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EX-32.2 - EXHIBIT 32.2 - Li3 Energy, Inc.v300591_ex32-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 31, 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.

Yesx 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 companyx
(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¨ Nox

 

As of February 13, 2012 were 322,209,220 shares of the registrant’s common stock outstanding.

 
 

 

LI3 ENERGY, INC.

 

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 24
     
Item 3 Quantitative and Qualitative Disclosures About Market Risk 31
     
Item 4 Controls and Procedures 31
   
Part II – Other Information  
     
Item 1 Legal Proceedings 32
     
Item 1A Risk Factors 32
     
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 32
     
Item 3 Defaults Upon Senior Securities 32
     
Item 4 (Removed and Reserved) 32
     
Item 5 Other Information 32
     
Item 6 Exhibits 32
   
Signatures 34

 

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 Amendment No. 2 to our Annual Report on Form 10-K/A for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission (the “SEC”) on January 6, 2012.

 

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)

  

   December 31,
2011
   June 30, 
2011
 
Assets          
Current Assets:          
Cash  $2,268,138   $952,401 
Deferred financing costs   -    103,250 
Prepaid expenses and advances   111,482    41,809 
Total current assets   2,379,620    1,097,460 
           
Mineral rights   64,041,000    64,041,000 
Other assets   21,711    - 
Property and equipment, net of accumulated depreciation of $24,651 and $19,195, respectively   241,602    - 
Total non- current assets   64,304,313    64,041,000 
Total assets  $66,683,933   $65,138,460 
           
Liabilities & Equity          
Current Liabilities:          
Accounts payable  $366,967   $259,992 
Accrued expenses   406,963    433,028 
Finders’ fees payable   160,000    - 
Payable to related parties   11,213    110,986 
Zero-coupon convertible debt, net of net of discount of $208,576 and $0, respectively   1,448,154    372,764 
Notes payable   95,000    95,000 
Total current liabilities   2,488,297    1,271,770 
           
Derivative liabilities-warrant instruments   6,830,711    15,244,754 
Total liabilities   9,319,008    16,516,524 
           
Commitments and contingencies   -    - 
           
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; 322,209,220 and 279,913,920 shares issued and outstanding as of December 31, 2011 and June 30, 2011, respectively   322,209    279,914 
Additional paid-in capital   63,238,456    58,307,796 
Deficit accumulated during exploration stage   (30,421,533)   (35,461,774)
Total equity of Li3 Energy, Inc.   33,139,132    23,125,936 
Non-controlling interest   24,225,793    25,496,000 
Total equity   57,364,925    48,621,936 
Total liabilities and equity  $66,683,933   $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) 
   Three Months Ended
December 31,
   Six Months Ended
December 31
   through
December 31
 
   2011   2010   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   -    4,070,000    -    4,070,000    8,838,785 
Loss (gain) on settlements, net   -    (422,500)   -    (422,500)   1,497,500 
Exploration expenses   2,984,020    36,644    3,452,262    309,286    6,348,116 
General and administrative expenses   1,550,168    1,979,346    2,800,364    2,810,573    11,199,644 
Total operating expenses   4,534,188    5,663,490    6,252,626    6,767,359    27,885,514 
                          
Other (income) expense:                         
Warrant modification expense   -    -    -    -    1,068,320 
Change in fair value of derivative liability – warrant instruments   (4,654,915)   3,601,894    (11,603,559)   829,168    736,135 
Loss on debt extinguishment   -    -    841,752    -    841,752 
Loss on foreign currency   25,878    1,046    40,863    4,483    44,640 
Interest income   (1,754)   (42)   (2,469)   (109)   (7,418)
Interest expense   166,549    2,557    700,753    4,501    1,123,893 
Total other (income) expense   (4,464,242)   3,605,455    (10,022,660)   838,043    3,807,322 
                          
Net income (loss)  $(69,946)  $(9,268,945)  $3,770,034   $(7,605,402)  $(31,691,740)
                          
Net loss attributable to non-controlling interest   (1,270,207)   -    (1,270,207)   -    (1,270,207)
Net income (loss) attributable to LI3 Energy, Inc.   1,200,261    (9,268,945)   5,040,241    (7,605,402)   (30,421,533)
                          
Basic and diluted loss per share  $0.00   $(0.10)  $0.02   $(0.09)     
                          
Weighted average number of  common shares outstanding                         
Basic   322,152,698    91,137,984    304,987,248    86,923,286      
Diluted   338,775,945    91,137,984    321,318,365    86,923,286      

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 December 31, 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 
October 2011, exercise of $0.05 per share D Warrants for cash   200,000    200    9,800    -    -    10,000 
October 2011, fair value of D warrants reclassified from derivative liability to equity upon exercise   -    -    28,497    -    -    28,497 
Amortization of stock-based compensation   -    -    308,383    -    -    308,383 
Net income, period ended December 31, 2011   -    -    -    5,040,241    (1,270,207)   3,770,034 
Balance, December 31, 2011   322,209,220   $322,209   $63,238,456   $(30,421,533)  $24,225,793   $57,364,925 

 

See accompanying notes to unaudited consolidated financial statements

 

6
 

 

LI3 ENERGY, INC.

