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EX-32.1 - EXHIBIT 32.1 - Li3 Energy, Inc.v244815_ex32-1.htm
 
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)
 
   
Three Months ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
Balance as of June 30,
  $ (15,244,754 )   $ (8,029,728 )
Change in fair value
    6,948,644       2,772,726  
Additions
    (3,779,978 )     (236,937 )
Exercise of Warrants
    561,965       -  
Ending balance
  $ (11,514,123 )   $ (5,493,939 )
                 
Change in fair value of derivative warrant instruments included in earnings for the period ended September 30, 2011 and 2010
  $ 6,948,644     $ 2,772,726  

 The Company recorded a realized loss of $511,511 on the settlement of a portion of the warrant derivative liability due to the exercise of certain warrants, and which is included in the change in the fair value of warrant derivative liability in the consolidated income statement during the period ended September 30, 2011.

NOTE 12.  COMMITMENTS AND CONTINGENCIES

Alfredo

During fiscal year 2011, the Company acquired an option to acquire a mine in Chile (“Alfredo Mine”) from a third party (“Alfredo Sellers”) which further required the Company to make periodic option payments to maintain the Company’s option rights to acquire the Alfredo Mine.  This option terminated during fiscal year 2011 as a result of the Company not making the required option payments.  Subsequent to the termination of the Company’s option rights, the Company entered into an additional agreement with the Alfredo Sellers (“SPA Amendment”).

 
20

 

Pursuant to the SPA Amendment, if and when the following milestones (“Milestones”) are achieved with respect to the Alfredo Mine or any other Li3 Energy Chilean iodine nitrate property, the Company will make the following additional payments (“Contingent Payments”) to the Alfredo Sellers:
 
 
a)
$1,000,000 upon the Board of Directors’ resolution to commence final engineering and design of the Alfredo Mine or any other Li3 Energy Chilean iodine nitrate property;
 
 
b)
A further $2,000,000 upon the Board of Directors’ resolution to commence construction of the Alfredo Mine or any other Li3 Energy Chilean iodine nitrate property;
 
 
c)
A further $2,500,000 upon commencement of commercial production from the Alfredo Mine (meaning production at a rate of 75% of design capacity for 3 months) or any other Li3 Energy Chilean iodine nitrate property;

In the event a Contingent Payment for any milestone is paid for any iodine nitrate property (including the Alfredo Mine), no Contingent Payment for the same milestone will be payable for any other Chilean iodine nitrate property. The Alfredo Sellers have the right to take any or all of the above milestone payments in shares of the Company’s common stock instead of cash, valued at the greater of (i) $0.25 per share or (ii) the average of the closing price of the common stock on the 30 trading days immediately preceding the relevant payment date. The Company is under no obligation to achieve or pursue any of the milestones and the Company currently does not own, or have any rights, to the Alfredo Mine or any other Chilean iodine nitrate properties.

We have not undertaken any exploration and development activities on the Alfredo Mine. As of the date of this filing, we are not in discussions with the owners of Alfredo to reacquire the option to purchase the Alfredo Mine, and there can be no assurance that a new option will be successfully negotiated or executed. We are actively exploring opportunities to acquire other iodine/sodium nitrate prospects in addition to or in lieu of the Alfredo Mine; however, there can be no assurance that suitable prospects will be available on terms acceptable to us or that any such acquisition will be successfully completed.

Nevada

Under the CSV, LM and MW Option Agreement, as amended, the Company is obligated to pay amounts totaling $75,000 contingent upon future events which had not occurred as of September 30, 2011.

Under the BSV Option Agreement, as amended, the Company was required to pay to GeoXplor $100,000 on June 30, 2010, which the Company has not paid. The $100,000 owed to GeoXplor is recorded in accrued expenses as of September 30, 2011 and June 30, 2011. During the year ended June 30, 2011, the Company became obligated to pay approximately $57,000 of claim maintenance fees on the Nevada Claims and approximately $32,600 of Nevada state taxes, which is recorded in accrued expenses as of September 30, 2011 and June 30, 2011. At September 30, 2011 and June 30, 2011, the Company has recorded $189,600 in accrued liabilities for these obligations.

