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, 2019 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, 2019 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 nine months ended October 31, 2019
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 October 31, 2019
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Warrant and convertible note derivative liability at January 31, 2019
|
|
$
|
58,656
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
58,656
|
|
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 of derivative
liability.
NOTE
4 – Related party transactions
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 October 31, 2019.
At
October 31, 2019, we had a balance of accrued unpaid wages of $759,949 to James Briscoe. We had a balance of accrued unpaid wages
of $36,137 to Patricia Madaris, CFO. Additionally, we had a balance of accrued unpaid wages of $15,625 to a former President.
We
had an option to explore 1 standard federal lode mining claim at the East Silverbell project and 29 standard federal lode mining
claims at the Walnut Creek project from JABA. James Briscoe, (a former director) 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 paid $4,650 in rental fees
to maintain these mineral claims until September 1, 2019 during the year ended January 31, 2019. The original option agreement
was for the period from April 11, 2008 through January 1, 2011. The Company did not retain or renew the option for JABA
and no further payments for rental fees for JABA were paid.
At
October 31, 2019, we had accounts payable to JABA of $34,798, which is reflected as accounts payable to related party on the accompanying
consolidated balance sheets.
At
October 31, 2019, we had a balance of $13,325 due to the spouse of James Briscoe, which is reflected as accounts payable to related
party on the accompanying consolidated balance sheets.
During
the nine months ended October 31, 2019, the Company received advances of $28,500 from two directors under two promissory with
interest at 10%. Total principal maturities under these two notes are $86,302 due October 31, 2020 (extended from October
31, 2019) and $35,430 due January 31, 2020. Additionally, the Company has a note payable of $10,000 from James Briscoe, under
a promissory note dated September 17, 2018, due September 17, 2019 with interest at 10%. The Company wishes
to extend this past due note as we have with notes with other directors until the Company has additional funding reserves. As
of October 31, 2019, the total balance of all related party notes was $143,178, which includes accrued interest of $11,446.
During
the nine months ended October 31, 2019, our CEO, Brett Gross, made various payments on behalf of the Company totaling $79,422,
reflected as advances from related party on the accompanying consolidated balance sheet. The advances bear no interest
and have no specified repayment date.
In
July and October 2019, the Company issued an aggregate of 60,000,000 Non-qualified stock options to four new directors for services.
The options vest immediately, have a 10-year term, an exercise price of $0.003, and resulted in share-based compensation expense
of $80,421 during the nine months ended October 31, 2019.
In
July 2019, the Company issued 43,215,212 shares of its common stock and 21,607,606 warrants to an investor, who also subsequently
became a director, for proceeds of $50,000, or $0.001157 per share. The warrants have a three-year term and are exercisable at
any time at an exercise price of $0.00162.
NOTE
5 – Stock options
Qualified
and Non-qualified incentive stock options to employees and directors outstanding at October 31, 2019 are as follows:
|
|
|
|
|
Weighted
average
|
|
|
|
Number of
|
|
|
exercise
|
|
|
|
options
|
|
|
price per share
|
|
Outstanding, January 31, 2019
|
|
|
89,754,950
|
|
|
$
|
0.033
|
|
Granted
|
|
|
60,000,000
|
|
|
|
0.003
|
|
Expired
|
|
|
(2,500,000
|
)
|
|
|
0.038
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding, October 31, 2019
|
|
|
147,254,950
|
|
|
$
|
0.021
|
|
|
|
|
|
|
|
|
|
|
Exercisable, October 31, 2019
|
|
|
147,254,950
|
|
|
$
|
0.021
|
|
These
options had a weighted average remaining life of 5.08 years and an aggregate intrinsic value of $0 as of October 31, 2019.
