Exhibit (a)(1)(A)
Offer to Purchase for Cash
by
BLUE WOLF MONGOLIA HOLDINGS CORP.
of
Up to 1,467,970 of its Ordinary Shares
at a Purchase Price of $9.97 Per Share
In Connection with its Consummation of a Proposed Business Combination
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, |
ON WEDNESDAY, JUNE 19, 2013 UNLESS THE OFFER IS EXTENDED. |
If you support Blue Wolf Mongolia Holdings Corp.’s proposed acquisition of Li3 Energy, Inc.,
do not tender your Ordinary Shares in the Offer because if more than 1,467,970 Ordinary Shares
are tendered in the Offer, we will not be able to consummate the Transaction.
Blue Wolf Mongolia Holdings Corp., a British Virgin Islands business company limited by shares (“Blue Wolf,” “we,” “us” or “our”) hereby offers to purchase up to 1,467,970 of Blue Wolf’s issued and outstanding ordinary shares, no par value (the “Ordinary Shares”), at a purchase price of $9.97 per share, net to the seller in cash, without interest (the “Share Purchase Price” or “Purchase Price”), for a total Purchase Price of up to $14,635,661 upon the terms and subject to certain conditions described in this Offer to Purchase for Cash (the “Offer to Purchase”) and in the letter of transmittal for the Ordinary Shares (the “Letter of Transmittal”) (which, together with this Offer to Purchase as they may be amended or supplemented from time to time, constitute the “Offer”).In accordance with the rules of the Securities and Exchange Commission (the “SEC”), in the event that more than 1,467,970 Ordinary Shares are so tendered, we may, and we expressly reserve our right to, accept for payment an additional amount of shares not to exceed 2% of our issued and outstanding Ordinary Shares without amending the Offer or extending the Expiration Date (such amount, the “2% Increase”). However, if more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, and we do not exercise our right pursuant to the 2% Increase to purchase additional Ordinary Shares, or if we are unable to satisfy the Merger Condition (as defined herein), we may amend, terminate or extend the Offer.Accordingly, there will be no proration in the event that more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn in the Offer. If we terminate the Offer, we will NOT: (i) purchase any Ordinary Shares pursuant to the Offer or (ii) consummate the Transaction (as defined below) in accordance with the terms of the Agreement and Plan of Merger described in this Offer to Purchase.
The Share Purchase Price of $9.97 is equal to the per share amount of the Ordinary Shares sold in our initial public offering (“IPO”) on deposit in the trust account established to hold the proceeds of our IPO (the “Trust Account”) as of two business days prior to the commencement of the Offer. See “The Offer — Number of Ordinary Shares; Share Purchase Price; No Proration.”
The Offer is being made pursuant to the terms of an Agreement and Plan of Merger dated as of May 21, 2013 (as may be amended from time-to-time, the “Agreement and Plan of Merger”), by and among Blue Wolf, Blue Wolf Acquisition Sub, Inc., a wholly owned subsidiary of Blue Wolf (“Merger Sub”), and Li3 Energy, Inc.,a Nevada corporation (“Li3”)pursuant to which, subject to the terms, conditions, and transactions contemplated therein including, but not limited to approval by Li3’s shareholders of such transaction, Merger Sub will merge with and into Li3(the “Transaction”). Pursuant to its Amended and Restated Memorandum and Articles of Association (the “Charter”), Blue Wolf is required, in connection with its business combination, to provide all holders of its Ordinary Shares with the opportunity to redeem their Ordinary Shares through a tender offer pursuant to the tender offer rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Offer is being made to provide Blue Wolf shareholders with such opportunity to redeem their Ordinary Shares. Upon consummation of the Transaction, Blue Wolf intends to change its name to “Li3 Energy Corp.” by resolution of its board. See “The Offer — Purpose of the Offer; Certain Effects of the Offer.”
Li3 will separately solicit its shareholders for approval of the Transaction. Blue Wolf will file a Registration Statement on Form F-4 with the Securities and Exchange Commission (“SEC”) to register the distribution of the Ordinary Shares issuable by Blue Wolf to Li3’s stockholders. The Registration Statement, which shall include a proxy statement/prospectus for Li3’s stockholders, must be declared effective by the SEC before the Transaction can be approved by Li3’s shareholders.