NOTE 13. SUBSEQUENT EVENTS

Exercise of warrants

On October 27, 2011, an investor exercised its Double Option to purchase 200,000 D units for gross proceeds of $10,000.

 
21

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Li3 Energy, Inc. (“Li3 Energy,” the “Company,” “we,” “us” or “our”) is an exploration company, focused on the discovery and development of lithium and potassium brine and nitrate and iodine deposits in Chile, Argentina and Peru.

We own (a) a 60% interest in the Maricunga project, which consists of mining concessions covering an area of approximately 3,553 acres (1,438 hectares) prospective for lithium and potassium brines, and is located in the Salar de Maricunga in northern Chile; (b) a mining concession on 2,995 acres (1,212 hectares) situated on brine salars in Argentina, known as Cauchari; and (c) undeveloped mineral claims prospective for lithium and potassium covering a total area of 19,500 acres (7,890 hectares) located in the Regions of Puno, Tacna and Moquegua, Peru. We are currently evaluating additional exploration and production opportunities.

We were incorporated on June 24, 2005, as Mystica Candle Corp. and were originally in the business of manufacturing, marketing and distributing soy-blend scented candles and oils. We determined that we could not continue with our business operations as outlined in our original business plan because of a lack of financial results and resources; therefore, we redirected our focus towards identifying and pursuing options regarding the development of a new business plan and direction. In July 2008 we changed our name from Mystica Candle Corp. to NanoDynamics Holdings, Inc., to facilitate discussions with NanoDynamics, Inc., a Delaware corporation, regarding a possible business combination. However, we determined not to proceed with that business combination. In October 2009, we changed our name from NanoDynamics Holdings, Inc., to Li3 Energy, Inc., as we refocused our business strategy on the energy sector and lithium mining opportunities.

The following discussion highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” above and “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission (“SEC”) (the “Form 10-K”), for a discussion of the uncertainties, risks and assumptions associated with these forward-looking statements.

The following discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements as of September 30, 2011, and for the three months ended September 30, 2011 and 2010, which are unaudited. In the opinion of management, such consolidated financial statements include the adjustments and accruals necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted in these financial statements as of September 30, 2011, and for the three months ended September 30, 2011 and 2010.
 
You should read this discussion and analysis together with such consolidated financial statements and the notes thereto.

Going Concern

The Company currently has positive working capital of $4,710,301 at September 30, 2011, but 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 exploration activities, the Company has sustained and continues to sustain losses. The Company cannot predict if and when the Company may generate profits. In the event the Company identifies commercial reserves of minerals, the Company 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.

Our ability to complete additional equity or debt 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 us and the offering terms. In addition, our ability to complete an offering may be dependent on the status of our exploration activities, which cannot be predicted. There is no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable.
 
 
22

 

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.