(An Exploration Stage Company)

Consolidated Statements of Cash Flow

(Unaudited)

           June 24, 2005 
   Six Months   Six Months   (inception) 
   Ended   Ended   Through 
   December 31,   December 31,   December 31, 
   2011   2010   2011 
Cash Flows from Operating Activities               
Net income (loss)  $3,770,034   $(7,605,402)  $(31,691,740)
Adjustments to reconcile net income (loss) to net cash used in operating activities:               
Depreciation   5,456    1,950    24,956 
Amortization of deferred financing costs   36,875    -    66,375 
Loss (gain) on settlements, net   -    (422,500)   1,497,500 
Loss on extinguishment of debt   841,752    -    841,752 
Stock-based compensation – related party   226,144    90,000    1,187,835 
Stock-based compensation   82,239    1,493,194    2,929,015 
Warrant modification expense   -    -    1,068,320 
Change in fair value of warrant derivative liabilities   (11,603,559)   829,168    736,135 
Zero coupon interest accretion and amortization of debt discount on convertible notes   660,032    -    1,032,796 
Inventory impairment   -    -    1,469 
Mineral rights impairment expense   -    4,070,000    8,838,785 
Changes in operating assets and liabilities:               
Increase in inventory   -    -    (1,469)
Decrease (increase) in prepaid expenses and advances   (69,673)   22,818    (111,482)
Increase in other assets   (21,711)   -    (21,711)
Increase in accounts payable   106,975    3,351    366,967 
Increase in accrued expenses   133,935   153,488    1,146,473 
Increase (decrease) in payable to related parties   (99,773)   84,919    11,213 
Net cash used in operating activities   (5,931,274)   (1,279,014)   (12,076,811)
                
Cash Flows from Investing Activities               
Acquisition of mineral rights   -    (430,000)   (7,968,785)
Acquisition of equipment   (247,058)   -    (256,558)
Increase in leasehold improvement   -    -    (10,000)
Net cash used in investing activities   (247,058)   (430,000)   (8,235,343)
                
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   210,000    -    1,643,575 
Proceeds from issuance of common stock, net of offering costs   7,314,069    1,944,912    19,446,717 
Net cash provided by financing activities   7,494,069    1,944,912    22,580,292 
                
Net increase in cash   1,315,737    235,898    2,268,138 
                
Cash at beginning of period   952,401    302,821    - 
                
Cash at end of period  $2,268,138   $538,719   $2,268,138 
                
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  $590,462   $-   $5,195,008 
Fair value of derivative warrant instruments issued in private offerings  $3,779,978   $990,050   $8,874,504 
Consolidation of non-controlling interest of the Maricunga Companies  $-   $-   $25,496,000 

See accompanying notes to unaudited consolidated financial statements

 

 

7
 

 

LI3 ENERGY, INC.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

For the quarterly period ended December 31, 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.

 

The Company’s six 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; Li3 Energy Caymans, Inc., 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”).

 

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. The Maricunga Companies are controlled by the Company. 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 December 31, 2011 and June 30, 2011, respectively. The Company has not experienced any losses on its deposits of cash and cash equivalents.

 

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. As of December 31, 2011, management evaluated our capitalized mineral rights for impairment and determined no impairment was required.

 

8
 

 

e. Earnings (Loss) per Share

 

Basic net earnings (loss) per share amounts are computed by dividing the net income (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 income (loss) per share.

 

Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS for the three months and six months ended December 31, 2011:

 

   Three months ended   Six months ended 
   December 31, 2011   December 31, 2011 
   Net
Income
   Shares   Per Share
Amount
   Net
Income
   Shares   Per Share
Amount
 
Basic EPS  $1,200,261    322,152,698   $0.00   $5,040,241    304,987,248   $0.01 
Dilutive effect of convertible debt   60,606    13,301,025        118,995    12,814,450     
Dilutive effect of warrants calculated using the treasury stock method   (80,556)   622,222        (333,200)   816,667     
Dilutive effect of restricted stock       2,700,000            2,700,000     
Diluted EPS  $1,180,311    338,775,945   $0.00   $4,826,036    321,318,365   $0.01 

  

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

 

   Three months ended 
   December 31,
2011
   December 31,
2010
 
Stock options   600,000    250,000 
Stock warrants   87,884,712    37,202,664 

  

   Six months ended 
   December 31,
2011
   December 31,
2010
 
Stock options   600,000    250,000 
Stock warrants   87,884,712    37,202,664 


 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

 

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 December 31, 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.

 

9
 

 

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 December 31, 2011 or June 30, 2011, and did not recognize any interest and/or penalties in our consolidated statements of operations during the six months ended December 31, 2011 or 2010, respectively.

 

h. Subsequent Events

 

We evaluated all subsequent events from December 31, 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 $31,691,740 and negative cash flows from operations of $12,076,811 during the period from June 24, 2005 (inception) through December 31, 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. 

 

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

 

   December 31,
2011
   June 30,
2011
 
Maricunga  $63,741,000   $63,741,000 
Noto   300,000    300,000 
Total  $64,041,000   $64,041,000 

 

10
 

 

Maricunga

  

On May 20, 2011, the Company and 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”) 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 a$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 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.

 

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 has filed a registration statement under the Securities Act in compliance with the Acquisition Agreement. The registration statement has not yet been declared effective.