THE OFFER IS CONDITIONED ON SATISFACTION OF THE MAXIMUM TENDER CONDITION AND THE MERGER CONDITION (EACH AS FURTHER DESCRIBED IN THIS OFFER TO PURCHASE) AND CERTAIN OTHER CONDITIONS. SEE “THE OFFER — CONDITIONS OF THE OFFER.”
Only Ordinary Shares validly tendered and not properly withdrawn will be purchased pursuant to the Offer. Ordinary Shares tendered pursuant to the Offer but not purchased in the Offer will be returned at our expense promptly following the expiration of the Offer. See “The Offer — Procedures for Tendering Shares.”
We will fund the purchase of Ordinary Shares in the Offer with cash available to us from the Trust Account upon consummation of the Transaction.Except as otherwise set forth inthe Agreement and Plan of Merger, all expenses (including, without limitation, each party’s respective legal, accounting and roadshow travel expenses) incurred in connection withthe Agreement and Plan of Mergerand the transactions contemplated thereby shall be paid by the party incurring such expenses, whether or not the Transaction is consummated.As of April 30, 2013, Blue Wolf had approximately $76,000 of cash and cash equivalents held outside the Trust Account (which amounts reflect the balance of loan proceeds received from the Sponsor). See “The Offer — Source and Amount of Funds.” The Offer is not conditioned on any minimum number of Ordinary Shares being tendered. The Offer is, however, subject to certain other conditions, including the Maximum Tender Condition and the satisfaction of the Merger Condition.See “The Offer — Purchase of Shares and Payment of Purchase Price” and “—Conditions of the Offer.”
Blue Wolf’s Ordinary Shares are listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol “MNGL.” As of May 17, 2013, the last reported closing price of the Ordinary Shares was $10.75 per share.Shareholders are urged to obtain current market quotations for the Ordinary Shares before deciding whether to tender their Ordinary Shares pursuant to the Offer. See “Price Range of Securities and Dividends.”
We also have outstanding Units comprised of one Ordinary Share and one warrant to acquire one Ordinary Share (a “Warrant” and, together with one Ordinary Share, “Units”). Blue Wolf’s Warrants and Units also are listed on Nasdaq under the symbols “MNGLW” and “MNGLU,” respectively. The Offer is only open for our Ordinary Shares, but not those together as part of our Units. You may tender Ordinary Shares that are included in Units, but to do so you must separate such Ordinary Shares from the Warrants prior to tendering such Ordinary Shares. While this is typically done electronically the same business day, you should allow at least one full business day to accomplish the separation. See “The Offer — Procedures for Tendering Shares.”
Our intention is to consummate the Transaction. Our board of directors has unanimously (i) approved our making the Offer, (ii) declared the advisability of the Transaction and approved the Agreement and Plan of Mergerand the Transaction, and (iii) determined that the Transaction is in the best interests of the shareholders of Blue Wolf and, if consummated, would constitute our initial business combination pursuant to our Charter. If you tender your Ordinary Shares in the Offer, you will not be participating in the Transaction because you will no longer hold such Ordinary Shares in Blue Wolf upon the consummation of the Transaction. Further, if more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, subject to the 2% Increase, we will not be able to consummate the Transaction. See “Price Range of Securities and Dividends” and “The Offer.”
THEREFORE, OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU DONOT ACCEPT THE OFFER WITH RESPECT TO YOUR ORDINARY SHARES.
The members of our board of directors will directly benefit fromthe Transactionand have interests in the Transaction that may be different from, or in addition to, the interests of Blue Wolf shareholders. See “The Transaction — Certain Benefits of Blue Wolf’s Directors and Officers and Others in the Transaction.” You must make your own decision as to whether to tender your Ordinary Shares and, if so, how many Ordinary Shares to tender. In doing so, you should read carefully the information in this Offer to Purchase and in the Letter of Transmittal, including the purposes and effects of the Offer. See “The Offer — Purpose of the Offer; Certain Effects of the Offer.” You should discuss whether to tender your Ordinary Shares with your broker, if any, or other financial advisor. See “Risk Factors” for a discussion of risks that you should consider before participating in the Offer.
Blue Wolf MHC, Ltd., our Sponsor, which is owned by certain of our officers, directors, advisors, their respective affiliates and other non-affiliates, and each of our officers and directors in their individual capacities, has agreed not to tender any Ordinary Shares pursuant to the Offer. See “The Offer — Purpose of the Offer; Certain Effects of the Offer” and “Certain Relationships and Related Transactions — Blue Wolf.”