Non-qualified
stock options to non-employee consultants and vendors outstanding at October 31, 2019 are as follows:
|
|
|
|
|
Weighted
average
|
|
|
|
Number of
|
|
|
exercise
|
|
|
|
options
|
|
|
price per share
|
|
Outstanding, January 31, 2019
|
|
|
625,000
|
|
|
$
|
0.036
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding, October 31, 2019
|
|
|
625,000
|
|
|
$
|
0.036
|
|
|
|
|
|
|
|
|
|
|
Exercisable, October 31, 2019
|
|
|
625,000
|
|
|
$
|
0.036
|
|
These
options had a weighted average remaining life of 1.08 years and an aggregate intrinsic value of $0 as of October 31, 2019.
During
the nine months ended October 31, 2019, we recognized $80,421 of compensation expense related to incentive and non-qualified stock
options granted to officers using the Black-Scholes valuation method with the following assumptions: stock prices of $0.0014 to
$0.0015, exercise price of $0.003, expected term of 5 years, volatility of 180.7% to 181.3%, annual rate of dividends of 0%, and
discount rates of 1.59% to 1.85%.
NOTE
6 – Warrants
As
of October 31, 2019, there were 176,022,095 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 $0.005 per whole warrant for one common share.
The warrants had an aggregate intrinsic value of $0 as of October 31, 2019.
Stock
warrants outstanding at October 31, 2019 are as follows:
|
|
Number of
|
|
|
Weighted
|
|
|
|
whole share
|
|
|
average
|
|
|
|
purchase
warrants
|
|
|
exercise
price per share
|
|
Outstanding, January 31, 2019
|
|
|
154,414,489
|
|
|
$
|
0.005
|
|
Issued
|
|
|
21,607,606
|
|
|
|
0.002
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Outstanding, October 31, 2019
|
|
|
176,022,095
|
|
|
$
|
0.005
|
|
|
|
|
|
|
|
|
|
|
Exercisable, October 31, 2019
|
|
|
176,022,095
|
|
|
$
|
0.005
|
|
On
July 12, 2019, the Company issued 21,607,606 warrants to an investor, who also subsequently became a director of the Company,
as part of their purchase of common stock during the nine months ended October 31, 2019. The warrants have a three-year term and
are exercisable at any time at an exercise price of $0.00162.
Effective
May 1, 2019, the Company’s extended the due date of all warrants expiring during the three months ended July 31, 2019, totaling
33,001,166 warrants, for an additional three years. There was no expense related to the extension of these warrants since these
were held by investors.
Effective
December 5, 2019, the Company’s extended the due date of all warrants expiring during the five months ending December 31,
2019, totaling 19,499,882 warrants, for an additional three years. 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 nine months ended October 31, 2019, 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 166% to 270.9% 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 nine months ended October 31, 2019 of $146,630
for newly granted and existing warrants (see Note 6) that were tainted and a derivative liability of $64,016 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 $14,016 and a debt discount of $50,000 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 nine months ended October 31, 2019, was $50,000. The remaining unamortized debt discount related to
the derivative liability was $0 as the note was fully converted by October 31, 2019.
During
the nine months ended October 31, 2019, the Company recorded a reclassification from derivative liability to equity of $136,513
for warrants becoming untainted and $82,438 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 $36,335 to reflect the value of
the derivative liability for warrants and convertible notes as of October 31, 2019. The Company did not have a derivative liability
as of October 31, 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:
|
|
Nine months ended
October 31,
|
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
58,656
|
|
|
$
|
168,686
|
|
Total gain on fair value change of derivative liability
|
|
|
(36,335
|
)
|
|
|
(84,007
|
)
|
Settlements
|
|
|
(218,951
|
)
|
|
|
(374,241
|
)
|
Additions recognized as debt discount
|
|
|
50,000
|
|
|
|
373,589
|
|
Additions due to tainted warrants
|
|
|
146,630
|
|
|
|
-
|
|
Ending balance
|
|
$
|
-
|
|
|
$
|
84,027
|
|
NOTE
8 – Convertible promissory notes and note payable
Following
is a summary of convertible promissory notes:
|
|
October 31, 2019
|
|
|
January 31, 2019
|
|
|
|
|
|
|
|
|
12% convertible note payable issued July 2018, due July 2019
|
|
|
-
|
|
|
|
21,641
|
|
8% convertible note payable issued April 2019, due February 2020
|
|
|
-
|
|
|
|
-
|
|
8% convertible note payable issued May 2019, due March 2020
|
|
|
54,940
|
|
|
|
-
|
|
8% convertible note payable issued August 2019, due May 2020
|
|
|
78,333
|
|
|
|
-
|
|
8% convertible note payable issued October 2019, due August 2020
|
|
|
47,393
|
|
|
|
-
|
|
|
|
|
180,666
|
|
|
|
21,641
|
|
Less debt discount
|
|
|
(15,663
|
)
|
|
|
(20,584
|
)
|
Less current portion of convertible notes
|
|
|
(165,003
|
)
|
|
|
(1,057
|
)
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
On
July 23, 2018, we received net proceeds of $48,000 under a convertible note dated July 19, 2018 (the “July 2018 Note”).
