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, 2020 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, 2020 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, 2020
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, 2020
|
|
$
|
134,922
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
134,922
|
|
Warrant and convertible note derivative liability at January 31, 2020
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Our
financial instruments consist of cash and cash equivalents, prepaid expenses, accounts payable, accrued liabilities, notes
payable, 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 of derivative liability.
NOTE
4 – Related party transactions
Our
CEO, Brett Gross, was elected as President and Chief Executive Officer on December 7, 2018 and received no compensation for these
services during the three months ended April 30, 2020.
At
April 30 and January 31, 2020, we had accounts payable to JABA (controlled by James Briscoe) of $34,798, which is reflected
as accounts payable to related parties on the accompanying consolidated balance sheets.
At
April 30 and January 31, 2020, we had a balance of $13,325 due to the spouse of James Briscoe.
At
April 30 and January 31, 2020, we had an aggregate balance due of approximately $167,000 on credit cards guaranteed by
James Briscoe reflected in accounts payable and accrued liabilities on the accompanying consolidated balance sheets.
At
April 30 and January 31, 2020, we had a balance of accrued unpaid wages of $759,949 to James Briscoe, our former Chairman
of the Board, CEO, CFO and President. Additionally, we had a balance of accrued unpaid wages of $15,625 to a former President
and $36,137 to Patricia Madaris, CFO.
On January 11, 2019, we discontinued renting
an office month-to-month from James Briscoe, a director who resigned on September 23, 2019. An amount of $2,610 of rent was unpaid
as of April 30 and January 31, 2020.
During
the three months ended April 30, 2020, our CEO, Brett Gross, made various payments on behalf of the Company totaling $30,690,
and advanced the Company $10,000 in cash, all of which are reflected as advances from related party on the accompanying consolidated
balance sheet. The total advances were $142,321 and $101,631 as of April 30 and January 31, 2020, respectively,
bear no interest and have no specified repayment date.
During
the three months ended April 30, 2020, the Company received proceeds of $55,000 from a director under a promissory note extended
with interest at 10%. Total maturities under this note and a note to another director are $214,170 due October 31, 2020. Additionally,
the Company has a note payable of $10,000 from James Briscoe, under a promissory note dated September 17, 2018, which matured
and became past due at September 17, 2019 with interest at 10%. As of April 30 and January 31, 2020,
the total balance of all related party notes was $225,786 and $166,560, respectively, which includes accrued interest of
$19,054 and $14,828, respectively.
NOTE
5 – Stock options
Qualified
and Non-qualified incentive stock options outstanding at April 30, 2020 are as follows:
|
|
|
|
|
Weighted
average
|
|
|
|
Number of
|
|
|
exercise
|
|
|
|
options
|
|
|
price per share
|
|
Outstanding, January 31, 2020
|
|
|
88,500,000
|
|
|
$
|
0.012
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding, April 30, 2020
|
|
|
88,500,000
|
|
|
$
|
0.012
|
|
|
|
|
|
|
|
|
|
|
Exercisable, April 30, 2020
|
|
|
88,500,000
|
|
|
$
|
0.012
|
|
These
options had a weighted average remaining life of 6.96 years and an aggregate intrinsic value of $0 as of April 30, 2020.
During
the three months ended April 30, 2020 and 2019, we recognized $0 of compensation expense related to stock options.
NOTE
6 – Warrants
As
of April 30, 2020, there were 200,082,809 whole share purchase warrants outstanding and exercisable. The warrants have a weighted
average remaining life of 2.0 years and a weighted average exercise price of $0.004 per whole warrant for one common share. The
warrants had an aggregate intrinsic value of $0 as of April 30, 2020.