 

Pursuant to a shareholders’ meeting held by the Maricunga Companies on October 6, 2011 in Chile (“Shareholder Meeting”), the majority shareholders of the Maricunga Companies approved a quota to cover expenses relating to the preservation and exploration of the mining concessions owned by the Maricunga Companies. Pursuant the Shareholder Meeting, Minera Li and the 40% non-controlling interest owners of the Maricunga Companies were required to make payments totaling $6,975,136 to bank accounts held by the Company within ninety days of the Shareholder Meeting, or January 4, 2012. Of the total $6,975,136 payments, Minera Li was to provide $4,185,083 and the 40% non-controlling interest shareholders (“minority shareholders”) were to provide $2,790,053. The minority shareholders have not made their required payments to the Company. As a result, all the expenses incurred by the Maricunga Companies during the six months ended December 31, 2012, or $3,175,518, were funded by the Company. The Company recorded 40% of the expenses incurred by the Maricunga Companies to the non-controlling interest, or $1,270,207 for the six months ended December 31, 2011.

 

Under Chilean law, each of the shareholders of the Maricunga Companies are required to contribute for the payment of expenses for exploration and exploitation of mining concessions in proportion to the shares they have in the Maricunga Companies.  Because the minority shareholders did not contribute their share of expenses to the Company pursuant to the Shareholder Meeting held on October 6, 2011, by January 4, 2012 (deadline for contribution), the shares owned by the minority shareholders shall be sold via a public auction in Chile at a later date determined by a Chilean court.  At a minimum, the aggregate bid price to acquire the shares of the minority shareholders will be the amount the minority shareholders  were required to contribute to the Company. 

 

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.

  

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.

 

11
 

 

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:

 

   December 31,
2011
   June 30,
2011
 
Leasehold improvement and office equipment  $198,762   $19,195 
Field equipment   67,491    - 
Less: Accumulated depreciation   (24,651)   (19,195)
Net property and equipment  $241,602   $- 

 

Depreciation expense for the six-month periods ending December 31, 2011 and 2010 was $5,456, and $1,950, respectively.

 

NOTE 6.   RELATED PARTY TRANSACTIONS

 

Legal Services

 

Antonio Ortúzar served as a director of the Company from February 18, 2010 to October 25, 2010, and also provided certain legal services to the Company as a Partner with a law firm.  For the six months ended December 31, 2010, the total legal fees that the Company incurred to such firm was approximately $69,000. As Mr. Ortúzar is no longer a director for the Company, he is no longer considered a related party.

 

MIZ

 

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

 

Pursuant to the 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 subject to acceleration upon a change of control or a termination of the agreement by the Company.

 

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 February 2012 and December 2013. During the six months ended December 31, 2011 and 2010, the Company recorded $165,529 and $171,000 of stock compensation expense for the shares based on these estimated vesting dates.

 

The Company also incurred $60,615 and $81,190 of stock-based compensation during the six months ended December 31, 2011 and 2010, respectively related to stock options granted to MIZ. See Note 10.

 

MIZ was also paid $216,667 (of which $100,000 related to amounts accrued at June 30, 2011) and $0 in cash for compensation during the six months ended December 31, 2011 and 2010, respectively.  

 

12
 

 

 

R&M Global Advisors

 

The Company is party to a 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 $97,125 and $0 in cash for compensation during the six months ended December 31, 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 December 31, 2011 and June 30, 2011 is $14,292 and $12,298, respectively. This Note is in default as of December 31, 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 December 31, 2011 and June 30, 2011 is $9,816 and $7,965, respectively. This Note is in default as of December 31, 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 Company determined the convertible debentures contained a beneficial conversion feature based on the conversion price of the debt instrument. 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.

 

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.

 

13
 

  

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.

 

   December 31, 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   72,538 
Amortization of debt discount   121,443 
Carrying value at December 31, 2011  $1,448,154 

 

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.

 

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.

 

14
 

 

Activity for derivative warrant instruments during the six months ended December 31, 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
December 31, 
2011
 
2009 Unit Offering warrants  $3,854,119   $-   $(2,588,538)  $-   $1,265,581 
First 2010 Unit Offering warrants   2,911,244    -    (1,849,599)   -    1,061,645 
Second 2010 Unit Offering warrants   1,800,265    -    (1,094,991)   (590,462)   114,812 
Third 2010 Unit Offering warrants   1,156,744    -    (858,869)   -    297,875 
Incentive warrants   1,072,441    -    (738,036)   -    334,405 
2011 Unit Offering warrants   3,736,897    -    (2,556,631)   -    1,180,266 
Lender warrants   523,234    -    (375,767)   -    147,467 
Warrants for advisory services and Arranger warrants   189,810    -    (136,900)   -    52,910 
POSCAN warrants   -    3,779,978    (1,404,228)   -    2,375,750 
Total  $15,244,754   $3,779,978   $(11,603,559)  $(590,462)  $6,830,711 

 

Activity for derivative warrant instruments during the six months ended December 31, 2010 was as follows:

 

   Balance at
June 30,
2010
   Initial valuation
of derivative
liabilities upon
issuance of new
warrants during
the period
   Increase
(Decrease) in
Fair Value of
Derivative 
Liability
   Balance at
December 31, 
2010
 
                     
2009 Unit Offering warrants  $6,313,769   $-   $(2,725,167)  $3,588,602 
First 2010 Unit Offering warrants   1,715,959    236,937    660,847    2,613,743 
Second 2010 Unit Offering warrants   -    151,361    1,107,695    1,259,056 
Third 2010 Unit Offering warrants   -    601,752    1,785,793    2,387,545 
   $8,029,728   $990,050   $829,168   $9,848,946 

 

During the six months ended December 31, 2011, 4,200,000 warrants were exercised for aggregate proceeds of $210,000. The Company reduced the derivative liability by $590,462 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 six months ended December 31, 2011, and 2010, respectively, and as of December 31, 2011 and 2010, respectively:

