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, 2016 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, 2016 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, 2016
are not necessarily indicative of the results to be expected for the full year.
Certain
amounts in the prior-year financial statements have been reclassified for comparative purposes to conform with the presentation
in the current-year financial statements
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 condensed 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.
As
of April 30, 2016 the significant inputs to the Company’s derivative liability calculation were Level 3 inputs.
The
following schedule summarizes the valuation of financial instruments at fair value in the balance sheets as of April 30, 2016
and January 31, 2016:
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Fair value measurements at reporting date using:
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Quoted prices
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|
|
|
|
|
|
|
|
|
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in active
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|
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Significant
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|
|
|
|
|
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markets for
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other
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Significant
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|
|
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identical
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observable
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unobservable
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liabilities
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inputs
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inputs
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Description
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Fair Value
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(Level 1)
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(Level 2)
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(Level 3)
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Warrant and convertible note derivative liability at April 30, 2016
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$
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6,586
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-
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-
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$
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6,586
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Warrant and convertible note derivative liability at January 31, 2016
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$
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3,293
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-
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-
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$
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3,293
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|
Our financial instruments consist of
cash and cash equivalents, accounts payable, accrued liabilities, convertible notes payable, notes payable, and warrant 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 warrant 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, 2016:
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, 2016, with $2,510 due and reflected in accounts
payable as of April 30, 2016.
At
April 30, 2016 we had a balance of accrued unpaid wages of $507,203 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.
On
May 31, 2016, the Company extended the expiration date of all 93,887,870 warrants issued between May 1, 2013 and May 1, 2016 for
an additional three years at their original exercise prices ranging from $0.0021 to $0.0324. These warrants included 43,156,160
warrants purchased by officers and directors at their original exercise prices ranging from $0.0021 to $0.0207.
We have an option to explore 26 standard
federal lode mining claims at the East Silver Bell project and 29 standard federal lode mining claims at the Walnut Creek project
from JABA US Inc., 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 no rental fees to maintain the mineral claims during the three months ended April 30, 2016.
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 now to June 1, 2021. This may additionally be extended in five year periods or increments in the future by any
JABA director.
NOTE
5 – Warrants
As of April 30, 2016, there were 96,387,870
whole share purchase warrants outstanding and exercisable. The warrants have a weighted average remaining life of 4.55 years and
a weighted average exercise price of $0.007 per whole warrant for one common share. The warrants had an aggregate intrinsic value
of $24,191 as of April 30, 2016.
Whole
share purchase warrants outstanding at April 30, 2016 are as follows:
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Number of
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Weighted average
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whole share
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exercise
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purchase warrants
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price per
share
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Outstanding, January 31, 2016
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98,731,285
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$
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0.008
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Issued
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2,631,579
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0.003
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Expired
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(4,974,994
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)
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0.017
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Exercised
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-
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-
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Outstanding, April 30, 2016
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96,387,870
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$
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0.007
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|
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Exercisable, April 30, 2016
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96,387,870
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$
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0.007
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During
the three months ended April 30, 2016, the Company issued 2,631,579 warrants to an investor at an exercise price of $0.0027 with
a three year term. The warrants were issued with common stock (one warrant for each common share purchased) and there is no additional
accounting for these investor warrants.
On
May 31, 2016, the Company extended the expiration date of all 93,887,870 warrants issued between May 1, 2013 and May 1, 2016 for
an additional three years, at their original exercise prices ranging from $0.0021 to $0.0324. These warrants are held by investors,
including officers and directors of the Company, and third-party service providers. On April 30, 2016, the Company recognized
a total of $540 of expense related to the extension of warrants held by third-party service providers. The extension to warrants
held by investors did not result in additional expense.
NOTE
6 – Derivative Liabilities
The
embedded conversion feature in the convertible debt instruments that the Company issued beginning in August 2013 (See Note 7),
and became convertible beginning in February 2014, 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. This convertible note 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 notes and warrants upon issuance or tainting and also as of April 30, 2016:
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●
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The
stock projections are based on the historical volatilities for each date. These ranged in the 170.3% - 179.4% 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;
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●
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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;
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●
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The
Company would not have funds available to redeem the notes during the remaining term of the convertible notes;
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●
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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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●
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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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●
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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.
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●
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For
the warrants with reset features, the Company assumed it would issue equity linked instruments from April 30, 2016 through
April 30, 2017 at 70% of market.
