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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
Amendment No. 1

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 000-54303
LI3 ENERGY, INC.
(Exact name of registrant as specified in its charter)

Nevada
20-3061907
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)

Av. Pardo y Aliaga 699 Of. 802
San Isidro, Lima, Peru
 (Address of principal executive offices)

+ (51) 1-212-1880
(Registrant’s telephone number, including area code)

N.A.
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer      ¨
 
Accelerated filer    ¨
Non-accelerated filer            ¨
 
Smaller reporting company  x
(Do not check if a smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

As of November 11, 2011, there were 322,209,220 shares of the registrant’s common stock outstanding.

 
 

 

LI3 ENERGY, INC.
 
EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A of Li3 Energy, Inc. amends our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, initially filed with the Securities Exchange Commission on November 14, 2011 (the “Original Filing”).  

This Amendment No. 2 is being filed solely to disclose, under Item 4 of Part I, our management’s evaluation of whether our disclosure controls and procedures are effective or not.

Except as set forth above, the Original Filing has not been amended, updated or otherwise modified.  This Amendment No. 1 does not reflect events occurring after November 14, 2011, the date of the Original Filing, or modify or update those disclosures that may have been affected by subsequent events.
 
TABLE OF CONTENTS
 
 
  Page  
   
Statement Regarding Forward-Looking Information
3
   
Part I – Financial Information
 
     
Item 1
Consolidated Financial Statements (unaudited)
4
     
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
     
Item 3
Quantitative and Qualitative Disclosures About Market Risk
28
     
Item 4
Controls and Procedures
28
   
Part II – Other Information
 
   
   
Item 1
Legal Proceedings
29
     
Item 1A
Risk Factors
29
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
29
     
Item 3
Defaults Upon Senior Securities
30
     
Item 4
(Removed and Reserved)
30
     
Item 5
Other Information
30
     
Item 6
Exhibits
30
   
Signatures
32

 
2

 

Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts included in this Report including, without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Report, regarding our financial condition, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements including, but not limited to, our ability to identify appropriate corporate acquisition and/or joint venture opportunities in the lithium mining sector, our ability to establish technical and managerial infrastructure, our ability to raise the required capital to take advantage of and successfully participate in such opportunities, and future economic conditions, political stability and lithium prices. Descriptions of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Quarterly Report on Form 10-Q appear in the section captioned “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission (the “SEC”).
 
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 
3

 
 
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LI3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Balance Sheets
(Unaudited)

   
September 30,
2011
   
June 30, 2011
 
Assets
           
Current Assets:
           
Cash
  $ 7,326,933     $ 952,401  
Deferred financing costs
    -       103,250  
Prepaid expenses and advances
    131,193       41,809  
Total current assets
    7,458,126       1,097,460  
                 
Mineral rights
    64,041,000       64,041,000  
Property and equipment, net of accumulated depreciation of $20,482 and $19,195, respectively
    55,558       -  
Total non- current assets
    64,096,558       64,041,000  
Total assets
  $ 71,554,684     $ 65,138,460  
                 
Liabilities & Stockholders' Equity
               
Current Liabilities:
               
Accounts payable
  $ 475,773     $ 259,992  
Accrued expenses
    472,700       433,028  
Finders’ fees payable
    310,000       -  
Payable to related parties
    110,845       110,986  
Zero-coupon convertible debt, net of accumulated amortization of $17,156 and $372,764, respectively
    1,283,507       372,764  
Notes payable
    95,000       95,000  
Total current liabilities
    2,747,825       1,271,770  
                 
Derivative liabilities-warrant instruments
    11,514,123       15,244,754  
Total liabilities
    14,261,948       16,516,524  
                 
Commitments and contingencies
    -       -  
                 
Stockholders' Equity:
               
Preferred stock, $0.001 par value, 10,000,000 shares  authorized; 0 shares issued and outstanding
    -       -  
Common stock, $0.001 par value, 990,000,000 shares authorized; 322,009,220 and 279,913,920 shares issued and outstanding as of September 30, 2011 and June 30, 2011, respectively
    322,009       279,914  
Additional paid-in capital
    63,096,521       58,307,796  
Deficit accumulated during exploration stage
    (31,621,794 )     (35,461,774 )
Total stockholders' equity of Li3 Energy, Inc.
    31,796,736       23,125,936  
Non-controlling interest
    25,496,000       25,496,000  
Total stockholder’s equity
    57,292,736       48,621,936  
Total liabilities and stockholders' equity
  $ 71,554,684     $ 65,138,460  

See accompanying notes to unaudited consolidated financial statements

 
4

 

LI3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statements of Operations
(Unaudited)

               
June 24, 2005
 
               
(inception)
 
   
 
   
through
 
   
Three Months Ended September 30,
   
September 30,
 
   
2011
   
2010
   
2011
 
                   
Revenues
  $ -     $ -     $ 2,278  
                         
Cost of goods sold
    -       -       1,182  
                         
Gross profit
    -       -       1,096  
                         
Operating expenses:
                       
Inventory impairment
    -       -       1,469  
Mineral rights impairment expense
    -       -       8,838,785  
Loss on settlements, net
    -       -       1,497,500  
Exploration expenses
    468,242       272,642       3,364,096  
General and administrative expenses
    1,250,196       831,227       9,649,476  
Total operating expenses
    1,718,438       1,103,869       23,351,326  
                         
Other (income) expense:
                       
Warrant modification expense
    -       -       1,068,320  
Change in fair value of derivative liability – warrant instruments
    (6,948,644 )     (2,772,726 )     5,391,050  
Loss on debt extinguishment
    841,752       -       841,752  
Loss on foreign currency
    14,985       3,437       18,762  
Interest income
    (715 )     (67 )     (5,664 )
Interest expense
    534,204       1,944       957,344  
Total other (income) expense
    (5,558,418 )     (2,767,412 )     8,271,564  
                         
Net income (loss)
  $ 3,839,980     $ 1,663,543     $ (31,621,794 )
                         
Basic and diluted earnings per share
  $ 0.01     $ 0.02          
                         
Weighted average number of  common shares outstanding
                       
Basic
    287,821,798       82,708,587          
Diluted
    304,402,915       85,208,587          

See accompanying notes to unaudited consolidated financial statements

 
5

 
 
LI3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
From June 24, 2005 (Inception) through September 30, 2011
 (Unaudited)