Operational Update

Chile

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 at least 51%, up to a maximum of 60%, ownership of the Maricunga Companies, which collectively own the Maricunga Project (“Maricunga”). The Maricunga property is undeveloped and covers an area of approximately 3,553 acres (1,438 hectares), comprising six exploitation mining 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 Energy SPA, acquired from the Maricunga Sellers a 60% interest in each of the Maricunga Companies (the “Maricunga Shares”). The purchase price was $6,370,000 in cash and 127,500,000 restricted shares of common stock of the Company (the “Maricunga Purchase Price Shares”), 50% of which is restricted from sale for nine months and the remainder of which is restricted from sale for 18 months as provided in the Acquisition Agreement (the “Lock-Up”). The Lock-Up will terminate if (a) we sign an agreement with one or more investors for them to finance the necessary development of the project to the stage of commercial production; (b) an offer with characteristics of a take-over bid is made for our shares; (c) our current CEO sells his shares in the Company, or (d) we agree to sell our shares in Minera Li Energy SPA and/or Minera Li Energy SPA agrees to the sale of the Maricunga Shares. In the event of (d) above, we have agreed that the sale price in any such sale will be based on at least two valuations carried out by institutions with recognized experience in these types of mining assets. The $6,370,000 in cash includes the $250,000 deposit paid in December 2010 and a $120,000 gross-up for the fees of certain agents to the Maricunga Sellers. On June 2, 2011, upon the registration in Chile of the transfer of the shares in the Maricunga Companies to Minera Li Energy SPA, the closing occurred and the remaining $6,120,000 cash and Maricunga Purchase Price Shares were released from escrow and paid to the Maricunga Sellers. The Company has agreed to register, under the Securities Act, half of the Maricunga Purchase Price Shares by January 31, 2012, and the remainder by October 31, 2012. In signing the Acquisition Agreement, the Company also committed to finance upon closing, up to $5 million for technical feasibility studies for the project within 180 days of closing. The Company estimates that capital expenditures for this project will be approximately $170 million.

We have agreed with the Maricunga Sellers: (a) to increase the number of directors constituting our Board of Directors to seven; (b) that the Maricunga Sellers will have the right to nominate three of our directors and that a fourth director (who shall hold the position of Chairman of the Board) will be jointly nominated by the Maricunga Sellers and by our management (such persons, or any successors thereto nominated by the Maricunga Sellers or by the Maricunga Sellers and management, as the case may be, the “Nominees”), and that the Board shall appoint such Nominees to fill vacancies created in the Board by the increase in the number of directors and by resignations, to serve until the next annual meeting of stockholders; (c) that the Nominees shall continue to be nominated as directors by our management at the next and subsequent annual meetings of our stockholders, and at any special meeting of the stockholders at which directors are to be elected (collectively, a “Meeting”), during the period of the Lock-Up (but the Nominees will be subject to reelection by the stockholders as provided in our By-Laws); and (d) that if any Nominee is not elected by the stockholders pursuant to the By-Laws, the Maricunga Sellers, or the Maricunga Sellers and management, as the case may be, will have the right to designate the same or another person as their Nominee at the next Meeting, provided it is within the period of the Lock-Up.

Previous exploration work has been done in Maricunga. During the 1980’s, the “Comite de Sales Mixtas” CORFO (State Agency of the Republic of Chile) carried out a study in order to determine the potential in inorganic salts of commercial interest of the Salars. After performing a sampling and chemical analysis program, CORFO made certain estimates of mineral resources at the Salar de Maricunga.

In 2007, the owners of the Project started the first campaign of exploration by drilling 58 wells on a systematic grid of 500 m2 with a depth of 20 meters in each well. After following certain protocols, 226 liquid samples were taken from the wells and were sent to the Cesmec laboratory in Antofagasta for analysis.

As part of our due diligence for the Maricunga acquisition, we conducted a preliminary brine sampling program in the first calendar quarter of 2011 which consisted of 104 samples, and results from these samples confirm the results of the 2007 shallow well sampling program and the historical sampling work performed by CORFO.

 
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In September 2011, POSCO Canada Ltd. (“POSCAN”) a wholly owned subsidiary of POSCO (a South Korean company), purchased 38,095,300 Units of our securities for approximately $8 million, with each “Unit” consisting of one share of our common stock and a three-year warrant to purchase one share of our common stock at an exercise price of $0.40. POSCAN will 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. The agreement with POSCAN includes provision for POSCAN to purchase brine from the Maricunga property and test it at POSCAN’s test facility in Korea. In addition, we and POSCAN will discuss and evaluate the development, financing and construction of a brine testing facility on the Maricunga property, and if such a facility is built, we would supply the test facility with brine and other materials and utilities and assist POSCAN in obtaining any rights, licenses and permits required to build and operate such facility. 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.