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these Ordinary Shares or passed upon the accuracy or adequacy of this Offer to Purchase or related documents. Any representation to the contrary is a criminal offense.
Questions and requests for assistance regarding the Offer may be directed to Morrow & Co., LLC, the information agent for the Offer (the “Information Agent”), at the telephone numbers set forth on the back cover of this Offer to Purchase. You may request additional copies of this Offer to Purchase, the Letter of Transmittal, and the other Offer documents from the Information Agent at the telephone numbers and address on the back cover of this Offer to Purchase. You may also contact your broker, dealer, commercial bank, trust company or nominee for copies of these documents.
May 21, 2013
IMPORTANT
If you desire to tender all or any portion of your Ordinary Shares, you must do one of the following before the Offer expires:
| · | if your Ordinary Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you must contact the nominee and have the nominee tender your Ordinary Shares for you; |
| · | if you hold certificates for Ordinary Shares registered in your own name, you must complete and sign the accompanying Letter of Transmittal according to its instructions and deliver it, together with any required signature guarantees, the certificates for your Ordinary Shares and any other documents required by the Letter of Transmittal, to Continental Stock Transfer & Trust Company (the “Depositary”) at the address shown on the back cover of this Offer to Purchase. Do not send such materials to Blue Wolf or the Information Agent; |
| · | if you are an institution participating in The Depository Trust Company, you must tender your Ordinary Shares according to the procedure for book-entry transfer described in “The Offer — Procedures for Tendering Shares;” or |
| · | if you are the holder of Units and wish to tender Ordinary Shares included in such Units, you must separate the Ordinary Shares from the Units prior to tendering such Ordinary Shares pursuant to the Offer. You must instruct your broker to do so, or if you hold Units registered in your own name, you must contact the Depositary directly and instruct them to do so. If you fail to cause your Ordinary Shares to be separated in a timely manner before the Offer expires, you will likely not be able to validly tender such Ordinary Shares prior to the expiration of the Offer. |
Li3 will separately solicit its shareholders for approval of the Transaction. Blue Wolf will file a Registration Statement on Form F-4 with theSEC to register the distribution of the Merger Consideration Shares issuable by Blue Wolf to Li3’s stockholders. The Registration Statement, which will include a proxy statement/prospectus for Li3’s stockholders, must be declared effective by the SEC before the Transaction can be approved by Li3’s shareholders.
To validly tender Ordinary Shares pursuant to the Offer, other than Ordinary Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee, you must properly complete and duly execute the Letter of Transmittal.
We have not authorized any person to make any recommendation on our behalf as to whether you should tender or refrain from tendering your Ordinary Shares pursuant to the Offer. You should rely only on the information contained in this Offer to Purchase and in the Letter of Transmittal or to which we have referred you. We have not authorized anyone to provide you with information or to make any representation in connection with the Offer other than those contained in this Offer to Purchase or in the Letter of Transmittal. If anyone makes any recommendation or gives any information or representation regarding the Offer, you must not rely upon that recommendation, information or representation as having been authorized by us, our board of directors, the Depositary or the Information Agent. You should not assume that the information provided in this Offer to Purchase is accurate as of any date other than the date as of which it is shown, or if no date is otherwise indicated, the date of this Offer to Purchase.
Questions and requests for assistance should be directed to Morrow & Co., LLC, the Information Agent for the Offer, at its address and telephone numbers set forth below and on the back cover of this Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal, and other materials related to the Offer may also be obtained for free from Morrow & Co., LLC. Copies of this Offer to Purchase, the Letter of Transmittal, and any other material related to the Offer may also be obtained at the website maintained by the Securities and Exchange Commission atwww.sec.gov. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance. See “Where You Can Find More Information.”