                      
Deficit
             
                     
Accumulated
             
               
Additional
   
During
   
Non-
       
   
Common Stock
   
Paid-In
   
Exploration
   
Controlling
       
   
Shares
   
Par Value
   
Capital
   
Stage
   
Interest
   
Total
 
                                     
Balance at June 24, 2005 (Inception)
    -     $ -     $ -     $ -     $ -     $ -  
Stock issued for cash on June 24, 2005 at $0.000105 per share
    35,526,336       35,526       (31,776 )     -       -       3,750  
Stock issued for cash on June 24, 2005 at $0.000105 per share
    35,526,336       35,526       (31,776 )     -       -       3,750  
Net loss, period ended June 30, 2005
    -       -       -       -       -       -  
Balance, June 30, 2005
    71,052,672       71,052       (63,552 )     -       -       7,500  
Stock issued for cash on March 14,  2006 at $0.001056 per share
    47,368,454       47,368       2,632       -       -       50,000  
Net loss, year ended June 30, 2006
    -       -       -       (14,068 )     -       (14,068 )
Balance, June 30, 2006
    118,421,126       118,420       (60,920 )     (14,068 )     -       43,432  
Net loss, year ended June 30, 2007
    -       -       -       (16,081 )     -       (16,081 )
Balance, June 30, 2007
    118,421,126       118,420       (60,920 )     (30,149 )     -       27,351  
Stock issued for cash on February 7, 2008 at $0.019 per share
    2,631,595       2,632       47,368       -       -       50,000  
Net loss, year ended June 30, 2008
    -       -       -       (95,656 )     -       (95,656 )
Balance, June 30, 2008
    121,052,721       121,052       (13,552 )     (125,805 )     -       (18,305 )
Net loss, year ended June 30, 2009
    -       -       -       (67,905 )     -       (67,905 )
Balance, June 30, 2009
    121,052,721       121,052       (13,552 )     (193,710 )     -       (86,210 )
October 2009, cancellation of former officer's shares
    (71,052,626 )     (71,052 )     71,052       -       -       -  
October 2009, stock issued to the chief executive officer for services at $0.0032 per share
    1,500,000       1,500       3,300       -       -       4,800  
November, 2009, common stock sold in private placement offering at $0.25 per share, less offering cost totaling $42,392
    6,400,000       6,400       1,018,222       -       -       1,024,622  
November, 2009, common stock sold in private placement offering at $0.25 per share, less offering cost totaling $5,350
    2,120,000       2,120       299,447       -       -       301,567  
November, 2009, common stock sold in private placement offering at $0.25 per share, less offering cost totaling $31,243
    1,820,000       1,820       234,944       -       -       236,764  
December, 2009, common stock sold in private placement offering at $0.25 per share, less offering cost totaling $4,859
    1,900,000       1,900       260,222       -       -       262,122  
December, 2009, common stock sold in private placement offering at $0.25 per share, less offering cost totaling $76,632
    1,760,000       1,760       167,361       -       -       169,121  
December 2009, stock issued to a consultant for services at $0.61 per share
    750,000       750       456,750       -       -       457,500  
February 2010, stock issued to a consultant for services at $0.93 per share
    375,000       375       348,375       -       -       348,750  
March, 2010, stock issued for acquisition of mineral rights at $0.91 per share
    4,000,000       4,000       3,636,000       -       -       3,640,000  
June, 2010 common stock sold in private placement offering at $0.25 per share, less offering cost totaling $250,204
    4,000,000       4,000       284,943       -       -       288,943  
Stock options issued to consultant for services
    -       -       114,783       -       -       114,783  
Amortization of stock-based compensation expense
    -       -       84,614       -       -       84,614  
Stock issued by CEO to employees and director for services
    -       -       129,500       -       -       129,500  
Net loss, year ended June 30 , 2010
    -       -       -       (16,048,682 )     -       (16,048,682 )
Balance, June 30, 2010
    74,625,095       74,625       7,095,961       (16,242,392 )     -       (9,071,806 )
                                                 
July 2010, common stock sold in private placement offering at $0.25 per share, less offering costs totaling $47,245    
    2,000,000       2,000       230,884       -       -       232,884  
August 2010, stock issued for acquisition of mineral rights at $0.39 per share    
    10,000,000       10,000       3,890,000       -       -       3,900,000  
August 2010, stock issued for services at $0.30 per share    
    87,096       87       26,042       -       -       26,129  
September 2010, common stock sold in private placement offering at $0.25 per share, less offering costs totaling $4,757    
    160,000       160       18,017       -       -       18,177  
November 2010, common stock sold in private placement offering at $0.05 per share – no offering costs    
    2,000,000       2,000       21,425       -       -       23,425  
November 2010, common stock sold in private placement offering at $0.05 per share – no offering costs    
    2,000,000       2,000       23,214       -               25,214  
December 2010, stock issued for services at $0.231 per share    
    1,551,253       1,551       356,788       -       -       358,339  
December 2010, common stock sold in private placement offering at $0.15 per share, less offering costs totaling $56,843    
    3,333,338       3,334       217,875       -       -       221,209  
December 2010, common stock sold in private placement offering at $0.15 per share, less offering costs totaling $100,616    
    5,383,325       5,383       363,246       -       -       368,629  
December 2010, common stock sold in private placement offering at $0.15 per share, less offering costs totaling $8,125    
    766,667       767       64,558       -       -       65,325  
January 2011, common stock sold in private placement offering at $0.15 per share, less offering costs totaling $41,033    
    1,783,333       1,783       91,472       -       -       93,255  
February 2011, common stock sold in private placement offering at $0.15 per share, less offering costs totaling $16,470    
    400,000       400       20,322       -       -       20,722  
February 2011 common stock issued for cash on sale of D Units upon exercise of Double Options, at $0.05 per share.    
    3,800,000       3,800       186,200       -       -       190,000  
February 2011, exercise of $0.05 per share D Warrants for cash    
    2,000,000       2,000       98,000       -       -       100,000  
February 2011, fair value of D warrants reclassified from derivative liability to equity upon exercise    
    -       -       2,328,951       -       -       2,328,951  
February 2011, common stock issued for legal services at $0.385 per share    
    608,310       608       233,591       -       -       234,199  
February 2011, common stock issued for Lacus settlement at $0.385 per share    
    500,000       500       192,000       -       -       192,500  
February 2011, common stock issued for Compensation Modification Agreement at $0.385 per share    
    1,000,000       1,000       384,000       -       -       385,000  
February 2011, common stock issued for Settlement Agreement at $0.385 per share    
    1,000,000       1,000       384,000       -       -       385,000  
February 2011, common stock issued for MIZ Employment Service Agreement vested stock-based compensation    
    500,000       500       (500 )     -       -       -  
February 2011, common stock issued to MIZ at $0.385 per share for salary under Employment Service Agreement
    500,000       500       192,000       -       -       192,500  
February 2011, common stock issued to MIZ for bonus under Employment Service Agreement at $0.38 per share
    236,842       237       89,763       -       -       90,000  
March 2011, exercise of $0.15 per share E Warrants for cash
    7,473,336       7,474       1,113,576       -       -       1,121,050  
March 2011, fair value of E warrants reclassified from derivative liability to equity upon exercise
    -       -       1,951,885       -       -       1,951,885  
March 2011, common stock issued for settlement with Puna Lithium at $0.32 per share
    6,000,000       6,000       1,914,000       -       -       1,920,000  
April 2011, exercise of $0.15 per share E warrants for cash
    150,000       150       22,350       -       -       22,500  
April 2011, fair value of E warrants reclassified from derivative liability to equity upon exercise
    -       -       70,545       -       -       70,545  
May 2011, cashless exercise of $0.05 per share D warrants
    515,254       515       -       -       -       515  
May 2011, fair value of D warrants reclassified from derivative liability to equity upon exercise
    -       -       253,165       -       -       253,165  
Beneficial conversion on convertible debt issued in May 2011
    -       -       368,000       -       -       368,000  
May 2011, common stock sold in private placement offering at $0.27 per share, less offering costs totaling $737,271
    23,920,071       23,920       3,554,723       -       -       3,578,643  
May 2011, common stock issued for acquisition of mineral rights at $0.25 per share
    127,500,000       127,500       31,747,500       -       -       31,875,000  
May 2011, Consolidation of Maricunga, non-controlling interest.
    -       -       -       -       25,496,000       25,496,000  
June 2011, common stock issued for services at $0.22 per share
    120,000       120       26,280       -       -       26,400  
Amortization of stock-based compensation
    -       -       777,963       -       -       777,963  
Net loss, year ended June 30, 2011
    -       -       -       (19,219,382 )     -       (19,219,382 )
Balance, June 30, 2011
    279,913,920       279,914       58,307,796       (35,461,774 )     25,496,000       48,621,936  
                                                 
