NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – Interim financial statement disclosure
The
consolidated financial statements included herein have been prepared by Liberty Star Uranium & Metals Corp. (the “Company”,
“we”, “our”) without audit, pursuant to the rules and regulations of the United States Securities and
Exchange Commission (“SEC”) and should be read in conjunction with our annual report on Form 10-K for the year ended
January 31, 2017 as filed with the SEC under the Securities and Exchange Act of 1934 (the “Exchange Act”). Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted, as permitted by the SEC, although we believe
the disclosures which are made are adequate to make the information presented not misleading. The consolidated financial statements
reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at
October 31, 2017 and the results of our operations and cash flows for the periods presented.
Interim
results are subject to significant seasonal variations and the results of operations for the three and nine months ended October
31, 2017 are not necessarily indicative of the results to be expected for the full year.
NOTE
2 – Going concern
The
Company has incurred losses from operations, and requires additional funds for further exploratory activity and to maintain its
claims prior to attaining a revenue generating status. There are no assurances that a commercially viable mineral deposit exists
on any of our properties. In addition, the Company may not find sufficient ore reserves to be commercially mined. As such, there
is substantial doubt about the Company’s ability to continue as a going concern.
Management
is working to secure additional funds through the exercise of stock warrants already outstanding, equity financings, debt financings
or joint venture agreements. The consolidated financial statements do not include any adjustments that might result from the outcome
of these uncertainties.
NOTE
3 – Summary of Significant Accounting Policies
Fair
Value
ASC
820 Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measurements. It 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. The standard describes three levels of inputs that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include
quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities
that are not active; and model-driven valuations whose inputs are observable or whose significant value drivers are observable.
Valuations may be obtained from, or corroborated by, third-party pricing services.
Level
3: Unobservable inputs to measure fair value of assets and liabilities for which there is little, if any market activity at the
measurement date, using reasonable inputs and assumptions based upon the best information at the time, to the extent that inputs
are available without undue cost and effort.
Our
financial instruments consist of cash and cash equivalents, accounts payable, accrued liabilities and convertible notes payable,
and derivative liability. It is management’s opinion that we are not exposed to significant interest, currency or credit
risks arising from these financial instruments. With the exception of the derivative liability, the fair value of these financial
instruments approximates their carrying values based on their short maturities or for long-term debt based on borrowing rates
currently available to us for loans with similar terms and maturities. Gains and losses recognized on changes in estimated fair
value of the derivative liability are reported in other income (expense) as gain (loss) on change in fair value.
NOTE
4 – Related party transactions
We
entered into the following transactions with related parties during the nine months ended October 31, 2017:
We
rented an office from Jim Briscoe, our Chairman of the Board, CEO and CFO, on a month-to-month basis for $522 per month. The total
rent expense related to this office was $4,698 for the nine months ended October 31, 2017. No amount was due as of October 31,
2017.
At
October 31, 2017, we had a balance of accrued unpaid wages of $652,949 to Jim Briscoe, our Chairman of the Board, CEO, CFO and
President. Additionally, we had a balance of accrued unpaid wages of $15,625 to a former President.
We
have an option to explore 26 standard federal lode mining claims at the East Silverbell project and 29 standard federal lode mining
claims at the Walnut Creek project from JABA US Inc., (“JABA”) an Arizona corporation in which two of our directors
are owners. We are required to pay annual rentals to maintain the claims in good standing. We paid $8,525 in rental fees to maintain
these mineral claims during the nine months ended October 31, 2017. The original option agreement was for the period from April
11, 2008 through January 1, 2011 and was extended through June 1, 2013, June 1, 2015 and then to June 1, 2021. This may be further
extended in five year periods or increments in the future by any JABA director.
At
October 31, 2017, we had accounts payable to JABA of $34,798, which is reflected as accounts payable to related party on the accompanying
consolidated balance sheets.