The total principal under the note is $50,000, bears interest at 12% per annum, includes OID of $2,000, is due on July 19, 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. During the nine months ended
October 31, 2019, the noteholder converted an aggregate of $21,714 of the remaining balance of this note for 197,400,727shares
of the Company’s common stock, leaving a balance of $0 as of October 31, 2019.
On
April 12, 2019, we received net proceeds of $50,000 from the issuance of a convertible note dated April 10,2019 (the “April
2019 Note”). The note bears interest at 8%, includes OID of $3,000, matures on February 28, 2020, 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. During the nine months ended October
31, 2019, the noteholder converted the note in full (an aggregate of $55,120) for 73,670,329 shares of the Company’s common
stock, leaving a balance of $0 as of October 31, 2019.
On
May 21, 2019, we received net proceeds of $50,000 from the issuance of a convertible note dated May 17,2019 (the “May 2019
Note”). The note bears interest at 8%, includes OID of $3,000, matures on March 17, 2020, 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.
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.
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 nine months ended October 31, 2019 and 2018, the Company recorded debt discounts of $50,000 and $373,589, respectively, due
to the derivative liabilities, and original issue debt discounts of $23,300 and $14,000, respectively, due to the convertible
notes. The Company recorded amortization of these discounts of $78,221 and $379,133 for the nine months ended October 31, 2019
and 2018, respectively.
Note
payable:
In
March, 2019, the Company received proceeds of $10,000 from a third-party under a promissory note due in March 2020, with interest
at 10%. The total balance of the note was 10,636 as of October 31, 2019, which includes accrued interest of $636.
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. On 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 nine months ended October 31, 2019, the Company issued a total of 271,071,056 shares of our common stock for conversions of
$76,834 of convertible notes payable at an exercise prices ranging from of $0.00011 to $0.00078.
In
July 2019, the Company issued 30,000,000 shares of its common stock to satisfy $213,000 owed for services due an investor relations
consultant for services provided in prior years which was previously included in accounts payable and accrued liabilities, resulting
in a gain on settlement of accounts payable of $177,000.
In
July 2019, the Company issued 43,215,212 shares of its common stock and 21,607,606 warrants to an investor, who also subsequently
became a director, for proceeds of $50,000, or $0.001157 per share. The warrants have a three-year term and are exercisable at
any time at an exercise price of $0.00162.
NOTE
10 – Commitments and contingencies
We
currently rent a storage space for $45 per month in Tombstone, AZ on a month-to-month basis.
NOTE
11 – Subsequent events
On
November 19, 2019, the Company sold 21,121,429 shares of the Company’s common stock to an accredited investor for $20,699,
or $0.00098 per share, in a private placement. The purchase includes 10,560,714 warrants (1/2 warrant for each share purchased)
with a three-year term to purchase the Company’s stock at an exercise price of 0.00137. The consideration received included
$10,000 plus the forgiveness of a note payable of $10,000 plus accrued interest of $699.
On
November 20, 2019, a noteholder converted $10,000 of the May 2019 Note for 18,867,925 shares of the Company’s common stock
at a price of $0.00053.