August and September 2011, exercise of $0.05 per share D Warrants for cash
    4,000,000       4,000       196,000       -       -       200,000  
August and September 2011, fair value of D warrants reclassified from derivative liability to equity upon exercise
    -       -       561,965       -       -       561,965  
September 2011, common stock sold to POSCO  at $0.21 per share, less offering costs totaling $685,944
    38,095,300       38,095       3,495,996       -       -       3,534,091  
Beneficial conversion on convertible debt Waiver Agreement
    -       -       330,019       -       -       330,019  
Amortization of stock-based compensation
    -       -       204,745       -       -       204,745  
Net income, period ended September 30, 2011
    -       -       -       3,839,980       -       3,839,980  
Balance, September 30, 2011
    322,009,220     $ 322,009     $ 63,096,521     $ (31,621,794 )   $ 25,496,000     $ 57,292,736  

 
6

 

LI3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statements of Cash Flow
(Unaudited)

               
June 24, 2005
 
   
Three Months
   
Three Months
   
(inception)
 
   
Ended
   
Ended
   
Through
 
   
September 30,
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
 
Cash Flows from Operating Activities
                 
Net income (loss)
  $ 3,839,980     $ 1,663,543     $ (31,621,794 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
                       
Depreciation
    1,287       975       20,787  
Amortization of deferred financing costs
    36,875       -       66,375  
Loss on settlements, net
    -       -       1,497,500  
Loss on extinguishment of debt
    841,752       -       841,752  
Stock-based compensation – related party
    159,147       82,564       1,120,838  
Stock-based compensation
    45,598       49,839       2,892,374  
Warrant modification expense
    -       -       1,068,320  
Change in fair value of warrant derivative liabilities
    (6,948,644 )     (2,772,726 )     5,391,050  
Zero coupon interest accretion and amortization of debt discount on convertible notes
    495,385       -       868,149  
Inventory impairment
    -       -       1,469  
Mineral rights impairment expense
    -       -       8,838,785  
Changes in operating assets and liabilities:
                       
Increase in inventory
    -       -       (1,469 )
Decrease (increase) in prepaid expenses and advances
    (89,384 )     36,409       (131,193 )
Increase (decrease) in accounts payable
    215,781       (23,782 )     475,773  
Increase in accrued expenses
    349,672       216,543       1,362,210  
Increase (decrease) in payable to related parties
    (141 )     139,667       110,845  
Net cash used in operating activities
    (1,052,692 )     (606,968 )     (7,198,229 )
                         
Cash Flows from Investing Activities
                       
Acquisition of mineral rights
    -       (180,000 )     (7,968,785 )
Acquisition of equipment
    (56,845 )     -       (66,345 )
Increase in leasehold improvement
    -       -       (10,000 )
Net cash used in investing activities
    (56,845 )     (180,000 )     (8,045,130 )
                         
Cash Flows from Financing Activities
                       
Proceeds from notes payable
    -       -       95,000  
Proceeds from zero-coupon convertible debt offering
    -       -       1,500,000  
Payment of deferred financing costs
    -       -       (75,000 )
Payment of waiver fee for convertible debt
    (30,000 )     -       (30,000 )
Proceeds from exercise of warrants
    200,000       -       1,633,575  
Proceeds from issuance of common stock, net of offering costs
    7,314,069       487,998       19,446,717  
                         
Net cash provided by financing activities
    7,484,069       487,998       22,475,292  
                         
Net increase (decrease) in cash
    6,374,532       (298,970 )     7,326,933  
                         
Cash at beginning of period
    952,401       302,821       -  
                         
Cash at end of period
  $ 7,326,933     $ 3,851       7,326,933  
                         
Supplemental disclosure of cash flow information:
                       
Cash paid during the period for:
                       
Income taxes
  $ -     $ -     $ -  
Interest
  $ -     $ -     $ -  
Non-cash investing and financing transactions:
                       
Common stock cancelled
  $ -     $ -     $ 71,052  
Issuance of common stock for acquisition of mineral rights
  $ -     $ 3,900,000     $ 39,415,000  
Warrants issued for services
  $ -     $ -     $ 157,010  
Warrants issued for offering costs
  $ -     $ -     $ 57,750  
Debt discount due to warrant derivative liabilities issued with convertible debt
  $ -     $ -     $ 1,132,000  
Debt discount due to beneficial conversion feature
  $ 330,019     $ -     $ 698,019  
Reclassification of warrant liability to additional paid-in-capital for warrant exercises
  $ 561,965     $ -     $ 5,166,511  
Fair value of derivative warrant instruments issued in private offerings
  $ 3,779,978     $ 236,937     $ 8,874,504  
Consolidation of non-controlling interest of the Maricunga Companies
  $ -     $ -     $ 25,496,000  

 
7

 

LI3 ENERGY, INC.
(An Exploration Stage Company)
Notes to the Consolidated Financial Statements
For the quarterly period ended September 30, 2011
(Unaudited)

NOTE 1.   NATURE OF BUSINESS AND BASIS OF PRESENTATION

Li3 Energy, Inc. (“Li3 Energy” or the “Company”) was incorporated under the laws of the State of Nevada on June 24, 2005. Initially, the Company’s principal products were soy-blend wax candles (the “Legacy Business”). In 2009, the Company redirected its business focus and strategy toward identifying and pursuing business opportunities in lithium and industrial minerals mining in North and South America, but has more recently focused solely on South America.

On October 19, 2009, the Company filed an amendment to its articles of incorporation with the Secretary of State of the State of Nevada, pursuant to which it changed its name from NanoDynamics Holdings, Inc., to Li3 Energy, Inc., to reflect the Company’s plans to focus its business strategy on the energy sector and related lithium mining opportunities in North and South America.

The Company’s five subsidiaries include; Li3 Energy Peru SRL (“Li3 Peru”), a wholly owned subsidiary in Peru, formed to explore mining opportunities in Peru and in South America; Minera Li Energy SPA (“Minera Li”), a wholly owned subsidiary in Chile; Alfredo Holdings, Ltd. (“Alfredo”), an exempted limited company incorporated under the laws of the Cayman Islands; Pacific Road Mining Chile, SA, a Chilean corporation (“PRMC”), which is a subsidiary of Alfredo; and Noto Energy S.A. (“Noto”), an Argentinean corporation. Also, in May 2011, Minera Li acquired 60% ownership of Sociedades Legales Mineras Litio 1 a 6 de la Sierra Hoyada de Maricunga, a group of six private companies (the “Maricunga Companies”).

During March 2011, the Company amended its Articles of Incorporation to provide for the issuance of 1,000,000,000 shares of capital stock (increased from 300,000,000 shares of capital stock), of which 990,000,000 are shares of common stock, par value $0.001 per share, and 10,000,000 are undesignated preferred stock, par value $0.001 per share.