We are now beginning our phase one exploration and development plan on Maricunga with the $8 million of funding from POSCAN. Our goal is to achieve a Measured and Indicated 43-101 Resource Report on Maricunga using these funds. In order to reach this goal, we plan to perform the following activities, among other things:

 
1.
We have already obtained permits for our proposed seismic and drilling program and test facility construction;
 
 
2.
A high resolution p-wave seismic refraction tomography survey;
 
 
3.
Sonic core sample drilling;
 
 
4.
Well drilling construction and RC drilling;
 
 
5.
Pump tests (i) to evaluate the hydraulic parameters of the salar, (ii) to supply quantities of production well brine for testing, and (iii) to stress the salar aquifer and measure the hydraulic response;
 
 
6.
Laboratory process simulations to test multiple potential process routes and generate laboratory scale quantities of lithium products;
 
 
7.
Construct a test facility near the salar in order to collect data;
 
 
8.
Undertake an environmental impact study.
 
We expect to complete these activities (other than the environmental impact study) by the end of the first calendar quarter of 2012. If successful, and we satisfy the conditions for and receive the additional $10 million of funding from POSCO Canada Ltd., we plan to use such funds to complete a feasibility study on Maricunga.

In addition, we are continuously evaluating more properties to acquire adjacent to Maricunga, as we seek to expand our land package in the area. We may also seek to acquire additional properties for any processing site and we also plan to make improvements to the Maricunga site infrastructure, camp, and property.

Alfredo

During fiscal year 2011, the Company acquired an option to acquire a mine in Chile (“Alfredo Mine”) from a third party (“Alfredo Sellers”) which further required the Company to make periodic option payments to maintain the Company’s option rights to acquire the Alfredo Mine.  This option terminated during fiscal year 2011 as a result of the Company not making the required option payments.  Subsequent to the termination of the Company’s option rights, the Company entered into an additional agreement with the Alfredo Sellers (“SPA Amendment”).

In March 2011, the Company signed SPA Amendment to the Alfredo SPA with the Alfredo Sellers. The SPA Amendment was in anticipation of the Company re-acquiring rights to the Alfredo property or another Chilean iodine nitrate property  If the Alfredo Sellers had closed on a proposed subscription of $2,000,000 in the Company’s 2011 Offering, the SPA Amendment would have adjusted the terms upon which the Alfredo Sellers could invest in the Company pursuant to an option granted under the Alfredo SPA. The Alfredo Sellers did not subscribe to the 2011 Offering. However, the SPA Amendment did change the Alfredo SPA as it relates to the Contingent Payments as noted below.

 
24

 
 
Pursuant to the SPA Amendment, if and when the following milestones (“Milestones”) are achieved with respect to the Alfredo Mine or any other Li3 Energy Chilean iodine nitrate project, the Company will make the following additional payments (“Contingent Payments”) to the Alfredo Sellers:
 
a)
$1,000,000 upon the Board of Directors’ resolution to commence final engineering and design of the Alfredo Mine or any other Li3 Energy Chilean iodine nitrate property;
 
b)
A further $2,000,000 upon the Board of Directors’ resolution to commence construction of the Alfredo Mine or any other Li3 Energy Chilean iodine nitrate property;
 
c)
A further $2,500,000 upon commencement of commercial production from the Alfredo Mine (meaning production at a rate of 75% of design capacity for 3 months) or any other Li3 Energy Chilean iodine nitrate property;

In the event a Contingent Payment for any milestone is paid for any iodine nitrate property (including the Alfredo Mine), no Contingent Payment for the same milestone will be payable for any other Chilean iodine nitrate property. The Alfredo Sellers have the right to take any or all of the above milestone payments in shares of the Company’s common stock instead of cash, valued at the greater of (i) $0.25 per share or (ii) the average of the closing price of the common stock on the 30 trading days immediately preceding the relevant payment date. The Company is under no obligation to achieve or pursue any of the milestones and the Company currently does not own, or have any rights, to the Alfredo Mine or any other Chilean iodine nitrate properties. The SPA Amendment was in anticipation of the Company re-acquiring rights to the Alfredo Mine or another Chilean iodine nitrate property (which has not yet occurred).

