NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – Basis of Presentation
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, 2018 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
April 30, 2018 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 months ended April 30, 2018
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.
|
|
|
|
|
Fair
value measurements at reporting date using:
|
|
Description
|
|
Fair
Value
|
|
|
Quoted
prices in
active markets
for
identical liabilities
(Level 1)
|
|
|
Significant
other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Warrant
and convertible note derivative liability at April 30, 2018
|
|
$
|
189,870
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
189,870
|
|
Warrant
and convertible note derivative liability at April 30, 2017
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
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 three months ended April 30, 2018:
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 $1,566 for the three months ended April 30, 2018. No amount was due as of April 30, 2018.
At
April 30, 2018, we had a balance of accrued unpaid wages of $684,949 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. James A. Briscoe, the Company’s Chief Executive Officer, Chief Financial Officer, President
and Chairman of the Board, controls JABA and the estate of Dr. J. M. Guilbert (deceased), a former director of the Company, holds
a small stock position, as well. We are required to pay annual rentals to maintain the claims in good standing. We paid $0 in
rental fees to maintain these mineral claims during the three months ended April 30, 2018
.
Fees are due September 1, 2018. 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
April 30, 2018, 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 April 30, 2018 are as follows:
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|
|
|
Weighted average
|
|
|
|
Number of
|
|
|
exercise
|
|
|
|
options
|
|
|
price per share
|
|
Outstanding, January 31, 2018
|
|
|
89,854,950
|
|
|
$
|
0.034
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding, April 30, 2018
|
|
|
89,854,950
|
|
|
$
|
0.034
|
|
|
|
|
|
|
|
|
|
|
Exercisable, April 30, 2018
|
|
|
89,854,950
|
|
|
$
|
0.034
|
|
These
options had a weighted average remaining life of 3.31 years and an aggregate intrinsic value of $0 as of April 30, 2018.
Non-qualified
stock options to non-employee consultants and vendors outstanding at April 30, 2018 are as follows:
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|
|
|
Weighted average
|
|
|
|
Number of
|
|
|
exercise
|
|
|
|
options
|
|
|
price per share
|
|
Outstanding, January 31, 2018
|
|
|
1,453,800
|
|
|
$
|
0.017
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding, April 30, 2018
|
|
|
1,453,800
|
|
|
$
|
0.017
|
|
|
|
|
|
|
|
|
|
|
Exercisable, April 30, 2018
|
|
|
1,453,800
|
|
|
$
|
0.017
|
|
These
options had a weighted average remaining life of 1.41 years and an aggregate intrinsic value of $0 as of April 30, 2018.
During
the three months ended April 30, 2018, we recognized $0 of compensation expense related to incentive and non-qualified stock options
granted to officers, employees and consultants.
NOTE
6 – Warrants
As
of April 30, 2018, there were 141,414,489 whole share purchase warrants outstanding and exercisable. The warrants have a weighted
average remaining life of 2.28 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 April 30, 2018.
Whole
share purchase warrants outstanding at April 30, 2018 are as follows:
|
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Number of
|
|
|
Weighted average
|
|
|
|
whole share
|
|
|
exercise
|
|
|
|
purchase warrants
|
|
|
price per share
|
|
Outstanding, January 31, 2018
|
|
|
141,414,489
|
|
|
$
|
0.006
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding, April 30, 2018
|
|
|
141,414,489
|
|
|
$
|
0.006
|
|
|
|
|
|
|
|
|
|
|
Exercisable, April 30, 2018
|
|
|
141,414,489
|
|
|
$
|
0.006
|
|
The
Company issued no warrants during the three months ended April 30, 2018.
NOTE
7 – Derivative Liabilities
The
embedded conversion feature in the convertible debt instruments that the Company issued (See Note 8), that became convertible
during the three months ended April 30, 2018, and the years ended January 31, 2018 and 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.
These convertible notes tainted all other equity linked instruments including outstanding warrants and fixed rate convertible
debt on the date that the instrument became convertible.
The
valuation of the derivative liability of the warrants was determined through the use of a Monte Carlo options model that values
the liability of the warrants based on a risk-neutral valuation where the price of the option is its discounted expected value.
