
Based Compensation
Stock
based compensation is accounted for using the Equity-Based Payments to Non-Employee Topic of the FASB ASC, which establishes standards
for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s
equity instruments or that may be settled by the issuance of those equity instruments. We determine the value of stock issued
at the date of grant. We also determine at the date of grant the value of stock at fair market value or the value of services
rendered (based on contract or otherwise) whichever is more readily determinable.
Stock
based compensation for employees is accounted for using the Stock Based Compensation Topic of the FASB ASC. We use the fair
value method for equity instruments granted to employees and will use the Black Scholes model for measuring the fair value of
options, if issued. The stock based fair value compensation is determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is recognized over the vesting periods.
Fair
Value Measurements
We
adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used
in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term
nature of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because
the effective yields on these obligations, which include contractual interest rates taken together with other features such as
concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar
credit risk.
ASC
820 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. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1 — quoted prices in active markets for identical assets or liabilities
Level
2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
Recent
Accounting Pronouncements
From
time to time new accounting pronouncements are issued by the Financial Accounting Standards Board or other standard setting bodies
that may have an impact on the Company’s accounting and reporting. The Company believes that such recently issued accounting
pronouncements and other authoritative guidance for which the effective date is in the future will not have an impact on its accounting
or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.
NOTE
3. GOING CONCERN
The
accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. To date, the Company has generated minimal revenue and has an accumulated deficit
of $14,201,187 and a working capital deficiency of $139,781 as of December 31, 2017. These factors, among others, raise substantial
doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that
might result from this uncertainty. We will need to raise funds or implement our business plan to continue operations.
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s
plan is to obtain such resources for the Company by obtaining capital sufficient to meet its minimal operating expenses by seeking
equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing
any of its plans.
The
ability of the Company to continue as a going concern is dependent upon, among other things, its ability to successfully accomplish
the plans described in the preceding paragraph and eventually begin operations in accordance with its business plan. The accompanying
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE
4. CAPITAL STOCK
On
February 27, 2015, the Company filed a Certificate of Change with the Nevada Secretary of State changing the number of authorized
common shares from 6,000,000 to 300,000,000. The Company is currently authorized to issue 50,000,000 shares of its $0.001 par
value preferred stock and 300,000,000 shares of its $0.001 par value common shares.
The
Company formally filed a Certificate of Designation authorizing 500,000 of the 50,000,000 authorized preferred shares to be designated
as $0.001 par value, Class “A” 6% Cumulative, Convertible Voting Preferred Stock with the Nevada Secretary of State
on December 31, 2013.
The
preferred stock ranks senior to the common stock of the Company in each case with respect to dividend distribution and distributions
of assets upon liquidation, dissolution or winding up of the Company whether voluntary or involuntary.
These
shares are issued as Class “A” 6% Cumulative, Convertible Voting Preferred Stock. Each share is valued at $1.00 per
share for purposes of calculating interest and for conversion purposes and accrues interest at 6% per annum from the date of issue.
Interest is cumulative for a maximum of two years and compounds annually. Interest accrued thereon shall become due and payable
and shall be paid by the Company on or prior to thirty (30) days after the second anniversary of issue date and each consecutive
two year period thereafter.
As
of December 31, 2017 and 2016, a total of $118,237 and $86,610 has not been declared by the Company, respectively.
Each
share is convertible at any time from date of issue into five (5) shares of Company common stock. Each share shall be entitled
to five (5) votes that may be cast by the holder at any shareholder meeting or event requiring a shareholder vote. All interest
accrued to date of conversion will be paid by Company to holder within sixty (60) days of date of conversion by holder. These
shares are callable by the Company at any time after three (3) years from date of issue at $1.00 plus accrued but unpaid interest
unless previously converted.
As
of December 31, 2017 and 2016, there were 440,500 and 440,500 shares of Class “A” 6% Cumulative, Convertible Voting
Preferred Stock issued and outstanding, respectively.
During
2016, at various times, an aggregate of 18,850,000 shares of common stock were issued in exchange for services and consideration.