Stock
warrants outstanding at April 30, 2020 are as follows:
|
|
Number of
|
|
|
Weighted
|
|
|
|
whole share
|
|
|
average
|
|
|
|
purchase
warrants
|
|
|
exercise
price per share
|
|
Outstanding, January 31, 2020
|
|
|
186,582,809
|
|
|
$
|
0.005
|
|
Issued
|
|
|
13,500,000
|
|
|
|
0.001
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding, April 30, 2020
|
|
|
200,082,809
|
|
|
$
|
0.004
|
|
|
|
|
|
|
|
|
|
|
Exercisable, April 30, 2020
|
|
|
200,082,809
|
|
|
$
|
0.004
|
|
During
the three months ended April 30, 2020, the Company issued 13,500,000 warrants to investors as part of their purchase of common
stock. The warrants have a three-year term and are exercisable at any time at exercise prices ranging from $0.0008 to $0.0011.
Effective
May 27, 2020, the Company extended the due date of all warrants expiring during the 12 months ending December 31, 2020, totaling
22,532,348 warrants, for an additional three years, including 4,875,000 warrants previously set to expire in January 2020. There
was no expense related to the extension of these warrants since these were held by investors.
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, 2020, 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, and warrants upon tainting,
were as follows:
|
●
|
The
stock projections are based on the historical volatilities for each date. These volatilities were in the 238.8% to 257.8%
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.
|
|
|
|
|
●
|
The
Holder would exercise the warrant at maturity if the stock price was above the exercise price;
|
|
|
|
|
●
|
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, 2020 of $189,472
for newly granted and existing warrants (see Note 6) that were tainted and a derivative liability of $158,592 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 $51,592 and a debt discount of $107,000 that was amortized
over the remaining term of the note using the effective interest rate method. Interest expense related to the amortization of
this debt discount for the three months ended April 30, 2020, was $90,214. The remaining unamortized debt discount related to
the derivative liability was $16,786 as of April 30, 2020.
During
the three months ended April 30, 2020, the Company recorded a reclassification from derivative liability to equity of $0 for
warrants becoming untainted and $106,514 due to the conversions of a portion of the Company’s convertible notes. The Company
also recorded the change in the fair value of the derivative liability as a gain of $55,036 to reflect the value of the derivative
liability for warrants and convertible notes as of April 30, 2020. During the three months ended April 30, 2019, the Company recorded
a reclassification from derivative liability to equity of $40,905 for warrants becoming untainted and $22,213 due to the conversions
of a portion of the Company’s convertible notes. The Company recorded the change in the fair value of the derivative liability
as a loss of $4,462 to reflect the value of the derivative liability for warrants and convertible notes as of April 30, 2019.
The Company did not have a derivative liability as of April 30, 2019 since none of the outstanding notes remained convertible
during the period and consequently, the outstanding warrants were no longer tainted.
The
following table sets forth a reconciliation of changes in the fair value of the Company’s derivative liability:
|
|
Three Months Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
-
|
|
|
$
|
58,656
|
|
Total (gain) loss
|
|
|
(55,036
|
)
|
|
|
4,462
|
|
Settlements
|
|
|
(106,514
|
)
|
|
|
(63,118
|
)
|
Additions recognized as debt discount
|
|
|
107,000
|
|
|
|
-
|
|
Additions due to tainted warrants
|
|
|
189,472
|
|
|
|
-
|
|
Ending balance
|
|
$
|
134,922
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized (gain) loss included in earnings relating to derivatives as of April 30, 2020 and 2019
|
|
$
|
(55,036
|
)
|
|
$
|
4,462
|
|
NOTE
8 – Convertible promissory notes and note payable
Following
is a summary of convertible promissory notes:
|
|
April 30, 2020
|
|
|
January 31, 2020
|
|
|
|
|
|
|
|
|
8% convertible note payable issued August 2019, due May 2020
|
|
$
|
-
|
|
|
$
|
79,886
|
|
8% convertible note payable issued October 2019, due August 2020
|
|
|
23,327
|
|
|
|
48,347
|
|
8% convertible note payable issued January 2020, due November 2020
|
|
|
40,451
|
|
|
|
39,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,778
|
|
|
|
167,868
|
|
Less debt discount
|
|
|
(23,796
|
)
|
|
|
(15,364
|
)
|
Less current portion of convertible notes
|
|
|
(39,982
|
)
|
|
|
(152,504
|
)
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
On
August 15, 2019, we received net proceeds of $67,000 from the issuance of a convertible note dated August 13, 2019 (the “August
2019 Note”). The note bears interest at 8%, includes OID of $10,000, matures on May 30, 2020, and is convertible after 180
days into shares of the Company’s common stock at a price of 75% 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. During the three months ended April
30, 2020, the noteholder converted a total of $79,800 of the note in for 136,375,071 shares of the Company’s common stock,
leaving a balance of $0 as of April 30, 2020.