NOTE
5 – Stock options
Qualified
and Non-qualified incentive stock options to employees and directors outstanding at October 31, 2017 are as follows:
|
|
|
|
|
Weighted
average
|
|
|
|
Number
of
|
|
|
exercise
|
|
|
|
options
|
|
|
price
per share
|
|
Outstanding,
January 31, 2017
|
|
|
97,392,450
|
|
|
$
|
0.034
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
(7,537,500
|
)
|
|
|
0.042
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding,
October 31, 2017
|
|
|
89,854,950
|
|
|
$
|
0.034
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
October 31, 2017
|
|
|
89,854,950
|
|
|
$
|
0.034
|
|
These
options had a weighted average remaining life of 3.81 years and an aggregate intrinsic value of $0 as of October 31, 2017.
Non-qualified
stock options to non-employee consultants and vendors outstanding at October 31, 2017 are as follows:
|
|
|
|
|
Weighted
average
|
|
|
|
Number
of
|
|
|
exercise
|
|
|
|
options
|
|
|
price
per share
|
|
Outstanding,
January 31, 2017
|
|
|
1,453,800
|
|
|
$
|
0.017
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(828,800
|
)
|
|
|
0.003
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding,
October 31, 2017
|
|
|
625,000
|
|
|
$
|
0.036
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
October 31, 2017
|
|
|
625,000
|
|
|
$
|
0.036
|
|
These
options had a weighted average remaining life of 3.08 years and an aggregate intrinsic value of $0 as of October 31, 2017.
During
the nine months ended October 31, 2017, we recognized $6,991 of compensation expense related to incentive and non-qualified stock
options granted to officers, employees and consultants.
NOTE
6 – Warrants
As
of October 31, 2017, there were 141,414,489 whole share purchase warrants outstanding and exercisable. The warrants have a weighted
average remaining life of 2.78 years and a weighted average exercise price of $0.006 per whole warrant for one common share. The
warrants had an aggregate intrinsic value of $0 as of October 31, 2017.
Whole
share purchase warrants outstanding at October 31, 2017 are as follows:
|
|
Number
of
|
|
|
Weighted
average
|
|
|
|
whole
share
|
|
|
exercise
|
|
|
|
purchase
warrants
|
|
|
price
per share
|
|
Outstanding,
January 31, 2017
|
|
|
130,682,120
|
|
|
$
|
0.006
|
|
Issued
|
|
|
12,482,369
|
|
|
|
0.003
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
(1,750,000
|
)
|
|
|
0.003
|
|
Outstanding,
October 31, 2017
|
|
|
141,414,489
|
|
|
$
|
0.006
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
October 31, 2017
|
|
|
141,414,489
|
|
|
$
|
0.006
|
|
During
the nine months ended October 31, 2017, the Company issued 12,482,369 warrants to investors at exercise prices ranging from $0.0028
to $0.0053 with a three-year term. The warrants were issued with common stock (one-half warrant for each common share purchased)
and there is no additional accounting for these investor warrants.
During
the nine months ended October 31, 2017, the Company issued 1,750,000 shares to an investor for the exercise of warrants at a price
of $0.0028 per share for cash proceeds of $4,900.
NOTE
7 – Derivative Liabilities
The
embedded conversion feature in the convertible debt instruments that the Company issued beginning in December 2016 (See Note 8),
and became convertible during 2017, qualified it as a derivative instrument since the number of shares issuable under the note
is indeterminate based on guidance in FASB ASC 815, Derivatives and Hedging.
The
valuation of the derivative liability attached to the convertible debt was arrived at through the use of a Monte Carlo model that
values the derivative liability within the notes. The technique applied generates a large number of possible (but random) price
paths for the underlying (or underlyings) via simulation, and then calculates the associated payment value (cash, stock, or warrants)
of the derivative features. The price of the underlying common stock is modeled such that it follows a geometric Brownian motion
with constant drift, and elastic volatility (increasing as stock price decreases). The stock price is determined by a random sampling
from a normal distribution. Since the underlying random process is the same, for enough price paths, the value of the derivative
is derived from path dependent scenarios and outcomes. The features in the notes that were analyzed and incorporated into the
model included the conversion features with the reset provisions, the call/redemption/prepayment options, and the default provisions.