We have not undertaken any exploration and development activities on the Alfredo Mine. As of the date of this filing, we are not in discussions with the owners of Alfredo to reacquire the option to purchase the Alfredo Mine, and there can be no assurance that a new option will be executed. We are actively exploring opportunities to acquire other iodine/sodium nitrate prospects in addition to or in lieu of the Alfredo property; however, there can be no assurance that suitable prospects will be available on terms acceptable to us or that any such acquisition will be successfully completed.

Argentina

In July 2010, we acquired 100% of the issued and outstanding shares of Noto Energy S.A., an Argentinean corporation (“Noto”), which beneficially owns a 100% interest over 2,995 acres situated on brine salars in Argentina, known as Cauchari. We are in the process of evaluating the Noto property. Given our limited resources, we continue to develop plans to pursue exploration and/or development of the Noto property. Any such plans include development beyond a year and are subject to the availability of financing. We continue to evaluate other nearby properties in Argentina to potentially expand our land package in this region.

We plan to expend approximately $50,000 on preliminary exploration work on the Noto property between now and the end of the first calendar quarter of 2012.

Strategic Plan

Our strategic plan is to explore and develop our existing projects and to identify opportunities and generate new projects with near-term production potential, with the goal of becoming a company with valuable lithium or industrial minerals properties. Our primary objective is to become a low cost lithium producer as well as a significant producer of potassium nitrate.   We believe the key to achieving this objective will be to become an integrated chemical company through the strategic acquisition and development of lithium assets as well as other assets that have by-product synergies.

We have acquired a 60% interest in the Maricunga project, an advanced lithium and potassium chloride project in Chile, and we continue to explore other lithium and industrial minerals prospects in the region, located to complement the potential Alfredo project or other nearby iodine projects that we may acquire, in order to achieve integration of operations to produce metallurgical grade lithium, commercial grade fertilizer and pharmaceutical grade iodine.

Our strategy currently principally involves the exploration of the Maricunga property and the acquisition and exploration of the Alfredo property or another iodine/nitrate property. On the Maricunga project, we expect to spend approximately $18.2 million of exploration and development expenses in order to complete a feasibility study on Maricunga. (A “feasibility study” means a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis for a final decision whether to advance the development of the deposit for mineral production.) The Company is dividing this into two phases: (i) Spending $8 million to reach a Measured and Indicated 43-101compliant resource, which is expected in the first calendar quarter of 2012; and, if phase one is successful, (ii) spending $10 million to complete a feasibility study on Maricunga.   If we acquire the Alfredo Property, we would expect to spend approximately $6.3 million of acquisition costs (not including an additional up to $5.5 million payable to Alfredo Sellers upon certain post-feasibility milestones), and we would expect to incur approximately $2.7 million of exploration expenses in order to bring the Alfredo Property to the feasibility stage. In the event we are unable to acquire the Alfredo Property, we will focus our efforts on the exploration of the Maricunga property, and we are also actively exploring opportunities to acquire other iodine/sodium nitrate prospects in addition to or in lieu of the Alfredo property, although there can be no assurance that suitable prospects will be available on terms acceptable to us or that any such acquisition will be successfully completed.

 
25

 

 
In order to finance the up to approximately $15 million of expected acquisition and exploration costs outlined above over the next twelve months, as well as to fund the approximately $2.5 million of working capital we expect to require over the next twelve months, we will need to raise a substantial amount of funds through one or more offerings of our debt, equity or convertible securities, which may include the $10 million of equity financing conditionally committed by POSCAN. There can be no assurance that such financing will be available, or will be available on acceptable terms, for us to meet these requirements.

Results of Operations

Three Months Ended September 30, 2011 Compared with Three Months Ended September 30, 2010

Revenues

We had no revenues during the three months ended September 30, 2011 and 2010.