The accompanying unaudited interim consolidated financial statements of Li3 Energy, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year ending June 30, 2011, as reported in Form 10-K, have been omitted.

NOTE 2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, Li3 Peru, Alfredo, PRMC, Noto, and Minera Li which holds the six majority owned subsidiaries consisting of the Maricunga Companies. All intercompany amounts have been eliminated in consolidation.

b. Exploration Stage Company

The Company is in the exploration stage in accordance with SEC guidance and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 915 - Development Stage Entities. Its activities to date have been limited to capital formation, organization, and development of its business, including acquisitions of mineral rights.

c. Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company had $0 cash equivalents at September 30, 2011 and June 30, 2011, respectively. The Company has not experienced any losses on its deposits of cash and cash equivalents.

 
8

 

d. Mineral Exploration and Development Costs

All exploration expenditures are expensed as incurred. Costs of acquisition and option costs of mineral rights are capitalized upon acquisition. Mine development costs incurred to develop new ore deposits, to expand the capacity of mines, or to develop mine areas substantially in advance of current production are also capitalized once proven and probable reserves exist and the property is determined to be a commercially mineable property. Costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations. If the Company does not continue with exploration after the completion of the feasibility study, the cost of mineral rights will be expensed at that time. Costs of abandoned projects are charged to mining costs, including related property and equipment costs. To determine if capitalized costs are in excess of their recoverable amount, periodic evaluation of the carrying value of capitalized costs and any related property and equipment costs are performed based upon expected future cash flows and/or estimated salvage value in accordance with ASC 360-10-35-15, Impairment or Disposal of Long-Lived Assets. As of September 30, 2011, management evaluated our capitalized mineral rights for impairment and determined no impairment was required.

e. Earnings (Loss) per Share
 
The Company accounts for earnings (loss) per share in accordance with FASB ASC Topic No. 260 – 10, which specifies the computation, presentation and disclosure requirements for earnings (loss) per share for entities with publicly held common stock and requires the presentation of basic earnings (loss) per share and diluted earnings (loss) per share.

Basic net loss per share amounts are computed by dividing the net loss by the weighted average number of common shares outstanding over the reporting period. In periods in which the Company reports a net loss, dilutive securities are excluded from the calculation as the effect would be anti-dilutive. The effects of the 15.625 for 1 forward stock split on October 19, 2009 have been reflected in the Company’s calculation of basic and diluted net loss per share.

Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS:

   
Three months ended
   
Three months ended
 
   
September 30, 2011
   
September 30, 2010
 
   
Net
Income
   
Shares
   
Per Share
Amount
   
Net
Income
   
Shares
   
Per Share
Amount
 
Basic EPS
  $ 3,839,980       287,821,798     $ 0.01     $ 1,663,543       82,708,587     $ 0.02  
Dilutive effect of convertible debt
    58,389       12,814,450                          
Dilutive effect of warrants calculated using the treasury stock method
    (291,101 )     1,066,667                          
Dilutive effect of restricted stock
          2,700,000                   2,500,000        
Diluted EPS
  $ 3,607,268       304,402,915     $ 0.01     $ 1,663,543       85,208,587     $ 0.02  

The following table sets forth the schedule of anti-dilutive securities excluded from computation of diluted EPS:

   
Three months ended
 
   
September 30,
2011
   
September 30,
2010
 
Stock options
    766,667       250,000  
Stock warrants
    87,884,712       54,200,565  

 
9

 

f. Use of Estimates and Assumptions
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Management has made significant estimates related to the fair value of the warrant derivative liability, accrued expenses and contingencies.
 
g. Income Taxes

Income taxes are provided in accordance with FASB ASC Topic No. 740. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and for net operating loss carry-forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  As of September 30, 2011 and June 30, 2011, we have established a valuation allowance to fully reserve our net deferred tax assets.

For financial statement purposes, we recognize the impact of an uncertain income tax position on the income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. We did not have any uncertain income tax positions or accrued interest or penalties included in our consolidated balance sheets at September 30, 2011 or June 30, 2011, and did not recognize any interest and/or penalties in our consolidated statements of operations during the three months ended September 30, 2011 or 2010, respectively.

h. Subsequent Events

We evaluated all subsequent events from September 30, 2011 through the date of the issuance of these consolidated financial statements.

i. Recent Accounting Pronouncements
 
Recently issued or adopted accounting pronouncements are not expected to, or did not have, a material impact on our financial position, results of operations or cash flows.

j. Reclassifications

Certain accounts in the prior period were reclassified to conform with the current period financial statement presentation.
 
NOTE 3.   GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company currently has no sources of recurring revenue and has generated net losses of $31,621,794 and negative cash flows from operations of $7,198,229 during the period from June 24, 2005 (inception) through September 30, 2011.

In the course of its development activities, the Company has sustained and continues to sustain losses. The Company cannot predict if and when it may generate profits. In the event the Company identifies commercial reserves of lithium or other minerals, it will require substantial additional capital to develop those reserves. The Company expects to finance its operations primarily through future financings. However, there exists substantial doubt about the Company’s ability to continue as a going concern because there is no assurance that it will be able to obtain such capital, through equity or debt financing, or any combination thereof, on satisfactory terms or at all. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet the Company’s ultimate capital needs and to support its growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, then the Company’s operations would be materially negatively impacted.

 
10

 

The Company’s ability to complete additional offerings is dependent on the state of the debt and/or equity markets at the time of any proposed offering, and such market’s reception of the Company and the offering terms. In addition, the Company’s ability to complete an offering may be dependent on the status of its exploration activities, which cannot be predicted. There is no assurance that capital in any form would be available to the Company, and if available, on terms and conditions that are acceptable.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required until such time as it can generate sources of recurring revenues and to ultimately attain profitability. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 4.  MINERAL RIGHTS

   
September 30,
2011
   
June 30,
2011
 
Maricunga
  $ 63,741,000     $ 63,741,000  
Noto
    300,000       300,000  
Total
  $ 64,041,000     $ 64,041,000  

Maricunga

On November 30, and December 1, 2010, the Company signed non-binding exclusive letters of intent with the shareholders (the “Maricunga Sellers”) of Sociedades Legales Mineras Litio 1 a 6 de la Sierra Hoyada de Maricunga, a group of six private companies (the “Maricunga Companies”), to acquire a percentage of the Maricunga Companies, which collectively own the Maricunga Project (“Maricunga”). During December 2010, the Company paid $250,000 to the Maricunga Sellers in connection with signing the non-binding letters of intent which provided the Company with additional time to perform its due diligence and prepare definitive purchase agreements. The Maricunga property is undeveloped and covers an area of approximately 3,553 acres (1,438 hectares), comprising six concessions, each held by a separate legal entity, and is located in the northeast section of the Salar de Maricunga in Region III of Atacama in northern Chile. Each concession grants the owner the right to explore for mineral deposits at the Maricunga property.