Based on these features, there are six primary events that can occur; payments are made in cash; payments are made with stock;
the note holder converts upon receiving a redemption notice; the note holder converts the note; the issuer redeems the note; or
the Company defaults on the note. The model simulates the underlying economic factors that influenced which of these events would
occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, conversion
price, etc.). Probabilities were assigned to each variable such as redemption likelihood, default likelihood, and timing and pricing
of reset events over the remaining term of the notes based on management projections. This led to a cash flow simulation over
the life of the note. A discounted cash flow for each simulation was completed, and it was compared to the discounted cash flow
of the note without the embedded features, thus determining a value for the derivative liability.
Key
inputs and assumptions used to value the convertible note when it became convertible and upon settlement were as follows:
|
●
|
The
stock projections are based on the historical volatilities for each date. These volatilities were in the 145% range. The stock
price projection was modeled such that it follows a geometric Brownian motion with constant drift and a constant volatility,
starting with the market stock price at each valuation date;
|
|
|
|
|
●
|
An
event of default would not occur during the remaining term of the note;
|
|
|
|
|
●
|
Conversion
of the notes to stock would be completed monthly after any holding period and would be limited based on: 5% of the last 6
months average trading volume and the ownership limit identified in the contract assuming the underlying number of common
shares increases at 1% per month. The effective discount was determined based on the historical trading history of the Company
based on the specific pricing mechanism in each note;
|
|
|
|
|
●
|
The
Company would not have funds available to redeem the notes during the remaining term of the convertible notes;
|
|
|
|
|
●
|
Discount
rates were based on risk free rates in effect based on the remaining term and date of each valuation and instrument.
|
Using
the results from the model, the Company recorded a derivative liability of $255,891 for outstanding warrants that were
tainted and a derivative liability of $213,685 for the fair value of the convertible feature included in the Company’s
convertible debt instruments for the nine months ended October 31, 2017. The derivative liability on the outstanding tainted
warrants was charged to additional paid in capital. The derivative liability recorded for the convertible feature created
a debt discount of $148,000 which is being amortized over the remaining term of the note using the effective interest rate
method, and a “day 1” derivative loss of $65,685 which is included in total (gains) losses on fair value change
of derivative liability in the consolidated statements of operations. Interest expense related to the amortization of this
debt discount for the nine months ended October 31, 2017 was $13,623. Additionally, $109,071 of debt discount
was charged to interest expense upon conversion of the underlying debt instrument. The remaining unamortized debt discount
related to the derivative liability was $25,306 as of October 31, 2017. The Company recorded the change in the fair value of the
derivative liability as a gain of $75,880 to reflect the value of the derivative liability for warrants and convertible
notes as $241,689 as of October 31, 2017. The Company also recorded a reclassification from derivative liability to equity of
$152,007 for the conversions of a portion of the Company’s convertible notes during the nine months ended October
31, 2017.