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Using
the results from the model, the Company recorded a derivative liability of $4,540 for outstanding warrants and a derivative liability
of $62,160 for the fair value of the convertible feature included in the Company’s convertible debt instruments for the
three months ended April 30, 2016. The derivative liability recorded for the convertible feature created a debt discount of $62,160
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, 2016, was $0. Additionally, $62,160 of debt discount was charged to interest expense as a result of the conversion of a portion
of the underlying debt instrument. The remaining unamortized debt discount related to the derivative liability was $0 as of April
30, 2016. The Company recorded the change in the fair value of the derivative liability as a loss of $5,512 to reflect the value
of the derivative liability for warrants and convertible notes as $6,586 as of April 30, 2016. The Company also recorded a reclassification
from derivative liability to equity of $68,919 for the conversions of a portion of the Company’s convertible notes.
The
following table sets forth a reconciliation of changes in the fair value of the Company’s derivative liability:
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Three months ended
April 30,
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2016
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2015
|
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Beginning balance
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$
|
3,293
|
|
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$
|
216,705
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Total (gains) losses
|
|
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5,512
|
|
|
|
(73,510
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)
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Settlements
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|
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(64,379
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)
|
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|
(455,301
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)
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Additions
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62,160
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|
|
|
473,618
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Ending balance
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$
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6,586
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$
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161,512
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Change in unrealized gains (losses) included in earnings relating to derivatives still held as of April 30, 2016 and 2015
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$
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(5,512
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)
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$
|
(73,510
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)
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NOTE
7 – Convertible promissory notes
Following
is a summary of convertible promissory notes:
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April 30,
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January 31,
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2016
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2016
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12% convertible note payable issued August 2013, due in August 2016
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$
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-
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$
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62,160
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12% convertible note payable issued November 2015, due November 2017
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116,660
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55,000
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12% convertible note payable issued December 2015, due September 2016
|
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52,042
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50,542
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168,702
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167,702
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Less debt discount
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(9,025
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)
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(8,470
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)
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Less current portion of convertible notes
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(51,489
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)
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(108,670
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)
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Long-term convertible notes payable
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$
|
108,188
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$
|
50,562
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In
August 2013, we entered into a promissory note (the “August 2013 Note”) for a principal sum of $555,000 plus accrued
and unpaid interest and any other fees. The consideration is up to $500,000, which would produce an original issue discount of
$55,000 if all the consideration is received. The lender paid $150,000 upon closing pursuant to the terms of the August 2013 Note.
The August 2013 Note has a maturity of one year from the delivery of each payment. The August 2013 Note may be convertible into
shares of common stock of our company at any time from 180 days after the date of each payment of consideration, at a conversion
price which is 70% of the average of the three lowest closing prices in the 20 trading days previous to the conversion. We may
repay the August 2013 Note at any time on or before 90 days from the effective date of the August 2013 Note with an interest rate
of 0%, after which we may not make any further payments on the August 2013 Note prior to the maturity date without written approval
from the lender. If we elect not to repay the August 2013 Note on or before 90 days from the effective date of the August 2013
Note, a one-time interest charge of 12% will be applied to the principal sum. We elected not to pay the $150,000 portion of the
August 2013 Note within 90 days from the effective date. After the $150,000 portion of the August 2013 Note became convertible,
the note holder elected to convert the principal and interest totaling $186,480 into 17,937,915 shares of the company’s
common stock during the months of February through May of 2014. On December 9, 2013, we received additional consideration of $75,000
pursuant to the terms of the August 2013 Note. We elected not to pay the $75,000 portion of the August 2013 Note within 90 days
from the effective date. In June, July and August 2014, the note holder converted principal and interest totaling $93,240 into
9,983,507 shares of the Company’s common stock. On June 24, 2014 and September 3, 2014, we received additional consideration
of $75,000 and $75,000, respectively, pursuant to the terms of the August 2013 Note. In December 2014 and January 2015, the note
holder converted principal and interest totaling $41,961 into 5,900,000 shares of the Company’s common stock. On February
25, 2015, we received additional consideration of $50,000 with $5,500 of original issue discount pursuant to the terms of the
August 2013 Note. On August 28, 2015, we received additional consideration of $50,000 with $5,500 of original issue discount pursuant
to the terms of the August 2013 Note. We elected not to repay the $50,000 portion of the August 2013 Note within 90 days from
the effective date. During the year ended January 31, 2016, the note holder converted principal and interest totaling $206,679
into 123,158,044 shares of the Company’s common stock. During the three months ended April 30, 2016, the note holder converted
principal and interest totaling $62,160 into 46,526,995 shares of the Company’s common stock. As of April 30, 2016, we had
$0 of principal and interest outstanding for the August 2013 Note.