Exploration expenses

During the three months ended September 30, 2011 and 2010, we incurred exploration expenses of $468,242 and $272,642, respectively.  The expenses incurred during the three months ended September 30, 2011 relate to our efforts to begin exploration activities on our Maricunga project in Chile and principally include direct expenses and consulting expenses.

General and administrative Expenses
 
During the three months ended September 30, 2011 and 2010, we incurred general and administrative expenses of $1,250,196 and $831,227, respectively.  General and administrative expenses largely consist of professional services and consulting, travel, stock compensation, and salaries.  The increase in expenses incurred related primarily to higher legal fees, and higher payroll expenses during the three months ended September 30, 2011.
  
Other Income (Expense)

Other income for the three months ended September 30, 2011, was $5,558,418 compared to other income of $2,767,412 for the three months ended September 30, 2010.  The increase in other income was due to our recognition of an unrealized gain from the change in the fair value of the derivative liability related to our outstanding warrant instruments of $6,948,644 during the three months ended September 30, 2011 compared to $2,772,726 during the three months ended September 30, 2010.  The change in fair value of our derivative warrant liability has no impact on our cash flow from operations.  

Interest expense amounted to $534,204 and $1,944 during the three months ended September 30, 2011 and 2010, respectively.  The large increase in interest expense was a result of interest and amortization of the debt discount on the $1.5 million zero coupon convertible notes entered into in May 2011.   The Company also incurred a loss on debt extinguishment of $841,752 as a result of entering into a waiver agreement with the lenders whereby the terms of the notes were extended and the conversion price reduced from $0.40 per share to $0.12 per share, which resulted in the Company expensing all unamortized deferred financing costs and recording the difference between the carrying value of the notes and the estimated fair value of the post-modification notes as expense.  During the three months ended September 30, 2011 and 2010, we incurred losses on foreign currency translation of $14,985 and $3,437, respectively, and such losses related to our operations in Peru and Chile.

Liquidity and Capital Resources

Liquidity and Capital Resources

Due to our brief history and historical operating losses, our operations have not been a source of liquidity, and our primary sources of liquidity have been debt and proceeds from the sale of our equity securities in several private placements.

Although we have begun the acquisition of certain mining properties, any of such properties that we may acquire will require exploration and development that could take years to complete before it begins to generate revenues. There can be no assurances that we will be successful in acquiring such properties or that if we do complete acquisitions, properties acquired will be successfully developed to the revenue producing stage. If we are not successful in our proposed mining operations, our business, results of operations, liquidity and financial condition will suffer materially.

 
26

 

 
Various factors outside of our control, including the price of lithium and other minerals, overall market and economic conditions, the downturn and volatility in the US equity markets and the trading price of our common stock may limit our ability to raise the capital needed to execute our plan of operations. We recognize that the US economy is currently experiencing a period of uncertainty and investor appetite for our securities may not be at their peak. These or other factors could adversely affect our ability to raise additional capital. As a result of an inability to raise additional capital, our short-term or long-term liquidity and our ability to execute our plan of operations could be significantly impaired.

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 POSCO Warrants and recorded as derivative liabilities-warrant instruments.

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.

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.

In addition to utilizing our capital to acquire properties and pay other corporate costs, we periodically issue shares of our common stock as consideration in lieu of cash to conserve our cash and meet our obligations.  We likely will continue to issue common stock for these purposes where feasible, if we determine that it is in our economic best interests.

 
27

 

 
We have been using the net proceeds from POSCAN towards the implementation of our business development plan and for general working capital purposes.  As we expect to spend approximately $12.3 million over the next twelve months, we will require additional capital to pay our obligations and to execute our exploration and development plans for our existing lithium mining properties and any others that we may be successful in acquiring.  We plan to seek to raise such capital through additional sales of our equity or debt securities.  There can be no assurance, however, that such financing will be available to us or, if it is available, that it will be available on terms acceptable to us and that it will be sufficient to fund our expected needs.  If we are unable to obtain sufficient financing, we may not be able to proceed with our exploration and development plans or meet our ongoing operational working capital needs.
 