The
following table sets forth a reconciliation of changes in the fair value of the Company’s derivative liability:
|
|
Nine months ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
—
|
|
|
$
|
3,293
|
|
Total (gains) losses on fair value change of derivative liability
|
|
|
(10,195
|
)
|
|
|
184,793
|
|
Settlements
|
|
|
(152,007
|
)
|
|
|
(1,178,881
|
)
|
Additions
|
|
|
403,891
|
|
|
|
990,795
|
|
Ending balance
|
|
$
|
241,689
|
|
|
$
|
-
|
|
NOTE
8 – Convertible promissory notes
Following
is a summary of convertible promissory notes:
|
|
October
31, 2017
|
|
|
January
31, 2017
|
|
|
|
|
|
|
|
|
12%
convertible note payable issued December 2016, due December 2017
|
|
$
|
-
|
|
|
$
|
33,467
|
|
12%
convertible note payable issued February 2017, due February 2018
|
|
|
48,280
|
|
|
|
—
|
|
12%
convertible note payable issued April 2017, due January 2018
|
|
|
11,174
|
|
|
|
—
|
|
8%
convertible note payable issued June 2017, due June 2018
|
|
|
55,274
|
|
|
|
—
|
|
12%
convertible note payable issued July 2017, due April 2018
|
|
|
51,578
|
|
|
|
—
|
|
8%
convertible note payable issued September 2017, due September 2018
|
|
|
43,635
|
|
|
|
—
|
|
12%
convertible note payable issued October 2017, due October 2018
|
|
|
50,181
|
|
|
|
—
|
|
|
|
|
260,122
|
|
|
|
33,467
|
|
Less
debt discount
|
|
|
(35,383
|
)
|
|
|
(2,646
|
)
|
Less
current portion of convertible notes
|
|
|
(224,739
|
)
|
|
|
(30,821
|
)
|
Long-term
convertible notes payable
|
|
$
|
—
|
|
|
$
|
—
|
|
On
December 14, 2016, we entered into a convertible promissory note (the “December 2016 Note”) to Tangiers Investment
Group, LLC (“Tangiers”) for a principal sum of up to $110,000, bearing interest at 12% per annum. The consideration
is up to $100,000, which would produce an original issue discount of $10,000 if all the consideration is received. The lender
paid $30,000 pursuant to the terms of the December 2016 Note on December 19, 2016, which resulted in the Company recording a $3,000
original issue discount. The maturity date is one year from the effective date of each payment, as well as any unpaid interest
and other fees. The December 2016 Note may be convertible into shares of common stock of our company after 180 days of funding
at a conversion price of 62.5% of the volume weighted average price of the Company’s common stock during the five trading
days previous to the conversion. We may repay the December 2016 Note at any time before 150 days from the effective date of the
December 2016 Note, or prepay at 130% of the principal from 151 to 180 days, after which we may not make any further payments
on the December 2016 Note prior to the maturity date without written approval from the lender. As of January 31, 2017, we had
$33,467 of principal and interest outstanding for the December 2016 Note. On June 16, 2017, Tangiers converted this note in full
for 34,222,222 shares of the Company’s common stock. As of October 31, 2017, we had $0 of principal and interest outstanding
for the December 2016 Note.
On
February 2, 2017, the Company and Tangiers entered into Amendment #1 to the December 2016 Note (“Amendment #1”). Amendment
#1 provides that, on or before February 2, 2017, Tangiers would make a payment to the Company of $77,000, which includes a 10%
OID. The net proceeds of $70,000 were received on February 2, 2017. The maturity date is February 3, 2018. Also on February 2,
2017, the Company and Tangiers entered into Amendment #2 to the December 2016 Note (“Amendment #2”). Amendment #2
provides that the conversion price under the Note is equal to 60% of the lowest trading price of the Company’s common stock
during the 20 consecutive trading days prior to Tangier’s conversion election. The default percentages of 5% and 10% of
the discount of conversion price point remained the same other than reflecting the amended discount price. In addition, the provision
in the Note relating to a right of first refusal was removed by Amendment #2. During the nine months ended October 31, 2017, Tangiers
converted an aggregate of $35,000 of this note for 32,436,378 shares of the Company’s common stock. As of October 31, 2017,
we had $48,280 of principal and interest outstanding under this note.
On April 11, 2017, we received proceeds of
$48,000, net of a $2,000 fee, under a convertible promissory note dated April 10, 2017 (the “April 2017 Note”). The
total principal under the April 2017 Note is $50,000, bears interest at 12% per annum, is due on January 10, 2018, and is convertible
in shares of the Company’s common stock after 180 days at a conversion price with a 45% discount to the lowest weighted
average market price during the previous 20 trading days to the date of conversion. During the nine months ended October
31, 2017, the noteholder converted an aggregate of $42,000 of this note for 50,617,801 shares of the Company’s common stock.