On
November 2, 2015, we entered into a promissory note (the “November 2015 Note”) for a principal sum of up to $500,000.
The consideration is up to $450,000, which would produce an original issue discount of $50,000 if all the consideration is received.
The lender paid $50,000 upon closing pursuant to the terms of the November 2015 Note, which resulted in the Company recording
a $5,000 original issue discount. The maturity date is two years from the effective date of each payment, as well as any unpaid
interest and other fees. The November 2015 Note may be convertible into shares of common stock of our company at any time at a
conversion price of 70% of the average of the three lowest closing prices in the 20 trading days previous to the conversion. We
may repay the November 2015 Note at any time on or before 90 days from the effective date of the November 2015 with an interest
rate of 0%, after which we may not make any further payments on the November 2015 Note prior to the maturity date without written
approval from the lender. If we elect not to repay the November 2015 Note on or before 90 days from the effective date of the
November 2015, a one-time interest charge of 12% will be applied to the principal sum. On March 23, 2016, the November 2015 Note
was amended to allow for conversion only after 180 days. On March 10, 2016, we received an additional $50,000 under the November
2015 Note, with a $5,000 original issue discount. As of April 30, 2016, we had of $116,660 of principal and interest outstanding
for the November 2015 Note.
On
December 29, 2015, the Company entered into a convertible promissory note (the “December 2015 Note”) for a principal
sum of $50,000, due on demand by the lender at any time on or after September 29, 2016, with interest at 12% per annum. The lender
paid $49,000 upon closing of the December 2015 Note, which included the lender retaining $1,000 as an original issue discount.
The December 2015 Note may be convertible into shares of the common stock of our company at any time after 180 days at a conversion
price of the lower of: (i) a 45% discount to the second lowest trading price during the previous ten trading days to the date
of a conversion notice; or (ii) a 45% discount to the second lowest trading price during the previous ten trading days before
the date the December 2015 Note was executed on December 29, 2015. As of April 30, 2016, we had of $52,042 of principal and interest
outstanding for the December 2015 Note.
During the three months ended April 30, 2016
and 2015, the Company recorded debt discounts of $62,160 and $331,323, respectively, due to the derivative liabilities, and original
issue debt discounts of $5,000 and $8,000, respectively, due to the convertible notes. The Company recorded amortization of these
discounts of $71,605 and $424,666 for the three months ended April 30, 2016 and 2015, respectively.
NOTE
8 – 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 April 30, 2016.
During the three months ended April 30, 2016,
$62,160 of the August 2013 Note was converted into 46,526,995 shares of the Company’s common stock. The conversions occurred
on multiple dates with conversion prices ranging from $0.00117 to $0.00152.
During
the three months ended April 30, 2016, the Company issued 2,631,579 units to an investor for total proceeds of $5,000. Each unit
consists of one share of the Company’s common stock and one warrant to purchase one share each of the Company’s common
stock. The warrants have an exercise price of $0.0027 and have a three year term.
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 three months ended April 30, 2016, the Company issued an aggregate of 14,456,414 shares of common stock for total
proceeds of $28,908 to Tangiers Investment Group, LLC under the Investment Agreement.
At April 30, 2016 there were 662,500 non-qualified
stock options outstanding to non-employee consultants and vendors with a weighted average exercise price of $0.075 per option;
of those options 662,500 are exercisable. At April 30, 2016 there were 87,341,250 incentive stock options outstanding with a weighted
average exercise price of $0.040 per option; of those options, 86,747,500 are exercisable with a weighted average exercise price
of $0.040.
During the three months ended April 30, 2016
we recognized $4,279 of compensation expense related to incentive and non-qualified stock options previously granted to officers,
employees and consultants.
NOTE
9 – Subsequent events
In May and June of 2016, $42,700 of the November
2015 Note was converted into 30,500,000 shares of the Company’s common stock.
In May and June of 2016, the Company issued
9,750,575 shares of common stock for $17,935 to Tangiers Investment Group, LLC under the Investment Agreement.
In May and June of 2016, the Company issued
an aggregate of 8,250,000 units to investors for aggregate proceeds of $33,000. Each unit consists of one share of the Company’s
common stock and one-half warrant to purchase one share each of the Company’s common stock. The warrants have an exercise
price of $0.004 and have a three year term.
In
May 2016, we received $28,000 pursuant to the terms of the November 2015 Note.