On
October 25, 2019, we received net proceeds of $40,000 from the issuance of a convertible note dated October 22, 2019 (the “October
2019 Note”). The note bears interest at 8%, includes OID of $7,300, matures on August 15, 2020, and is convertible after
180 days into shares of the Company’s common stock at a price of 75% 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. During the three months ended April
30, 2020, the noteholder converted a total of $27,000 of the note in for 58,865,248 shares of the Company’s common stock,
leaving a balance of $23,327 as of April 30, 2020.
On
January 30, 2020, we received net proceeds of $33,000 from the issuance of a convertible note dated January 27, 2020 (the “January
2020 Note”). The note bears interest at 8%, includes OID of $3,600 and legal fees of $3,000, matures on November 15, 2020,
and is convertible after 180 days into shares of the Company’s common stock at a price of 75% 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. Total balance
under the note was $40,451 as of April 30, 2020.
During
the three months ended April 30, 2020 and 2019, the Company recorded debt discounts of $107,000 and $0, respectively, due to the
derivative liabilities, and original issue debt discounts of $0 and $3,000, respectively, due to the convertible notes. The Company
recorded amortization of these discounts of $98,568 and $21,696 for the three months ended April 30, 2020 and 2019, 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.
During
the three months ended April 30, 2020, the Company issued a total of 195,240,319 shares of our common stock for conversions of
$106,800 of convertible notes payable at an exercise prices ranging from of $0.00045 to $0.00072.
During
the three months ended April 30, 2020, the Company issued a total of 27,000,000 shares of its common stock and 13,500,000 warrants
to two investors for proceeds of $20,599, or $0.0006 to $0.0008 per share. The warrants have a three-year term and are exercisable
at any time at an exercise price of $0.0008 to $0.0011 per share.
NOTE
10 – Commitments and contingencies
Legal
Matter
On
August 22, 2019 (and amended on December 23, 2019), the Company filed a complaint with the Superior Court of Arizona (Case No.
C20194139), demanding the titles and possession of certain vehicles and equipment of the Company from our former CEO, as well
as seeking recovery of damages from the former CEO in an amount of not less than $50,000. None of the vehicles and equipment,
individually or in total, have any material net book value (being fully depreciated) as of April 30 or January 31, 2020. The matter
is ongoing as of the date of this filing.
On
February 18, 2020, our former CEO and his spouse (the “Counterclaimants”) filed a First Amended Answer: First
Amended Complaint and Counterclaim with the Superior Court of Arizona seeking dismissal of the Company’s complaint and reimbursement
of Counterclaimants’ attorney fees incurred related to the matter. Additionally,
the counterclaim alleges breach of contract by the Company and requests reimbursement of amounts loaned to the Company by our
former CEO and his spouse, along with reimbursement of attorney fees. The Company believes these counterclaims are without
merit and will aggressively defend them, and believes no unfavorable outcome or material effect on our consolidated financial
statements will result.
NOTE
11 – Subsequent events
In
May 2020, a noteholder converted a total of $22,020 of the October 2019 Note for 48,933,333 shares of the Company’s common
stock at a price of $0.00045 per share.
On May 5, 2020, the Company received
loan proceeds of $30,387
under the SBA’s Paycheck Protection
Program (“PPP”). The PPP loan, dated May 5, 2020, bears interest at 1% and is due in 18 monthly installments
of $1,710 beginning December 1, 2020. Under the loan terms, the Company may apply (and plans to apply) for forgiveness within
60 days from the note date. On May 5, 2020, the Company also received proceeds of $3,000 under the SBA’s Economic Injury
Disaster Loan program (“EIDL”) which the Company believes will not require repayment under the terms.