 

   Initial
Valuations –
December 31,
2011
   Initial
Valuations -
December 31,
2010
   Valuation as of
December 31,
2010
   Valuation as of
December 31,
2011
 
Common stock issuable upon exercise of warrants   38,095,300    16,353,830    37,202,664    89,284,712 
                     
Market value of common stock on measurement date (1)  $0.145    $0.12-$0.30   $0.229   $0.067 
                     
Adjusted Exercise price  $0.40    $0.05 - $0.25    $0.05 - $0.64    $0.05- $0.48 
                     
Risk free interest rate (2)   0.42%   1.13% - 2.06%    2.01%   0.36%-.83% 
Warrant lives in years   3.0    5.0    3.8-5.0    2.30-4.20 
Expected volatility (3)   205%   151%-158%    158%   179%-217% 
Expected dividend yield (4)   0    0    0    0 
Assumed stock offerings per year over next five years (5)   1-2    1-2    1-2    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    $0.15 - $1.50    $0.15- $1.50    $0.15-$0.50 

  

(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.

 

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 restricted shares of common stock under the 2009 Plan which vests in 1/3 increments each January 15th of 2012, 2013 and 2014. The value of the issuable shares was determined based on the $0.22 per share 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 six months ended December 31, 2011, the Company recorded $73,282 of stock compensation in connection with this agreement. No shares have been issued for the six months ending December 31, 2011.

 

16
 

 

Common Stock sales

 

July 1, 2011 through December 31, 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 December 31, 2011, the Company has paid $400,000 of the fees and has $160,000 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.

  

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.

 

17
 

 

The table below reflects the allocation of the gross proceeds from the POSCAN Offering during the six months ended December 31, 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

 

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 and expirations   (533,333)   0.25    -    - 
Outstanding at December 31, 2011   1,266,667   $0.39    7.29   $- 
Exercisable at December 31, 2011   600,000   $0.41    5.81   $- 

 

During the six months ended December 31, 2011 and 2010, the Company recognized stock-based compensation expense of $69,571 and $129,774, respectively, related to stock options (of which $60,615 and $81,190 was related party for the six months ended December 31, 2011 and 2010, respectively – See Note 6).  As of December 31, 2011, there was approximately $96,605 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 1.61 years.

 

Warrants

 

Summary information regarding common stock warrants issued and outstanding as of December 31, 2011 is as follows:

 

   Warrants   Weighted Average
Exercise Price
 
Outstanding at 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   (4,200,000)   0.05 
Outstanding at December 31, 2011   89,284,712   $0.37 

  

18
 

  

Warrants outstanding as of December 31, 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    2.9 – 3.0 years    7,162,305 
November 10, 2009 – December 23, 2009  $0.48    7,211,339    2.9 – 3.0 years    7,211,339 
June 9, 2010 – September 13, 2010  $0.32    9,575,516    3.4– 3.7 years    9,575,516 
June 9, 2010 – July 13, 2010  $0.20    527,891    3.4 – 3.5 years    527,891 
November 8-15, 2010  $0.05    1,400,000    3.9 years    1,400,000 
December 9, 2010 – March 24, 2011  $0.15    4,806,878    3.9 – 4.2 years    4,806,878 
March 24, 2011  $0.45    4,256,827    4.2 years    4,256,827 
April 7, 2011  $0.37    11,960,050    2.4 years    11,960,050 
April 7, 2011  $0.26    1,913,606    2.4 years    1,913,606 
May 2, 2011  $0.43    1,500,000    4.3 years    1,500,000 
May 2, 2011  $0.36    75,000    4.3 years    75,000 
June 27, 2011  $0.37    800,000    2.3 years    800,000 
September 14, 2011  $0.40    38,095,300    2.7 years    38,095,300 
Total        89,284,712         89,284,712 

 

The intrinsic value of warrants outstanding at December 31, 2011 was $23,800.

 

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.

 

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 December 31, 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  $-   $-   $6,830,711   $6,830,711 

  

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) 
   Six Months ended 
   December 31,   December 31, 
   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    - 
Balance as of September 30,  $(11,514,123)  $(5,493,939)
Change in fair value   4,654,915    (3,601,894)
Additions   -    (753,113)
 Exercise of warrants   28,497    - 
Balance as of December, 31  $(6,830,711)  $(9,848,946)
Change in fair value of derivative warrant instruments included in earnings for the three months ended December 31, 2011 and 2010   4,654,915    (3,601,894)
Change in fair value of derivative warrant instruments included in earnings for the six months ended December 31, 2011 and 2010  $11,603,559   $(829,168)

 

 

The Company recorded a realized loss of $537,486 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 December 31, 2011.

 

20
 

  

NOTE 12.  COMMITMENTS AND CONTINGENCIES

 

Mining Permits

 

Both mineral exploration and extraction require permits from various foreign, federal, state, provincial and local governmental authorities and are governed by laws and regulations, including those with respect to prospecting, mine development, mineral production, transport, export, taxation, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. There can be no assurance that we will be able to obtain or maintain any of the permits required for the continued exploration of our mineral properties or for the construction and operation of a mine on our properties at

economically viable costs.