At September 30, 2011, we had cash and cash equivalents of $7,326,933, compared to $952,401 at June 30, 2011.  The increase in cash and cash equivalents from June 30, 2011 to September 30, 2011 was the result of the Company receiving $7,484,069 of cash from financing activities due to the Company receiving $7,314,069 of net cash proceeds from the sale of units to POSCAN and $200,000 from the exercise of warrants and was reduced by a $30,000 fee for the Waiver Agreement.  These amounts are partially offset by the cash used in operating activities $1,052,692 and the acquisition of fixed assets $56,845.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide disclosure under this Item 3.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and includes those policies and procedures that:
 
 
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

 
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

 
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 
28

 

Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of September 30, 2011 of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act.  Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2011. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses as more fully described below.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) inadequate segregation of duties consistent with control objectives; and (2) ineffective controls over period end financial disclosure and reporting processes primarily due to limited financial accounting staff resources. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of September 30, 2011.

Management believes that the material weaknesses set forth above did not have an effect on our financial results.
 
Management’s Remediation Initiatives

In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we intend to identify and implement additional internal controls during fiscal year 2012.

Changes in Internal Controls over Financial Reporting
 
There were no changes in the Company’s internal controls over financial reporting, known to executive management that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm business.

We are currently not aware of any pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by any governmental authority.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in the Form 10-K under Part I, Item 1A, “Risk Factors,” therein.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Except as previously disclosed in Current Reports on Form 8-K that we have filed, or as set forth below, we have not sold any of our equity securities during the period covered by this Report that were not registered under the Securities Act.

 
29

 

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None. 
 
Item 5. Other Information

None.
 
Item 6. Exhibits

The following exhibits are filed as part of (or are furnished with, as indicated below) this Quarterly Report or, where indicated, were heretofore filed and are hereby incorporated by reference.

In reviewing the agreements included (or incorporated by reference) as exhibits to this Form 10-Q, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:

 
x
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
 
 
x
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
 
 
x
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
 
 
x
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Form 10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
 
Exhibit
Number
   
Description
       
10.1
   
Securities Purchase Agreement, dated as of August 24, 2011, between Li3 Energy, Inc. and POSCO Canada, Ltd. (1)
       
10.2
   
Investor’s Rights Agreement, dated as of August 24, 2011, between Li3 Energy, Inc. and POSCO Canada, Ltd. (1)

10.3
   
Form of Warrant to be issued pursuant to Securities Purchase Agreement. (1)
       
10.4 †
   
Employment Services Agreement, dated as of August 24, 2011, between Li3 Energy, Inc. and Luis F. Saenz. (1)
       
10.5
   
Amendment and Waiver Agreement, dated as of August 25, 2011, between Li3 Energy, Inc. and certain private institutional investors. (1)

 
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31.1
   
Certification of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
31.2
   
Certification of Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
32.1¶
   
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
32.2¶
   
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Management contract or compensatory plan or arrangement

This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

(1)
Previously filed as an Exhibit to the Company’s Current Report on Form 8-K filed with the SEC on August 26, 2011, which exhibit is incorporated herein by reference.

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:  January 6, 2012
LI3 ENERGY, INC.
   
 
By:
/s/ Luis F. Saenz
   
Name: Luis F. Saenz
   
Title:   Chief Executive Officer
   
 (Principal Executive Officer)
     
 
By:
/s/ Eric E. Marin
   
Name: Eric E. Marin
   
Title:   Interim Chief Financial Officer
   
 (Principal Financial Officer)

 
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EXHIBIT INDEX

Exhibit
Number
   
Description
       
31.1
   
Certification of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
31.2
   
Certification of Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
32.1¶
   
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
32.2¶
   
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

 
33