2,500,000 shares were sold to investors at $0.02 per share; 800,000 shares valued at $0.05 per share were issued for settlement
of accounts payable – related party of $24,003 and a loss on settlement of debt in the amount $17,677 was recorded related
to this issuance; 6,000,000 shares, valued at $0.04 per share, 1,500,000 shares valued at $0.02 per share and 1,500,000 shares
valued at $0.05 per share were issued to Board members; 3,000,000 shares valued at $0.04 per share and 550,000 valued at $0.05
per share were issued to consultants; 3,000,000 shares were issued in error on November 29, 2016, cancelled on November 29, 2016
and returned to the treasury.
On
January 13, 2017, 4,350,000 shares were cancelled.
On
April 25, 2017, the Company issued 8,100,000 shares of common stock to 3 directors and various consultants for past services rendered.
The fair value of these shares is $0.02 per share based on the stock price; thus $162,000 was recognized as stock based compensation.
Also, on that date, the Company issued 3,000,000 shares of S-8 shares to two consultants. The fair market value of these shares
is $0.02 per share based on the stock price; thus $60,000 was recognized as stock based compensation.
On November 18, 2017, the Company issued
67,500,000 shares of its unregistered Common Stock to a related party as consideration for acquisition of nine (9) Unpatented
Placer Mining Claims valued at $675,000 by the Company and 3,000,000 shares of unregistered Common Stock as payment for outstanding
accounts payable- related party valued at $30,000 and the remaining balance of $224,372 of the debt was forgiven and recorded
to additional paid-in capital.
As
of December 31, 2017 and 2016, there were 105,416,350 and 28,166,350 shares of common stock issued and outstanding, respectively.
NOTE
5. NOTES AND DEBENTURES PAYABLE
In
2009, the Company received multiple set of funds and the terms of each note payable are set forth: $5,000 note payable due upon
demand and then in 2013 an $80,000 note bearing 6% per annum, simple interest, payable on or before August 23, 2013. The Company
and note holders are in discussions with respect to the payoff of the notes as they both are in default.
At
December 31, 2017, the Company has recorded accrued interest of $3,997 related to the notes and debentures payable which is included
in the $24,576 accrued interest balance on the balance sheet. A $10,000 payment of accrued interest was made in 2017.
At
December 31, 2016, the Company has recorded accrued interest of $8,697 related to the notes and debentures payable which is included
in the $26,776 accrued interest balance on the balance sheet. A $7,000 payment of accrued interest was made in 2016.
NOTE
6. LOAN PAYABLE
We
have two short-term loans totaling $25,000 at December 31, 2017 and 2016. These loans were due in 2012 and as of December 31,
2017 and 2016, are in default. These notes are accruing interest at a rate of 10% per annum. At December 31, 2017 and 2016, the
Company has recorded accrued interest of $20,578 and $18,078, respectively related to the loans payable which is included in the
$24,576 and $26,776, respectively of accrued interest balance on the balance sheet.
NOTE
7. INCOME TAXES
The
components of the Company’s deferred tax asset are as follows as of December 31, 2017 and 2016:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Net operating loss carry forward at 21% (2017) and 35% (2016)
|
|
$
|
2,318,157
|
|
|
$
|
3,832,590
|
|
Valuation allowance
|
|
|
(2,318,157
|
)
|
|
|
(3,832,590
|
)
|
Net deferred tax allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the fiscal year ended December 31, 2016 the Company measured our U.S. deferred tax assets at a statutory income tax rate of 35%.
The valuation allowance for 2017 decreased by approximately $1,533,000 due to the change in enacted tax rates from 35% in 2016
to 21% in 2017.
On
December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law including a one-time mandatory transition
tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others.
We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition
tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax
assets and liabilities. The Company does not have any foreign earnings and therefore, we do not anticipate the impact of a transition
tax. We have remeasured our U.S. deferred tax assets at a statutory income tax rate of 21%. Since the Tax Act was passed late
in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider
the accounting of any transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance
and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period
in accordance with SAB 118, and no later than fiscal year end December 31, 2018.
Deferred
tax asset consists of accumulated net operating losses of approximately $11,038,000 and $10,950,000 as of December 31, 2017 and
2016, respectively, which expire between 2033 and 2036.
The
reconciliation of income tax expense at the U.S. statutory rate of 21% and 35% for the years ended December 31, 2017 and 2016,
respectively, is as follows:
|
|
2017
|
|
|
2016
|
|
US Statutory rate
|
|
|
21
|
%
|
|
|
35
|
%
|
Valuation allowance
|
|
|
-21
|
%
|
|
|
-35
|
%
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
The
Company had no gross unrecognized tax benefits that, if recognized, would affect the effective income tax rate in future periods.