 

In Chile, lithium is not exploitable via regular mining concessions. The Chilean Mining Code (“CMC”) establishes the reserve of lithium to the State of Chile and expressly provides that the exploration or exploitation of “non-concessible” substances (including lithium) can be performed only directly by the State of Chile, or its companies, or by means of administrative concessions or special operation contracts, fulfilling the requirements and conditions set forth by the President of the Republic of Chile for each case. Currently neither the Company nor its subsidiaries have sufficient authority (or permits) to explore and exploit lithium in Chile. However, the government of Chile has announced its intention to increase the exploitation of lithium in Chile, and it may seek to amend the law to allow exploitation by private enterprises. However, the approval of a two-thirds majority of the Chilean Congress will be required to amend the existing law, and there can be no assurance that the government will be successful in these efforts (due to political and other considerations). Alternatively, the government may begin granting operating contracts to private companies such as Li3 Energy. The failure of the government to allow private exploitation of lithium within our development horizon for Maricunga would have a material adverse effect on our prospects. Unlike exploitation permitting, exploration permitting is not mineral specific in Chile. Accordingly, there can be no assurance that we will be able to obtain the permits necessary to exploit any minerals that our exploration activities discover.

 

There has been a recent trend in Argentina, at the National and Provincial levels, of seeking to limit and/or to restrict certain mining activities within the territory of certain Provinces. The Province of Jujuy, which is adjacent to the Province of Salta, where the Noto Properties are located, issued in March 2011 a Decree declaring lithium reserves as strategic natural resources for the Province, subjecting lithium exploration and exploitation projects to the evaluation of an Experts Committee, and the subsequent approval of different government bodies and the favorable recommendation of the Experts Committee. There can be no assurance that similar regulations won’t be issued in the Province of Salta.

 

In October 2010, the National Law No. 26,639, "Regime of Minimum Principles for the Preservation of Glaciers and Periglacial Environment" (the "Glaciers Law"), was promulgated. The Glaciers Law is aimed at the protection and preservation of glaciers and the periglacial environment. The Glaciers Law regulates, limits and in certain cases bans, certain activities developed on glacial and periglacial areas. Depending on how the Glaciers Law is interpreted – and, specifically, the definition of the term “periglacial” – this regulation could have a negative effect on the potential activities to be conducted on the Noto Properties.

 

We believe that we are in compliance with all material laws and regulations that currently apply to our activities but there can be no assurance that we can continue to remain in compliance. Current laws and regulations could be amended and we might not be able to comply with them, as amended. Further, there can be no assurance that we will be able to obtain or maintain all permits necessary for our future operations, or that we will be able to obtain them on reasonable terms. To the extent such approvals are required and are not obtained, we may be delayed or prohibited from proceeding with planned exploration or development of our mineral properties.

 

Non-Binding Agreement-Mining Properties

 

On November 30, 2011, the Company entered into a non-binding agreement (“Non-Binding Agreement”) with three companies (collectively, the “M2 Sellers”) with mining concessions with respect to an aggregate of 1,506 hectares in Chile (the “Chilean Prospect”) located near the Company’s Maricunga property. Pursuant to the Non-Binding Agreement, the Company made a one-time nonrefundable payment (the “M2 Deposit”) of $250,000 on January 5, 2012. The M2 Deposit provides the Company with 60 days to perform due diligence procedures to determine whether or not to proceed with negotiating definitive agreements with the M2 Sellers regarding the Chilean Prospect.

 

The Non-Binding Agreement contemplates that, in exchange for the stock of the M2 Sellers, the Company will make staged payments in cash and/or common stock of approximately $10 million (including the M2 Deposit) and an additional 45,000,000 shares of Company common stock. However, until such time, if ever, that a definitive agreement is entered into with respect to the Chilean Prospect, the Company cannot be certain what consideration the Company may be required to pay therefor.

 

2011 Offering – Registration Rights Penalties

 

On March 22, 2011, the Board of Directors approved a private placement offering (the “2011 Offering”) to investors of up to $10,000,000 worth of units of securities at an offering price of $0.27 per unit (“G Unit”). Each G Unit consisted of (i) one share of our common stock, par value $0.001 per share, and (ii) a warrant to purchase one-half of a share of common stock, at an exercise price of $0.40 per whole share (“G Warrant”, or “2011 Unit Offering warrant”). The G Warrants are exercisable for a period of three years. On April 7, April 13, May 3, May 6, and May 19, 2011, the Company held closings of the 2011 Offering with respect to an aggregate of 23,920,071 units of its securities, for aggregate gross proceeds of approximately $6,458,189 ($5,720,918 net after offering expenses and placement agent fees). The Company also issued to placement agents and finders warrants to purchase an aggregate of 1,913,606 shares of common stock at an exercise price of $0.27 per share and exercisable for a period of three years.

 

Pursuant to a registration rights agreement for the 2011 Offering, we agreed to file a registration statement with the Securities and Exchange Commission within 75 days after the closing date to register the shares of common stock and the shares of common stock underlying the G warrants under the Securities Act of 1933, as amended, and to use our best efforts to cause such registration statement to become effective within 150 days after the filing date, all at our own expense. Pursuant to the registration rights agreement, in the event the Company does not meet these deadlines, we have agreed to pay the investors monetary penalties of 2% of their investment per month until such failures are cured (up to an aggregate maximum penalty of 10%, or $645,819). The Company was required to file the registration statement by June 21, 2011, however the registration statement was not filed until July 1, 2011, and the Company recorded a monetary penalties accrual of $38,750, which has not yet been paid as of December 31, 2011. The Company was required to cause the registration statement to become effective by November 28, 2011, however the registration statement was not effective as of December 31, 2011, and the Company recorded a monetary penalties accrual of $142,000, which has not yet been paid as of December 31, 2011. Although the Company intends to seek a waiver for these monetary penalties, there is no assurance the Company will be successful in obtaining a waiver.