On May 20, 2011, the Company and the Maricunga Sellers signed the Framework Contract of Mining Project Development and Buying and Selling of Shares of Sociedades Legales Mineras Litio 1 a 6 de la Sierra Hoyada de Maricunga (the “Acquisition Agreement”), whereby the Company, through its Chilean subsidiary, Minera Li, acquired from the Maricunga Sellers a 60% interest in each of the Maricunga Companies. The purchase price, including amounts paid to agents, was $6,370,000 in cash and 127,500,000 restricted shares of common stock of the Company (the “Maricunga Purchase Price Shares”) which had a fair value of $31,875,000 based on the market price on the date of issuance. The $6,370,000 in cash includes the $250,000 deposit paid in December 2010 and $120,000 due to agents. Pursuant to the Acquisition Agreement, closing occurred on June 2, 2011, the date by which the Maricunga Sellers and agents received their shares of common stock (which were registered in Chile) and the remaining $6,000,000 of cash. The agents received $120,000 at closing.

The assets of the Maricunga Companies consist solely of undeveloped mineral rights and were recorded as an asset purchase. The Company consolidated Sociedades Legales Mineras Litio 1 a 6 de la Sierra Hoyada de Maricunga and recorded the assets at 100% based on purchase price of $6,370,000 in cash and 127,500,000 restricted shares of common stock which had a fair value of $31,875,000. The Company recorded a non-controlling interest for the 40% of the Maricunga Companies that were not acquired, or $25,496,000.

We have agreed to register under the Securities Act one-half of the 127,500,000 Maricunga Purchase Price Shares on a “best efforts” basis by January 31, 2012 and the remainder by October 31, 2012. In the event that the SEC limits the number of shares that may be sold pursuant to the registration statement, we may remove from the registration statement such number of shares as specified by the SEC, and may file subsequent registration statements covering the resale of additional shares of such common stock. Accordingly, we are not obligated to pay any penalties in the event we are unable to register the shares, or obtain or maintain an effective registration statement related to such shares.

The Company estimates that capital expenditures for this project will be approximately $170 million.

The Company will evaluate any future impairment based on consideration of economic and operational feasibility and a continuing assessment of its rights to exploit minerals under Chilean laws and regulations.

 
11

 

Noto

Pursuant to an Assignment Agreement dated March 12, 2010 (the “Assignment Agreement”), the Company purchased all of Puna Lithium Corporation’s (“Puna”) interests in and rights for the acquisition of Noto Energy S.A. (”Noto”) under a letter of intent dated November 23, 2009, as amended (the “Letter of Intent”), entered into by and among Puna, Lacus Minerals S.A., and the shareholders of Noto Energy S.A. (“Noto Shareholders”), an Argentinian corporation.

On March 12, 2010, the Company entered into a Share Purchase Agreement with the Noto Shareholders (the “Share Purchase Agreement”) for the acquisition of one hundred percent (100%) of the issued and outstanding shares of Noto, which beneficially owns a one hundred percent (100%) undeveloped mineral interest in over 2,995 acres (1,212 hectares) situated on brine salars in Argentina, known as Cauchari (the “Noto Properties”).

Under the Share Purchase Agreement, the Company acquired upon closing on July 30, 2010, one hundred percent (100%) of the issued and outstanding shares of Noto, for $300,000 in cash, of which $200,000 was paid during the year ending June 30, 2010, and $100,000 was paid on July 30, 2010 when the transaction closed. Noto’s only asset is the mineral interest in the Noto Properties. Accordingly, the Company recorded the acquisition as an asset purchase. The Company is currently developing plans to pursue exploration and/or development of the Noto Properties.

NOTE 5.  PROPERTY AND EQUIPMENT
 
Property and equipment consists of the following:

   
September 30,
2011
   
June 30,
 2011
 
Leasehold improvement and equipment
  $ 76,040     $ 19,195  
Less: Accumulated depreciation
    (20,482 )     (19,195 )
Net property and equipment
  $ 55,558     $ -  

Depreciation expense for the three-month periods ending September 30, 2011 and 2010 was $1,287, and $975, respectively.

NOTE 6.   RELATED PARTY TRANSACTIONS

Legal Services
 
Antonio Ortúzar, who served as a director of the Company from February 18, 2010, to October 25, 2010, is a Partner in a law firm that the Company has engaged to perform certain legal services.  The Company pays for such legal services at the standard rates that the firm charges its unrelated clients.  For the three months ended September 30, 2011 and 2010, the Company incurred $0 and $66,000 of legal fees to the law firm, respectively.  

MIZ

The Company is party to an employment services agreement between MIZ Comercializadora, S de R.L. (“MIZ”) and the Company in which Tom Currin (a partial owner of MIZ) serves as Chief Operating Officer of the Company.

Pursuant to the Chief Operating Officer’s Employment Services Agreement, the Company granted to MIZ an award under the 2009 Plan pursuant to which the Company shall issue 2,500,000 restricted shares of its common stock (the “Restricted Stock”). The shares of Restricted Stock vest in installments of between 300,000 and 1,000,000 shares upon the achievement of certain milestones set forth in the Employment Services Agreement, subject to acceleration upon a change of control or a termination of Mr. Currin’s employment by the Company for good reason (as defined in the Employment Services Agreement) or by the Company for any reason other than for cause (as defined in the Employment Services Agreement). If his employment is terminated by the Company for cause as defined in the Employment Services Agreement, or by Mr. Currin for any reason other than good reason, then all unvested Restricted Stock will immediately expire.

The Company determined the grant date of the 2,500,000 shares was August 11, 2010. The stock price on the grant date was $0.38 per share. Total compensation expense which may be recognized in connection with these restricted shares is $950,000 if all of the shares vest. A milestone was achieved in January 2011, resulting in the vesting of 500,000 shares of common stock and the Company recorded $190,000 of stock-based compensation expense during the year ended June 30, 2011 based on a vesting service period of approximately five months beginning on the grant date. In February 2011, the Company issued the 500,000 fully vested shares of Restricted Stock to MIZ. The remaining 2,000,000 shares contain various vesting requirements that the Company estimates will be achieved between November 2011 and June 2013. During the three months ended September 30, 2011 and 2010, the Company recorded $122,373 and $53,824 of stock compensation expense for the shares based on these estimated vesting dates.

 
12

 

The Company also incurred $36,774 and $28,740 of stock-based compensation during the three months ended September 30, 2011 and 2010, respectively related to stock options granted to MIZ. See Note 10.

MIZ was also paid $50,000 and $0 in cash for compensation during the three months ended September 30, 2011 and 2010, respectively.  At September 30, 2011 and June 30, 2011, the Company has $100,000 of accrued bonus to MIZ recorded in payable to related parties in the consolidated balance sheets.

R&M Global Advisors

The Company is party to an employment services agreement between R&M Global Advisors, LLC. (“R&M Global Advisors”) and the Company in which Eric Marin (a partial owner of R&M Global Advisors) serves as interim Chief Financial Officer of the Company.

R&M Global Advisors was paid $22,500 and $0 in cash for compensation during the three months ended September 30, 2011 and 2010, respectively.

NOTE 7. NOTES PAYABLE

The Company issued a $50,000 unsecured Promissory Note dated June 5, 2008 (the ”Note”) to Milestone Enhanced Fund Ltd. (“Milestone”) in connection with Milestone’s $50,000 working capital loan to the Company, and the terms and conditions of such Note allow for prepayment of the principal and accrued interest any time without penalty. The interest rate is 8% per annum and the maturity date was June 5, 2010. The total interest accrued at September 30, 2011 and June 30, 2011 is $13,306 and $12,298, respectively. This Note is in default as of September 30, 2011 and remains payable to Milestone.