As of October 31, 2017, we had $11,174 of principal and interest outstanding under the note.
On
June 20, 2017, we received proceeds of $50,000, net of a $3,000 fee, under a convertible note dated June 20, 2017 (the “June
2017 Note”). The total principal under the June 2017 Note is $53,000, bears interest at 8% per annum, is due on June 20,
2018, and is convertible in shares of the Company’s common stock after 180 days at a conversion price of 65% of the lowest
weighted average market price during the previous 10 trading days to the date of conversion. As of October 31, 2017, we had $55,274
of principal and interest outstanding.
On
July 27, 2017, we received proceeds of $48,000, net of a $2,000 fee, under a convertible note dated July 26, 2017 (the “July
2017 Note”). The total principal under the July 2017 Note is $50,000, bears interest at 12% per annum, is due on April 26,
2018, and is convertible in shares of the Company’s common stock after 180 days at a conversion price with a 45% discount
to the lowest weighted average market price during the previous 20 trading days to the date of conversion. As of October 31, 2017,
we had $51,578 of principal and interest outstanding.
On
September 15, 2017, we received proceeds of $40,000, net of a $3,000 fee, under a convertible note dated September 15, 2017 (the
“September 2017 Note”). The total principal under the September 2017 Note is $43,000, bears interest at 8% per annum,
is due on September 13, 2018, and is convertible in shares of the Company’s common stock after 180 days at a conversion
price of 65% of the lowest weighted average market price during the previous 10 trading days to the date of conversion. As of
October 31, 2017, we had $43,635 of principal and interest outstanding.
On
October 18, 2017, we received proceeds of $48,000, net of a $2,000 fee, under a convertible note dated October 18, 2017 (the “October
2017 Note”). The total principal under the October 2017 Note is $50,000, bears interest at 12% per annum, is due on October
18, 2018, and is convertible in shares of the Company’s common stock after 180 days at a conversion price with a 45% discount
to the lowest weighted average market price during the previous 20 trading days to the date of conversion. As of October 31, 2017,
we had $50,181 of principal and interest outstanding.
During
the nine months ended October 31, 2017 and 2016, the Company recorded debt discounts of $148,000 and $225,969, respectively,
due to the derivative liabilities, and original issue debt discounts of $19,000 and $7,800, respectively, due to the convertible
notes. The Company recorded amortization of these discounts of $134,263 and $240,050 for the nine months ended October
31, 2017 and 2016, respectively.
NOTE
9 – Stockholders’ deficit
Our
common shares are all of the same class, are voting and entitle stockholders to receive dividends as defined. Upon liquidation
or wind-up, stockholders are entitled to participate equally with respect to any distribution of net assets or any dividends that
may be declared.
On
July 15, 2015, the Company’s shareholders approved an amendment to the Company’s articles of incorporation to increase
the number of authorized common shares from 1,250,000,000 to 6,250,000,000.
Between
February 2014 and July 2014, pursuant to the investment agreement with KVM, KVM purchased 34,214,226 shares for $456,924, of which
$55,673 is still owed to the Company and is reflected as a stock subscription receivable as of October 31, 2017.
On
June 20, 2015, we entered into an investment agreement (the “Investment Agreement”) with Tangiers Investment Group,
LLC (the “Investor”), whereby the Investor has agreed to invest up to $8,000,000 to purchase shares of our common
stock. Subject to the terms and conditions of the Investment Agreement and a registration rights agreement, we may, in our sole
discretion, deliver a notice to the Investor which states the dollar amount which we intend to sell to the Investor on a certain
date. The amount that we shall be entitled to sell to Investor shall be equal to one hundred and fifty percent (150%) of the average
daily volume (U.S. market only) of the common stock for the ten (10) trading days prior to the applicable notice date so long
as such amount does not exceed an accumulative amount per month of $100,000. The minimum amount shall be equal to $5,000. In connection
with the Investment Agreement, we also entered into a registration rights agreement dated June 20, 2015, whereby we agreed to
file a Registration Statement on Form S-1 with the SEC within thirty (30) days of the date of the registration rights agreement
and to have the Registration Statement declared effective by the SEC within ninety (90) days after we have filed the Registration
Statement. We filed Form S-1 on July 2, 2015 and Form S-1 Amendment No. 1 on July 29, 2015, for registration of 100,000,000 shares
of the Company’s common stock under the Investment Agreement, which was declared effective by the SEC on August 5, 2015.