 

21
 

  

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.  Subsequent to the termination of the Company’s option rights, the Company entered into an additional agreement with the Alfredo Sellers (“SPA Amendment”). 

 

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.

 

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 December 31, 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 December 31, 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 December 31, 2011 and June 30, 2011. At December 31, 2011 and June 30, 2011, the Company has recorded $189,600 in accrued liabilities for these obligations.

 

Employment Agreement

 

During December 2011, the Company entered into a one year employment agreement with a new Vice President of Finance (the “VP of Finance”) which shall begin on January 1, 2012. Pursuant to the agreement, the VP of Finance will receive a salary of $185,000 per year, and a $40,000 bonus.

 

In addition, the employment agreement requires that we grant the VP of Finance 250,000 shares of restricted common stock which will vest over 3 years. The value of the issuable shares was determined based on the $0.067 closing price of the common stock on the measurement date, and totaled $16,750. The Company will record stock compensation expense for this restricted stock over the 3-year service period which begins on January 1, 2012.

 

The employment agreement also requires that we grant the VP of Finance 250,000 stock options which will vest over 18 months and shall be exercisable at $0.40 per share. The Company will record stock compensation expense for these stock options of $12,857 over the 18-month vesting period which begins on January 1, 2012.

 

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NOTE 13. SUBSEQUENT EVENTS

 

New World Resource Corp.

 

On January 19, 2012, the Company entered into a non-binding agreement (the “NW LOI”) whereby the Company would acquire certain options (the “New World Options”) held by New World Resource Corp., with respect to a the Pastos Grandes lithium brine project in the Sud Lipez province within the Department of Potosi, Bolivia (the “Pastos Project”), as well as certain other assets.

  

The NW LOI contemplates a purchase price for the New World Option and other assets consisting of equity representing 22.5% of the Company after completion of such transaction.

 

The Company has agreed to advance $150,000 to fund a required payment under the New World Options that will come due in February 2012. However, in the event the Company and New World Resource Corp. terminate the proposed transaction, or if the transaction does not close pursuant to the timeline agreed to by both parties, New World Resource Corp. shall reimburse the Company the full amount of such advance. 

 

R3 Fusion

 

On January 13, 2012, the Company entered into an Agreement, dated as of January 12, 2012 (the “R3 Agreement”), with R3 Fusion, Inc. (“R3”) to apply R3’s intensified evaporative technology (“SPaCeR™”) in processing brine from the Company’s properties. Pursuant to the R3 Agreement, R3 will provide the Company with a demonstration plant consisting of two units having a design flow capacity of at least 1.6 liters per second each, and on-site training. The Company will pay R3 equipment use fees of $37,500 per month for the first twelve months following successful installation and commissioning of the system, and, if the Company elects to keep the equipment on site thereafter, $12,500 per month for up to an additional thirty-six months. The R3 Agreement requires the Company to make a $100,000 deposit (the “R3 Deposit”) which R3 Deposit shall be refunded upon the Company’s return of the equipment after twelve months of use. The R3 Agreement also provides that the Company will be given the exclusive license (the “Exclusive Rights”) to exploit R3’s SPaCeR™ technology throughout the world for the processing of lithium-containing brine for so long as the Company is using such systems in the processing of brine at its facilities in South America. The Agreement provides that the Company and R3 shall negotiate the terms and conditions of such license in good faith within sixty days of the execution of the R3 Agreement.

 

The R3 Agreement provides that R3 shall develop and deliver to the Company a proposal to deliver up to sixty-five additional SPaCeR™ systems as soon as practical following successful demonstration of the SPaCeR™ at the Company’s property.

 

The Company may elect to terminate the agreement at any time after June 30, 2012; provided that if the Company does so prior to January 12, 2013, it will forfeit its Exclusive Rights and $50,000 of the R3 Deposit.

   

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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. in the business of manufacturing, marketing and distributing soy-blend scented candles and oils. We determined that we could not continue with our original business plan. In July 2008, we changed our name to NanoDynamics Holdings, Inc., to facilitate discussions with NanoDynamics, Inc. regarding a possible business combination that was not completed. In October 2009, we changed our name 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 December 31, 2011, and for the three and six months ended December 31, 2011 and 2010, which are unaudited. In the opinion of management, such consolidated financial statements include all 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 December 31, 2011, and for the three and six months ended December 31, 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 negative working capital of $(108,677) at December 31, 2011, but no sources of recurring revenue and has generated net losses of $31,691,740 and negative cash flows from operations of $12,076,811 during the period from June 24, 2005 (inception) through December 31, 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.   

 

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.

 

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Operational Update

 

Chile

 

On May 20, 2011, the Company and 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”) 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 a $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 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.

 

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 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.

 

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.

  

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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 the event producible quantities of minerals are determined to be economically feasible, we will still be required to obtain permits from the Chilean government to exploit the mineral reserves. There is no assurance that our testing or feasibility analysis will indicate economically producible quantities or that we will be able to obtain the necessary permits to exploit the mineral resources.

 

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.