The technique applied generates a large number of possible (but random) price paths for the underlying common stock via simulation,
and then calculates the associated exercise value (i.e. “payoff”) of the option for each path. These payoffs are then
averaged and discounted to a current valuation date resulting in the fair value of the option.
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:
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●
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The stock projections are based on the historical volatilities for each date. These volatilities were in
the
139% to 140%
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;
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|
|
|
●
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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;
|
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|
|
|
●
|
Discount
rates were based on risk free rates in effect based on the remaining term and date of each valuation and instrument.
|
|
|
|
|
●
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The
Holder would exercise the warrant at maturity if the stock price was above the exercise price;
|
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●
|
The
Holder would exercise the warrant after any holding period prior to maturity at target prices starting at 2 times the exercise
price for the Warrants or higher subject to monthly limits of: 5% of the last 6 months average trading volume increasing by 1%
per month and the ownership limit identified in the contract assuming the underlying number of common shares increases at 1% per
month.
|
Using the results from the model, the Company
recorded a derivative liability during the three months ended April 30, 2018 of $0 for newly granted and existing warrants (see
Note 6) that were tainted and a derivative liability of $103,963 for the fair value of the convertible feature included
in the Company’s convertible debt instruments. The derivative liability recorded for the convertible feature created a “day
1” derivative loss of $13,616 and a debt discount of $90,347 which is being amortized over the remaining term of the note
using the effective interest rate method and is classified as convertible debt on the balance sheet. Interest expense related
to the amortization of this debt discount for the three months ended April 30, 2018, was $80,046. Additionally, $0 of original
issuance cost was charged to interest expense as a result of the conversion of a portion of the underlying debt instrument (See
Note 8). The remaining unamortized debt discount related to the derivative liability was $10,758 as of April 30, 2018.
The Company recorded the change in the fair value of the derivative liability as a gain of $2,735 to reflect the value of the
derivative liability for warrants and convertible notes as of April 30, 2018. The Company also recorded a reclassification from
derivative liability to equity of $0 for warrants becoming untainted and $80,044 due to the conversions of a portion of the Company’s
convertible notes.
Since
no convertible note was convertible as of April 30, 2017 or January 31, 2017, no derivative liability remained as of that date.
The
following table sets forth a reconciliation of changes in the fair value of the Company’s derivative liability:
|
|
Three months ended
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
168,686
|
|
|
$
|
—
|
|
Total (gains) losses on fair value change of derivative liability
|
|
|
10,881
|
|
|
|
—
|
|
Settlements
|
|
|
(80,044
|
)
|
|
|
—
|
|
Additions recognized as debt discount
|
|
|
90,347
|
|
|
|
—
|
|
Ending balance
|
|
$
|
189,870
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
NOTE
8 – Convertible promissory notes
Following
is a summary of convertible promissory notes:
|
|
April 30, 2018
|
|
|
January 31, 2018
|
|
|
|
|
|
|
|
|
12% convertible note payable issued July 2017, due April 2018
|
|
$
|
-
|
|
|
$
|
23,090
|
|
8% convertible note payable issued September 2017, due September 2018
|
|
|
-
|
|
|
|
44,906
|
|
12% convertible note payable issued October 2017, due October 2018
|
|
|
34,849
|
|
|
|
51,693
|
|
12% convertible note payable issued November 2017, due November 2018
|
|
|
53,830
|
|
|
|
51,184
|
|
12% convertible note payable issued December 2017, due December 2018
|
|
|
52,844
|
|
|
|
50,691
|
|
12% convertible note payable issued January 2018, due January 2019
|
|
|
51,759
|
|
|
|
50,148
|
|
12% convertible note payable issued February 2018, due November 2018
|
|
|
53,723
|
|
|
|
-
|
|
12% convertible note payable issued March 2018, due January 2019
|
|
|
53,384
|
|
|
|
-
|
|
12% convertible note payable issued April 2018, due February 2019
|
|
|
43,054
|
|
|
|
-
|
|
|
|
|
343,443
|
|
|
|
271,712
|
|
Less debt discount
|
|
|
(23,509
|
)
|
|
|
(9,716
|
)
|
Less current portion of convertible notes
|
|
|
(319,934
|
)
|
|
|
(261,996
|
)
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
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. During the year ended
January 31, 2018, the noteholder converted an aggregate of $30,000 of this note for 45,454,544 shares of the Company’s common
stock. As of January 31, 2018, we had $23,090 of principal and interest outstanding under this note. During the three months ended
April 30, 2018, the noteholder converted an aggregate of $23,339 of this note for 38,576,247 shares of the Company’s common
stock, leaving a balance of $0 as of April 30, 2018.