During the year ended January 31, 2016, the Company issued an aggregate of 100,000,000 shares of common stock for total proceeds
of $129,751 to Tangiers Investment Group, LLC under the Investment Agreement.
The
Company filed a registration statement on Form S-1 with the SEC on January 21, 2016 and Amendment No. 1 thereto on February 24,
2016, for registration of 350,000,000 shares of the Company’s common stock under the Investment Agreement dated June 20,
2015 with Tangiers Investment Group, LLC. The registration statement, as amended, was declared effective by the SEC on March 15,
2016. During the year ended January 31, 2017, the Company issued an aggregate of 110,098,238 shares of common stock for total
proceeds of $179,291 to Tangiers Investment Group, LLC under the Investment Agreement. During the nine months ended October 31,
2017, the Company issued an aggregate of 92,609,558 shares of common stock for total proceeds of $170,334 to Tangiers Investment
Group, LLC under the Investment Agreement. The Company filed a Post-Effective Amendment No. 2 to the registration statement with
the SEC on September 29, 2017, however is was withdrawn by the Company on November 20, 2017 in light of the fact that the Company’s
common stock is not quoted on either the OTCQB or OTC Bulletin Board marketplace. The Company intends to re-file a post-effective
amendment after the Company’s common stock is re-quoted on either the OTC Bulletin Board or OTCQB.
During
the nine months ended October 31, 2017, the Company received aggregate proceeds of $58,000 from investors to purchase a total
of 24,964,736 units. Each unit consists of one share of the Company’s common stock and one-half warrant to purchase one-half
equivalent share each of the Company’s common stock. The warrants have exercise prices ranging from $0.0028 to $0.0053 with
a three-year term.
During the nine months ended October 31, 2017,
the Company issued 117,276,401 shares for the conversion of $113,960 of convertible notes payable at exercise prices ranging from
$0.00072 to $0.00113.
During
the nine months ended October 31, 2017, the Company issued 1,750,000 shares to an investor for the exercise of warrants at a price
of $0.0028 per share for cash proceeds of $4,900.
During
the nine months ended October 31, 2017, the Company issued 999,480 shares for services with a fair value of $3,748. The Company
also issued 24,242,424 shares with a fair value of approximately $53,333 to settle accounts payable of $44,000. The Company recorded
a $9,333 loss on settlement of accounts payable for the excess of fair value of the stock issued over the accounts payable settled.
NOTE
10 – Commitments and contingencies
The
Company entered into a 24-month office lease at 5232 E Pima Street, Suite D, Tucson, Arizona, effective October 1, 2016 through
September 30, 2018, with a base rent of $2,100 per month through September 30, 2017 and then $2,163 per month through September
30, 2018.
NOTE
11 – Subsequent events
On
November 9, 2017, the Company issued 15,722,573 shares for the conversion of $11,242 of a convertible note at an exercise price
of $0.00072.
On
November 22, 2017, we received proceeds of $48,000, net of a $2,000 fee, under a convertible note dated November 20, 2017 (the
“November 2017 Note”). The total principal under the November 2017 Note is $50,000, bears interest at 12% per annum,
is due on November 20, 2018, and is convertible in shares of the Company’s common stock after 180 days at a conversion price
with a 45% discount to the lowest weighted average market price during the previous 20 trading days to the date of conversion.
On
December 7, 2017, the Company issued 25,641,026 shares for the conversion of $20,000 of a convertible note at an exercise price
of $0.00078.