 

On November 30, 2011, the Company entered into a non-binding agreement (“Non-Binding Agreement”) with three companies (collectively, the “M2 Sellers”) with mining concessions with respect to an aggregate of 1,506 hectares in Chile (the “Chilean Prospect”) located near the Company’s Maricunga property. Pursuant to the Non-Binding Agreement, the Company made a one-time nonrefundable payment (the “M2 Deposit”) of $250,000 on January 5, 2012. The M2 deposit provides the Company with 60 days to perform due diligence procedures to determine whether or not to proceed with negotiating definitive agreements with the M2 Sellers regarding the Chilean Prospect.

 

The Non-Binding Agreement contemplates that, in exchange for the stock of the M2 Sellers, the Company will make staged payments in cash and/or common stock of approximately $10 million (including the M2 Deposit) and an additional 45,000,000 shares of Company common stock. However, until such time, if ever, that a definitive agreement is entered into with respect to the Chilean Prospect, the Company cannot be certain what consideration the Company may be required to pay therefor.

 

Bolivia

 

On January 19, 2012, the Company entered into a non-binding agreement (the “NW LOI”) whereby the Company would acquire certain options (the “New World Options”) held by New World Resource Corp., with respect to a the Pastos Grandes lithium brine project in the Sud Lipez province within the Department of Potosi, Bolivia (the “Pastos Project”), as well as certain other assets.

  

The NW LOI contemplates a purchase price for the New World Option and other assets consisting of equity representing 22.5% of the Company after completion of such transaction.

 

The Company has agreed to advance $150,000 to fund a required payment under the New World Options that will come due shortly. However, in the event the Company and New World Resource Corp. terminate the proposed transaction, or if the transaction does not close pursuant to the timeline agreed to by both parties, New World Resource Corp. shall reimburse the Company the full amount of such advance. 

 

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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.

 

Our strategy currently principally involves the exploration of the Maricunga property and the acquisition and exploration of 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.  

 

In order to finance the up 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. Furthermore, if we enter into any definitive agreements to acquire the New World Options, the Chilean Prospect and/or other properties, we will require additional funds to finance such acquisitions, as well as to fund option payments and/or exploration costs with respect to such properties. There can be no assurance that such financing will be available, or will be available on acceptable terms, for us to meet these requirements.

 

Application of Intensified Evaporative Technology

 

On January 13, 2012, we entered into an Agreement (the “R3 Agreement”), with R3 Fusion, Inc. (“R3”) to apply R3’s intensified evaporative technology (“SPaCeR™”) in processing brine from our properties. Pursuant to the R3 Agreement, R3 will provide us with a demonstration plant consisting of two units having a design flow capacity of at least 1.6 liters per second each, and on-site training. We will pay R3 equipment use fees of $37,500 per month for the first twelve months following successful installation and commissioning of the system, and, if we elect to keep the equipment on site thereafter, $12,500 per month for up to an additional thirty-six months. The Agreement requires us to make a $100,000 deposit (the “R3 Deposit”) which R3 Deposit shall be refunded upon our return of the equipment after twelve months of use. The R3 Agreement also provides that we will be given the exclusive license (the “Exclusive Rights”) to exploit R3’s SPaCeR™ technology throughout the world for the processing of lithium-containing brine for so long as we are using such systems in the processing of brine at our facilities in South America. The R3 Agreement provides that we and R3 shall negotiate the terms and conditions of such license in good faith within sixty days of the execution of the R3 Agreement.

 

The R3 Agreement provides that R3 shall develop and deliver to us a proposal to deliver up to sixty-five additional SPaCeR™ systems as soon as practical following successful demonstration of the SPaCeR™ at our property.

 

We believe the SPaCeR™ technology may speed the rate of mineral recovery from brine. However there can be no assurance that it will do so on a commercially favorable basis or at all.

 

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We may elect to terminate the agreement at any time after June 30, 2012; provided that if we do so prior to January 12, 2013, we will forfeit our Exclusive Rights and $50,000 of the R3 Deposit.

 

Results of Operations

 

Three Months Ended December 31, 2011 Compared with Three Months Ended December 31, 2010

 

Revenues

 

We had no revenues during the three months ended December 31, 2011 and 2010.

 

Gain on settlement

 

The Company recorded a gain on settlement of $422,500 as a result of a settlement with Lacus during the three months ended December 31, 2010.

 

Mineral Rights Impairment Expense

 

During the three months ended December 31, 2011 and 2010, we incurred impairment expenses of $0 and $4,070,000, respectively. The impairment expense recorded during the three months ended December 31, 2010 was incurred as a result of the Company not making the option payments required to retain the rights to acquire the Alfredo property, which terminated the option agreement.

 

Exploration expenses

 

During the three months ended December 31, 2011 and 2010, we incurred exploration expenses of $2,984,020 and $36,644, respectively.  The expenses incurred during the three months ended December 31, 2011 relate to our efforts to begin exploration activities on our Maricunga project in Chile and principally include drilling expenses and other direct expenses.

 

General and administrative Expenses

 

During the three months ended December 31, 2011 and 2010, we incurred general and administrative expenses of $1,550,168 and $1,979,346, respectively.  General and administrative expenses largely consist of professional fees, travel, stock compensation, and salaries.  The decrease in expenses was largely due to lower stock compensation expense, partially offset by higher professional fees, and higher payroll expenses during the three months ended December 31, 2011.

 

Other Income (Expense)

 

Other income for the three months ended December 31, 2011, was $4,464,242 compared to other expense of $3,605,455 for the three months ended December 31, 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 $4,654,915 during the three months ended December 31, 2011 compared to unrealized loss of $3,601,894 during the three months ended December 31, 2010.  The change in fair value of our derivative warrant liability has no impact on our cash flows from operations.  