The Company issued an unsecured Convertible Promissory Note (the “Convertible Note”) dated April 30, 2009, bearing an interest rate of 8.25% per annum, in the amount of $45,000, due on November 8, 2010 to Milestone. The Convertible Note provides that the principal and interest balance due on the Convertible Note are convertible at Milestone’s option pursuant to terms to be mutually agreed upon by the Company and Milestone in writing at a later date. The Company and Milestone have not yet negotiated such conversion terms. The total interest accrued on the Convertible Note at September 30, 2011 and June 30, 2011 is $8,901 and $7,965, respectively. This Note is in default as of September 30, 2011 and remains payable to Milestone.

NOTE 8. CREDIT AGREEMENT

On May 2, 2011, the Company entered into and simultaneously closed a Credit Agreement for a $1.5 million bridge loan with three private institutional investors. Under the Credit Agreement, the Company issued to each lender a zero-coupon original issue discount note due February 2, 2012. The notes were convertible into shares of the Company’s common stock at the lender’s option at a price of $0.40 per share. The aggregate face amount of the notes at the February 2, 2012 maturity would be $1,677,438. The Company may prepay the notes at its option (together with accrued original issue discount), and was required to prepay them (together with accrued original issue discount) first out of the net proceeds of any future capital raising transactions by the Company.

The Company also agreed to issue to the lenders warrants to purchase an aggregate of 1,500,000 shares of common stock, exercisable for five years at an initial exercise price of $0.50 per share (the “Lender Warrants”). The Lender Warrants contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and these provisions could result in modification of the warrants exercise price based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40. The fair values of the Lender Warrants were recognized as derivative warrant instruments at issuance and are measured at fair value at each reporting period. The Company determined the fair value of the warrants was $1,132,000 at the issuance date. This amount was recorded as a debt discount and is amortized to interest expense over the term of the debentures.

The convertible debentures were analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $368,000. This amount was recorded as a debt discount and is amortized to interest expense over the term of the debentures.

The Company agreed to pay finder’s fees consisting of cash in the amount of 5% of the aggregate issue price of the notes, or $75,000 in total, and warrants to purchase an aggregate of 75,000 shares of common stock, exercisable for five years at an initial exercise price of $0.40 per share (the “Arranger Warrants”). The Arranger Warrants contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and these provisions could result in modification of the warrants exercise price based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40. The fair value of the Arranger Warrants was recognized as derivative warrant instruments at issuance and is measured at fair value at each reporting period. The Company determined the fair value of the Arranger Warrants at the issuance date was $57,750, which was recorded as deferred financing costs. The deferred financing costs of $132,750 will be amortized over the life of the debt on a straight-line basis which approximates the effective interest method.

 
13

 

On August 25, 2011, the Company entered into an Amendment and Waiver Agreement with the holders of the zero-coupon bridge notes (the “Waiver Agreement”).  Pursuant to the Waiver Agreement, effective upon the closing of POSCAN’s initial $8 million investment under the SPA (see Note 10), the zero-coupon bridge notes maturity date was extended to June 30, 2012, and the Company is not required to make any prepayment out of the proceeds of the SPA.  As the POSCAN closing occurred on September 14, 2011, the Waiver Agreement was deemed effective on that date.  The Waiver Agreement does not alter the principal amount of the zero-coupon bridge notes, however it provides that such notes will accrue interest at a rate of 15% per annum from February 2, 2012, until June 30, 2012.  The Waiver Agreement also reduces the conversion price of the $1.5 million zero-coupon bridge notes from $0.40 to $0.12 per share.  In connection with the Waiver Agreement, the Company agreed to pay an arranger a cash fee of $30,000.

The Company concluded that the Waiver Agreement resulted in a substantial modification of terms of the debt because the fair value of the embedded conversion feature increased by more than 10% as a result of the decrease in the conversion price from $0.40 per share to $0.12 per share. Accordingly, the Company recognized the amendment as an extinguishment of debt and recorded a loss on debt extinguishment.   The Company determined that the fair value of the Credit Agreement approximated the initial $1.5 million face value of the notes plus accrued interest of $84,192 due to the short-term nature of the notes.  As a result, the Company recorded a loss on debt extinguishment of $841,752, consisting of $745,377, the difference between the carrying value of the notes and the estimated fair value of the post-modification notes, $66,375 of unamortized deferred financing costs and $30,000 for the Waiver Agreement arranger fee.  See summary below.

   
September
14,2011
 
Loss on Extinguishment
     
Estimated fair value of debt after modification
  $ 1,584,192  
Waiver fee
    30,000  
Fair value of assets given
    1,614,192  
Less: Carrying Value of pre-modification debt
    (838,815 )
Unamortized deferred financing costs
    66,375  
Loss on debt extinguishment
  $ 841,752  

The new convertible debentures were analyzed for a beneficial conversion feature after the debt modification at which time it was concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $330,019. This amount was recorded as a debt discount and is amortized to interest expense over the term of the debentures. See detail summary below for carrying value of debt.

   
September
30,2011
 
Post-Modification Debt
     
Estimated fair value of debt after modification
  $ 1,584,192  
Less: Beneficial conversion feature discount
    (330,019 )
Carrying value at September 14, 2011
    1,254,173  
Accrued interest
    12,178  
Amortization of debt discount
    17,156  
Carrying value at September 30, 2011
    1,283,507  

NOTE 9. DERIVATIVE LIABILITIES

The Company has determined that certain warrants the Company has issued contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and these provisions could result in modification of the warrants exercise price based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40.

 
14

 

The warrants (including any Agent warrants) issued in connection with the 2009 Unit Offering, the 2010 Unit Offerings,  the Incentive warrants, the 2011 Unit Offering warrants, the Lender Warrants, the Warrants issued for advisory services, the Arranger Warrants and the POSCAN warrants contain anti-dilution provisions that provide for a reduction in the exercise price of such warrants in the event that future common stock (or securities convertible into or exercisable for common stock) is issued (or becomes contractually issuable) at a price per share (a “Lower Price”) that is less than the exercise price of such warrant at the relevant time. The amount of any such adjustment is determined in accordance with the provisions of the relevant warrant agreement and depends upon the number of shares of common stock issued (or deemed issued) at the Lower Price and the extent to which the Lower Price is less than the exercise price of the warrant at the relevant time. In addition, the number of shares issuable upon exercise of the 2010 Unit Offering Warrants, the Incentive warrants and all warrants issued to agents under both the 2009 Unit Offering, and the 2010 Unit Offerings will be increased inversely proportional to any decrease in the exercise price, thus preserving the aggregate exercise price of the warrants both before and after any such adjustment.

The fair values of the warrants issued in the 2009 Unit Offering, the 2010 Unit Offerings, the Incentive warrants, the 2011 Unit Offering, the Lender Warrants, the Arranger warrants, the warrants issued for advisory services and the POSCAN Warrants were recognized as derivative warrant instruments at issuance or when they become issuable and are measured at fair value at each reporting period. The Company determined the fair values of these warrants using a modified lattice valuation model.