At December 31, 2017, the amount of gross unrecognized tax benefits before valuation allowances and the amount that would favorably
affect the effective income tax rate in future periods after valuation allowances were $0. The Company recognizes interest expense
and penalties related to unrecognized tax benefits in operating expenses. The Company had no accruals for interest or penalties
as December 31, 2017 or December 31, 2016.
The
Company files income tax returns in the United States. The Company has not filed its tax returns since 2014. The Company
will file its U.S. federal return for the years ended December 31, 2017, 2016 and 2015 in 2018. Once filed, the 2017 U.S. federal
return and those for 2016 and 2015 will be considered as open tax years. No tax returns are currently under examination
by any tax authorities. The Company has not accrued any additional interest or penalties or the delinquency of our outstanding
tax returns as we have incurred net losses in those periods still outstanding.
NOTE
8. RELATED PARTY TRANSACTIONS
The
officers and directors for the Company are involved in other business activities and may, in the future, become involved in other
business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between
the Company and their other business interest. The Company has not formulated a policy for the resolution of such conflicts.
As
of December 31, 2016, the Company had an outstanding payable of $3,803 to a company owned by the CEO for packaging services provided
during the year. As of December 31, 2017 the balance due is $9,198.
On July 11, 2017 Nathan Marks was appointed
as Director and his company is also a customer. The Company had sales of $160,866 and $212,905 during the years ended December
31, 2017 and 2016, respectively, to this company.
The Company made payments of $26,157 and
$31,941 to M. Strata, LLC during the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017 and 2016, the
Company owed M. Strata, LLC $700 and $164,522 related to tonnage fees, respectively.
On November 18, 2017, finalized an Agreement
with M Strata, LLC and the Company issued 67,500,000 shares of its unregistered Common Stock to AFCC, LLC (a Wyoming LLC) as consideration
for acquisition of nine (9) Unpatented Placer Mining Claims valued at $675,000 by the Company and 3,000,000 shares of unregistered
Common Stock as payment for outstanding payables valued at $254,372. The 3,000,000 shares issued for the $254,372 of payables
were valued at $30,000 and the remaining balance of $224,372 was forgiven and recorded in additional paid-in capital.
Shareholder Advance
During the year ended December 31, 2017,
various shareholders advanced $22,700 to the Company to help pay for operating expenses. The advances don’t have re-payment
terms.
NOTE
9. CONCENTRATION
The
Company has concentrated sales as follows:
|
|
% of Sales
|
|
|
|
2017
|
|
|
2016
|
|
Customer #1- related party
|
|
|
86
|
%
|
|
|
87
|
%
|
The
Company has concentrated purchases as follows:
|
|
% of Purchases
|
|
|
|
2017
|
|
|
2016
|
|
Vendor #1- related party
|
|
|
25
|
%
|
|
|
64
|
%
|
Vendor #2
|
|
|
31
|
%
|
|
|
-
|
|
NOTE
10. COMMITMENTS AND CONTINGENCIES
The
Company has been advised by the Bureau of Land Management that it must prepare and submit an amended plan of remediation
for Eagle 4 and related areas where mining and related activities are being conducted and also will be required to submit an environmental
assessment as well which will interrupt mining activities. The amended plan of remediation to be submitted may result
in increasing the amount of the bond presently posted by the Company. In addition, the Company has been advised by the BLM
that it owes the BLM for materials removed from the mine site in prior years. The amounts have not been determined.
Management estimates that the cost to be minimal and possibly zero. The Company and the BLM are waiting also for the Army Corps
of Engineers to determine if a drainage ditch adjacent to the mine site is a stream, which is regulated by them. As of December
31, 2017 no determination has been made by the Army Corps of Engineers. No communication has been received from the Army Corps
of Engineers since May 2014.
The
Company’s Attorney continues an on going dialogue with the Bureau of Land Management and hopes to reach an agreement over
an alleged water diversion on U.S. Rare Earth Minerals, Inc. Panaca, NV BLM mine site. It is hoped that the Army Corps of Engineer’s
will soon visit the site and render a decision.
NOTE
11. SUBSEQUENT EVENTS
In
preparing the financial statements, the Company has evaluated events and transactions for potential recognition or disclosure
through the date the financial statements were available to be issued and none were noted.