 

Interest expense amounted to $166,549 and $2,557 during the three months ended December 31, 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.  During the three months ended December 31, 2011 and 2010, we incurred losses on foreign currency translation of $25,878 and $1,046, respectively, and such losses related to our operations in Peru and Chile.

 

Six Months Ended December 31, 2011 Compared with Six Months Ended December 31, 2010

 

Revenues

 

We had no revenues during the six months ended December 31, 2011 and 2010.

 

Mineral Rights Impairment Expense

 

During the six months ended December 31, 2011 and 2010, we incurred impairment expenses of $0 and $4,070,000, respectively. The impairment expense recorded during the six months ended December 31, 2010 was incurred as a result of the Company not making the option payments required to retain the rights to acquire the Alfredo property, which terminated the option agreement.

 

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Gain on settlement

 

The Company also recorded a gain on settlement of $422,500 as a result of a settlement with Lacus during the six months ended December 31, 2010.

 

Exploration expenses

 

During the six months ended December 31, 2011 and 2010, we incurred exploration expenses of $3,452,262 and $309,286, respectively.  The expenses incurred during the six months ended December 31, 2011 relate to our efforts to begin exploration activities on our Maricunga project in Chile and principally include drilling expenses and other direct expenses.

 

General and administrative Expenses

 

During the six months ended December 31, 2011 and 2010, we incurred general and administrative expenses of $2,800,364 and $2,810,573, respectively.  General and administrative expenses largely consist of professional fees, travel, stock compensation, and salaries.  The decrease in expenses was largely due to lower stock compensation expense, partially offset by higher professional fees, and higher payroll expenses during the six months ended December 31, 2011.

 

Other Income (Expense)

 

Other income for the six months ended December 31, 2011 was $10,022,660 compared to other expense of $838,043 for the six months ended December 31, 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 $11,603,559 during the six months ended December 31, 2011 compared to an unrealized loss of $829,168 during the six months ended December 31, 2010.  The change in fair value of our derivative warrant liability has no impact on our cash flows from operations.  

 

Interest expense amounted to $700,753 and $4,501 during the six months ended December 31, 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 during the six months ended December 31, 2011as 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 six months ended December 31, 2011 and 2010, we incurred losses on foreign currency translation of $40,863 and $4,483, 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.

 

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.

 

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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.

 

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 in excess of $8 million over the next twelve months, or more, if we acquire the New World Options, the Chilean Prospect and/or other properties, 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 December 31, 2011, we had cash and cash equivalents of $2,268,138, compared to $952,401 at June 30, 2011.  The increase in cash and cash equivalents from June 30, 2011 to December 31, 2011 was the result of the Company receiving $7,494,069 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 $210,000 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 $5,931,274 and the acquisition of fixed assets $247,058.

 

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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.

 

Under the supervision and the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation as of December 31, 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 December 31, 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 December 31, 2011.

 

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

 

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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. The Company has engaged a third party consulting firm to evaluate the effectiveness of the design and operation of existing internal controls over financial reporting and recommend improvements to internal controls to be implemented 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

 

Except for the additional risk factor set forth below, there have been no material changes from the risk factors disclosed in the Form 10-K under Part I, Item 1A, “Risk Factors,” therein.

 

We may be unable to successfully negotiate definitive agreements with respect to any of the transactions for which we have signed letters of intent.

 

We have entered into a non-binding letter of intent to acquire certain options (the “New World Options”) held by New World Resource Corp., a Canadian mineral exploration company, with respect to the Pastos Grandes lithium project in the Sud Lipez province within the Department of Potosi, Bolivia (the “Pastos Project”). We have also entered into a non-binding agreement to acquire the stock of three companies (the “M2 Sellers”) that own mining concessions with respect to an aggregate of 1,506 hectares in Chile (the “Chilean Prospect”) located near our existing Maricunga property.

 

There can be no assurance that we will negotiate agreements to acquire the New World Options or the M2 Sellers on acceptable terms or at all. Moreover, even if we are successful in acquiring the New World Option, there can be assurance that we will satisfy the requirements of such option and ultimately acquire the Pastos Project.

 

We may spend substantial resources pursuing acquisition opportunities, including without limitation the Pastos Project and the Chilean Prospect. However, if we are unable to enter into definitive agreements on commercially favorable terms, our financial condition, results of operations and prospects may be materially adversely affected.

 

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.

  

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. 

 

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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
       
3.1     Bylaws of the Company, as Amended (2)
10.1     Contractor Services Agreement between the Company and R&M Global Advisors, Inc., dated as of November 23, 2011 (1)
       
10.2     Agreement Between R3 Fusion and Li3 Energy, dated as of January 12, 2012 (3)
       
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.
   
(1) Previously filed with the Securities and Exchange Commission on December 2, 2011, as an exhibit to Amendment No. 2 to the Company’s Registration Statement on Form S-1/A, which exhibit is incorporated herein by reference.

 

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(2) Previously filed with the Securities and Exchange Commission on November 29, 2011 as an exhibit to the Company’s current report on Form 8-K, which exhibit is incorporated herein by reference.
   
 (3) Previously filed with the Securities and Exchange Commission on January 20, 2012 as an exhibit to the Company’s current report on Form 8-K, which exhibit is incorporated herein by reference.

 

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:  February 13, 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.

 

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