Activity for derivative warrant instruments during the three months ended September 30, 2011 was as follows:

  
 
Balance at
June 30,
2011
   
Initial valuation
of derivative
liabilities upon
issuance of new
warrants during
the period
   
Decrease in
Fair Value of
Derivative
Liability
   
Exercise of
warrants
   
Balance at
September 30, 
2011
 
2009 Unit Offering warrants
  $ 3,854,119     $ -     $ (1,759,907 )   $ -     $ 2,094,212  
First 2010 Unit Offering warrants
    2,911,244       -       (1,436,010 )     -       1,475,234  
Second 2010 Unit Offering warrants
    1,800,265       -       (1,015,041 )     (561,965 )     223,259  
Third 2010 Unit Offering warrants
    1,156,744       -       (631,099 )     -       525,645  
Incentive warrants
    1,072,441       -       (495,337 )     -       577,104  
2011 Unit Offering warrants
    3,736,897       -       (1,762,321 )     -       1,974,576  
Lender warrants
    523,234       -       (263,507 )     -       259,727  
Warrants for advisory services and Arranger warrants
    189,810       -       (99,648 )     -       90,162  
POSCAN warrants
    -       3,779,978       514,226       -       4,294,204  
Total
  $ 15,244,754     $ 3,779,978     $ (6,948,644 )   $ (561,965 )   $ 11,514,123  

Activity for derivative warrant instruments during the three months ended September 30, 2010 was as follows:
 
  
 
Balance at
June 30,
2010
   
Initial valuation
of derivative
liabilities upon
issuance of new
warrants during
the period
   
Decrease in
Fair Value of
Derivative
Liability
   
Balance at
September 30,
2010
 
                                 
2009 Unit Offering warrants
  $ 6,313,769     $ -     $ (2,403,438 )   $ 3,910,331  
2010 Unit Offering warrants
    1,715,959       236,937       (369,288 )     1,583,608  
    $ 8,029,728     $ 236,937     $ (2,772,726 )   $ 5,493,939  

During the three months ended September 30, 2011, 4,000,000 warrants were exercised for aggregate proceeds of $200,000. The Company reduced the derivative liability by $561,965 based on the fair value of the warrants on the date of exercise and increased additional paid-in capital by the same amount.

 
15

 

The following is a summary of the assumptions used in the modified lattice valuation model as of the initial valuations of the derivative warrant instruments issued during the three months ended September 30, 2011, and 2010, respectively and as of September  30, 2011 and 2010, respectively:

  
 
Initial
Valuations –
September 30,
2011
   
Initial
Valuations -
September 30,
2010
   
Valuation as of
September 30,
2010
 
Valuation as of
September 30,
2011
 
Common stock issuable upon exercise of warrants
 
38,095,300
   
2,300,000
   
20,798,448
 
89,484,712
 
                       
Market value of common stock on measurement date (1)
 
$0.145
   
$0.30 - $0.39
   
$0.25
 
$0.112
 
                       
Adjusted Exercise price
 
$0.40
   
$0.25 - $0.50
   
$0.25 - $0.90
 
$0.05- $0.48
 
                       
Risk free interest rate (2)
 
0.42%
   
1.51% - 1.90%
   
1.27%
 
0.42%-.96%
 
Warrant lives in years
 
3.0
   
5.0
   
4.11 – 4.95
 
2.55-4.45
 
Expected volatility (3)
 
205%
   
151%
   
151%
 
176%-205%
 
Expected dividend yield (4)
 
0
   
0
   
0
 
0
 
Assumed stock offerings per year over next five years (5)
 
1-2
   
1
   
1
 
1-2
 
Probability of stock offering in any year over five years (6)
 
100
   
100%
   
100%
 
100%
 
Range of percentage of existing shares offered (7)
 
10%-31%
   
10% - 30%
   
10% - 30%
 
10%-31%
 
Offering price range (8)
 
$0.21-$0.45
   
$0.25 - $1.50
   
$0.25 - $1.50
 
$0.21-$0.45
 

(1)
The market value of common stock is the stock price at the close of trading on the date of issuance or at period-end, as applicable.
 
(2)
The risk-free interest rate was determined by management using the 3 or 5 year Treasury Bill as of the respective Offering or measurement date.
 
(3)
Because the Company does not have adequate trading history to determine its historical trading volatility, the volatility factor was estimated by management using the historical volatilities of comparable companies in the same industry and region.
 
(4)
Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.
 
(5)
Management estimates the Company will have at least one stock offering in each of the next 5 years.
 
(6)
Management has determined that the probability of a stock offering is 100% in each of the next five years.
 
(7)
Management estimates that the range of percentages of existing shares offered in each stock offering will be between 10% and 31% of the shares outstanding.
 
(8)
Represents the estimated offering price range in future offerings as determined by management.

 
16

 

NOTE 10.  STOCKHOLDERS’ EQUITY

Common Stock issuable for services

On June 27, 2011, the Company granted its Chief Executive Officer an award of 700,000 shares of the Company’s common stock which vests in 1/3 increments on each of January 15, 2012, January 15, 2013 and January 15, 2014. The value of the issuable shares was determined based on the $0.22 closing price of the common stock on the measurement date, and totaled $154,000. The Company will record stock compensation expense over the 3 year service period. During the three months ended September 30, 2011, the Company recorded $36,641 of stock compensation in connection with this agreement. No shares have been issued as of September 30, 2011.
 
Common Stock sales

July 1, 2011 through September 30, 2011

On August 24, 2011, we entered into a Securities Purchase Agreement (the “SPA”) and an Investor Rights Agreement (the “IRA”) with POSCO Canada Ltd. (“POSCAN”), a wholly owned subsidiary of POSCO ( a Korean company), (together, the “POSCAN Agreements”), pursuant to which on September 14, 2011, POSCAN purchased 38,095,300 Units for $0.21 per Unit or $8,000,013 ($7,314,069 net after offering expenses), with each “Unit” consisting of one share of our common stock and a three-year warrant (“POSCAN Warrants”) to purchase one share of our common stock at an exercise price of $0.40 per share.  A total of $3,779,978 of the proceeds were allocated to the value of the related POSCAN Warrants and recorded as derivative liabilities-warrant instruments (See Note 9).  The Company incurred finders’ fees equal to 7% of the gross proceeds received from the SPA.  At September 30, 2011, the Company has paid $250,000 of the fees and has $310,000 of Finders’ fees payable recorded in the consolidated balance sheet.

 POSCAN has committed to purchase an additional 47,619,000 Units at the same $0.21 price per Unit (for an aggregate additional purchase price of approximately $10 million) upon satisfaction of certain conditions, including:  (i) completion of an updated Measured and Indicated Resource Report prepared in compliance with Canadian National Instrument (“NI”) 43-101 standards that concludes that our Maricunga property meets certain technical requirements and that proceeding to the feasibility study phase for the Maricunga project is warranted; (ii) completion of a work program agreed to by us and POSCAN; and (iii) having the necessary permits and approvals in place for building and operating a brine test facility on the Maricunga property.  The SPA provides that we are to use the proceeds from such investments exclusively for activities related to the development of the Maricunga project, pursuant to budgets mutually agreeable to us and POSCAN.

The SPA includes provisions for POSCAN to purchase brine from the Maricunga property and test it at POSCAN’s test facility in Korea.  In addition, the SPA provides that we and POSCAN will discuss and evaluate the development, financing and construction of a brine testing facility on the Maricunga property, and that if such facility is built, we would (i) supply the test facility with brine and other materials and utilities and (ii) assist POSCAN in obtaining any rights, licenses and permits required to build and operate such facility.