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
January 31, 2018, we had $44,906 of principal and interest outstanding. During the three months ended April 30, 2018, the noteholder
converted an aggregate of $44,720 of this note for 61,825,722 shares of the Company’s common stock, leaving a balance
of $0 as of April 30, 2018.
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 January 31, 2018,
we had $51,693 of principal and interest outstanding. During the three months ended April 30, 2018, the noteholder converted an
aggregate of $20,000 of this note for 36,363,636 shares of the Company’s common stock, leaving a balance of $34,849 as of
April 30, 2018.
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 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. As of April 30, 2018,
we had $53,830 of principal and interest outstanding.
On
December 21, 2017, we received proceeds of $48,000, net of a $2,000 fee, under a convertible note dated December 20, 2017 (the
“December 2017 Note”). The total principal under the note is $50,000, bears interest at 12% per annum, is due on December
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. As of April 30, 2018,
we had $52,844 of principal and interest outstanding.
On
January 25, 2018, we received proceeds of $48,000, net of a $2,000 fee, under a convertible note dated January 22, 2018 (the “January
2018 Note”). The total principal under the note is $50,000, bears interest at 12% per annum, is due on January 22, 2019,
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 April 30, 2018, we had
$51,759 of principal and interest outstanding.
On February 23, 2018, we received proceeds
of $50,000 from the issuance of a convertible note dated February 23, 2018 (the “February 2018 Note”). The note bears
interest at 8%, includes OID of $3,000, matures on November 30, 2018, and is convertible after 180 days into shares of the Company’s
common stock at a price of 65% of the average of the lowest 5 weighted average market prices of the Company’s common
stock during the 10 trading days prior to conversion. As of April 30, 2018, we had $53,723 of principal and interest outstanding.
On March 26, 2018, we received proceeds of
$50,000 from the issuance of a convertible note dated March 26, 2018 (the “March 2018 Note”). The note bears interest
at 8%, includes OID of $3,000, matures on January 15, 2019, and is convertible after 180 days into shares of the Company’s
common stock at a price of 65% of the average of the lowest 5 weighted average market prices of the Company’s common
stock during the 10 trading days prior to conversion. As of April 30, 2018, we had $53,384 of principal and interest outstanding.
On April 25, 2018, we received proceeds
of $40,000 from the issuance of a convertible note dated April 25, 2018 (the “April 2018 Note”). The note bears interest
at 8%, includes OID of $3,000, matures on February 15, 2019, and is convertible after 180 days into shares of the Company’s
common stock at a price of 65% of the average of the lowest 5 weighted average market price of the Company’s common
stock during the 10 trading days prior to conversion. As of April 30, 2018, we had $43,054 of principal and interest outstanding.
During
the three months ended April 30, 2018 and 2017, the Company recorded debt discounts of $90,347 and $0, respectively, due to the
derivative liabilities, and original issue debt discounts of $9,000 and $9,000, respectively, due to the convertible notes. The
Company recorded amortization of these discounts of $85,554 and $2,527 for the three months ended April 30, 2018 and 2017,
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.
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 January 31, 2018. During the three months ended April 30, 2018, the
Company determined that this receivable was impaired and reduced the balance to $0, resulting in a loss of $55,673.
During
the three months ended April 30, 2018, the Company issued a total of 136,765,605 shares of our common stock for conversions of
$88,059 of convertible notes payable at exercise prices ranging from $0.0006 to $0.0007.
As
of April 30, 2018, the Company was in the process of negotiating an agreement to settle a liability for investor relation
services with a consultant amounting to $213,000 in exchange for approximately 30 million shares of the Company’s
common stock.
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
June 1, 2018, we received proceeds of $40,000 from the issuance of a convertible note dated May 29, 2018. The note bears interest
at 8%, includes OID of $3,000, matures on March 15, 2019 , and is convertible after 180 days into shares of the Company’s
common stock at a price of 65% of the average of the lowest 5 weighted average market prices of the Company’s
common stock during the 10 trading days prior to conversion