The securities purchased by POSCAN will be restricted and may not be sold (subject to customary exceptions) until the earlier of nine months from their issuance or November 20, 2012.  Pursuant to the IRA, we have granted POSCAN the right to demand registration of the common stock included in the Units, and issuable upon exercise of the warrants included in the Units, commencing 12 months after the date of issuance of the Units and ending five years after the date of the IRA.  Our obligation to register any such shares shall terminate once they may be sold without registration in any 30 day period pursuant to Rule 144 under the Securities Act.  Upon a registration demand made by POSCAN pursuant to the IRA, we must file a registration statement covering the shares within 75 calendar days of such demand, and use our best efforts to have it declared effective within 120 calendar days of filing.  If we do not meet these deadlines, we must pay liquidated damages of 2% of the purchase price of the securities per month until such failures are cured (up to an aggregate maximum of 10%).  POSCAN will also have “piggy-back” registration rights with respect to such shares.

The IRA provides that we will appoint a director nominated by POSCAN to our Board of Directors, and will continue to nominate a POSCAN-designee at each annual meeting for as long as POSCAN owns not less than 10% of the issued and outstanding shares of our common stock.  So long as POSCAN holds any shares of our common stock (subject to customary exceptions), we shall not issue any new securities to any person unless we have also offered to POSCAN the right to purchase its pro rata share of such securities on the same terms and conditions as are offered, as to maintain its then percentage interest in our outstanding capital.  The IRA also provides that, until the earlier of (i) POSCAN owning less than 10% of our issued and outstanding common stock and (ii) our aggregate market capitalization exceeding $250 million, we may not undertake certain actions without the approval of POSCAN (which approval may be evidenced by the affirmative vote or consent of POSCAN’s director nominee), including:  a liquidation, merger or reorganization; a sale of all or substantially all of our assets; incurring indebtedness in excess of $1,000,000 (subject to certain exceptions); create or take any action that results in our holding the capital stock of any subsidiary that is not wholly owned (with certain exceptions); transfer or license our proprietary technology to a third party; substantially change the scope of our business; or amend or waive any non-competition or non-solicitation provision applicable to our Chief Executive Officer or Chief Operating Officer.

 
17

 

POSCO (with its subsidiaries) is a diversified company, with operations in energy, chemicals and materials and is one of the largest steel manufacturers in the world.   There can be no assurance that any final agreement will be reached with POSCAN with respect to a pilot plant, a commercial plant, any further investment by POSCAN, any purchase by POSCAN of our production, or otherwise.

The table below reflects the allocation of the gross proceeds from the POSCAN Offering during the three months ended September 30, 2011:

Par value of common stock issued
 
$
38,095
 
Paid-in capital
   
3,495,996
 
Derivative warrant liabilities
   
3,779,978
 
Offering expenses
   
685,944
 
Total gross proceeds
 
$
8,000,013
 

Stock Option Awards

A Director resigned on September 14, 2011, and forfeited 333,333 stock options. Accordingly, only 166,667 of his options remain outstanding and shall expire on December 14, 2011.

Summary of stock option activity is presented in the table below:
 
   
Number of
Shares
   
Weighted-
average
Exercise
Price
   
Weighted-
average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
Value
 
Outstanding at June 30, 2011
    1,800,000       0.35       8.06       -  
Forfeitures
    (333,333 )     0.25       -       -  
Outstanding at September 30, 2011
    1,466,667     $ 0.37       7.72     $ -  
Exercisable at September 30, 2011
    766,667     $ 0.37       6.76     $ -  

During the three months ended September 30, 2011 and 2010, the Company recognized stock-based compensation expense of $45,731 and $53,032, respectively related to stock options (of which $36,774 and $28,740 was related party for the three months ended September 30, 2011 and 2010, respectively – See Note 6).  As of September 30, 2011, there was approximately $124,350 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized ratably over a weighted-average period of approximately 1.83 years.

Warrants
 
Summary information regarding common stock warrants issued and outstanding as of September 30, 2011 is as follows:

   
Warrants
   
Weighted Average
Exercise Price
 
Outstanding at year-ended June 30, 2011
    54,200,565     $ 0.35  
                 
Issued
    38,095,300       0.40  
                 
Warrants issued pursuant to anti-dilution provisions
    1,188,847       0.38  
Exercised
    (4,000,000 )     0.05  
Outstanding at September 30, 2011
    89,484,712     $ 0.37  

 
18

 

Warrants outstanding as of September 30, 2011

Issuance Date
 
Exercise
Price
   
Outstanding
Number
of Shares
 
Remaining
Life
 
Exercisable
Number
of Shares
 
November 10, 2009 – December 23, 2009
  $ 0.31       7,162,305  
3.1 – 3.2 years
    7,162,305  
November 10, 2009 – December 23, 2009
  $ 0.48       7,211,339  
3.1 – 3.2 years
    7,211,339  
June 9, 2010 – September 13, 2010
  $ 0.32       9,575,516  
3.7 – 4.0 years
    9,575,516  
June 9, 2010 – July 13, 2010
  $ 0.20       527,891  
3.7 – 3.8 years
    527,891  
November 8-15, 2010
  $ 0.05       1,600,000  
4.1 years
    1,600,000  
December 9, 2010 – March 24, 2011
  $ 0.15       4,806,878  
4.2 – 4.4 years
    4,806,878  
March 24, 2011
  $ 0.45       4,256,827  
4.5 years
    4,256,827  
April 7, 2011
  $ 0.37       11,960,050  
2.6 years
    11,960,050  
April 7, 2011
  $ 0.26       1,913,606  
2.6 years
    1,913,606  
May 2, 2011
  $ 0.43       1,500,000  
4.6 years
    1,500,000  
May 2, 2011
  $ 0.36       75,000  
4.6 years
    75,000  
June 27, 2011
  $ 0.37       800,000  
2.5 years
    800,000  
September 14, 2011
  $ 0.40       38,095,300  
3.0 years
    38,095,300  
Total
            89,484,712         89,484,712  

The intrinsic value of warrants outstanding at September 30, 2011 was $99,200.

NOTE 11.   FAIR VALUE MEASUREMENTS
 
As defined in FASB ASC Topic No. 820 – 10, fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic No. 820 – 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:

Level 1:
 
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2:
 
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.

Level 3:
  
Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The Company’s valuation models are primarily industry standard models.  Level 3 instruments include derivative warrant instruments.  The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.

As required by FASB ASC Topic No. 820 – 10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of the derivative warrant instruments was calculated using a modified lattice valuation model.

 
19

 

Fair Value on a Recurring Basis
 
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2011:

   
Quoted
Prices
                   
   
In Active
   
Significant
             
   
Markets for
   
Other
   
Significant
       
   
Identical
   
Observable
   
Unobservable
   
Total
 
   
Assets
   
Inputs
   
Inputs
   
Carrying
 
Description
 
Level 1
   
(Level 2)
   
(Level 3)
   
Value
 
Derivative liabilities - warrant instruments
  $ -     $ -     $ 11,514,123     $ 11,514,123  

The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2011:

Description
 
Quoted
Prices
In Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total
Carrying
Value
 
Derivative liabilities - warrant instruments
  $ -     $ -     $ 15,244,754     $ 15,244,754  

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as level 3 in the fair value hierarchy:

   
Significant Unobservable Inputs (Level 3)