Table of Contents
| Page |
Summary Term Sheet and Questions and Answers | 1 |
Forward-Looking Statements | 11 |
Risk Factors | 12 |
Information About the Companies | 25 |
Selected Historical Financial Information | 26 |
Selected Unaudited Condensed Combined Pro Forma Financial Information | 29 |
Comparative Share Information | 31 |
The Transaction | 32 |
The Agreement and Plan of Merger | 38 |
Related Agreements | 43 |
The Offer | 44 |
Description of Securities | 57 |
Material Differences in the Rights of Blue Wolf Shareholders Following the Transaction | 68 |
Price Range of Securities and Dividends | 69 |
Business of Blue Wolf | 72 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Blue Wolf | 75 |
Management of Blue Wolf | 78 |
Business of Li3 | 83 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Li3 | 99 |
Management of Li3 | 110 |
Executive Compensation of Li3 | 115 |
Management Following the Transaction | 121 |
Unaudited Condensed Combined Pro Forma Financial Statements | 124 |
Beneficial Ownership of Securities | 128 |
Certain Relationships and Related Transactions | 131 |
Appraisal Rights | 134 |
Where You Can Find More Information | 134 |
Index to Financial Statements | F-1 |
Annex I — Agreement and Plan of Merger, dated as of May 21, 2013 by and among Blue Wolf Mongolia Holdings Corp.,Blue Wolf Acquisition Sub, Inc., a wholly-owned subsidiary of Blue Wolf, and Li3 Energy, Inc.
Certain Definitions
Unless otherwise specified in this Offer to Purchase or the context otherwise requires:
| · | references to “Blue Wolf” are to Blue Wolf Mongolia Holdings Corp., a British Virgin Islands business company; |
| · | references to “Li3” are to Li3 Energy, Inc., a Nevada corporation; |
| �� | references to “combined company” are to Blue Wolf andLi3following the Transaction; |
| · | references to “we,” “our” and “us” prior to consummation of the Transaction are to Blue Wolf and Li3, as applicable; and |
| · | References to “we,” “our” and “us” following the consummation of the Transaction are to Blue Wolf and its wholly owned subsidiary, Li3. |
Summary Term Sheet and Questions and Answers
This summary term sheet highlights important information contained in the Blue Wolf Mongolia Holdings Corp., a British Virgin Islands business company limited by shares (“Blue Wolf,” “we,” “us” or “our”), Offer to Purchase for Cash (the “Offer to Purchase”) the Ordinary Shares (as defined below) and the Transaction (as defined below). To understand the Offer (as defined below) and the Transaction fully and for a more complete description of the terms of the Offer and the Transaction, you should carefully read this entire Offer to Purchase, including any Annexes hereto, and the Letter of Transmittal (the “Letter of Transmittal”), which collectively constitute the “Offer.” We have included references to the sections of this Offer to Purchase where you will find a more complete description of the topics addressed in this summary term sheet.
Ordinary Shares Subject of the Offer | | Up to 1,467,970 ordinary shares, no par value (the Ordinary Shares”) of Blue Wolf.However, in accordance with the rules of the Securities and Exchange Commission (the “SEC”), in the event that more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, we may, and we expressly reserve our right to, accept for payment an additional amount of shares not to exceed 2% of our issued and outstanding Ordinary Shares without amending the Offer or extending the Expiration Date (such amount, the “2% Increase”), if it permits us to accept for payment all Ordinary Shares validly tendered in this Offer. |
| | |
Price Offered Per Ordinary Share | | $9.97 net to the seller in cash, without interest thereon (the “Share Purchase Price” or “Purchase Price”). |
| | |
Scheduled Expiration of Offer | | 5:00 p.m., New York City time, on June 19, 2013, unless the Offer is otherwise extended, which may depend on the timing and process of Securities and Exchange Commission (“SEC”) review of this Offer to Purchase and the Registration Statement on Form F-4 to be filed separately by Blue Wolf or terminated (the “Expiration Date”). |
| | |
Party Making the Offer | | Blue Wolf Mongolia Holdings Corp. |
For further information regarding the Offer, see “The Offer.”
Who is offering to purchase the Ordinary Shares?
Blue Wolf is offering to purchase the Ordinary Shares. See “Business of Blue Wolf” and “The Offer.”
What Ordinary Shares are sought?
We are offering to purchase up to 1,467,970 outstanding Ordinary Shares validly tendered and not properly withdrawn pursuant to the Offer.However, in accordance with the rules of the SEC, in the event that more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, we may, and we expressly reserve our right to, accept for payment an additional amount of shares pursuant to the 2% Increase without amending the Offer or extending the Expiration Date. Any such purchases would only be made if it permitted us to accept for payment all Ordinary Shares validly tendered in this Offer.
Unless otherwise expressly stated, this Offer to Purchase assumes that no more than 1,467,970 Ordinary Shares will be accepted for payment in this Offer, and that Blue Wolf will not elect to exercise its rights pursuant to the 2% Increase to purchase any additional shares.
Why is the Offer for 1,467,970 Ordinary Shares?
Pursuant to our Charter, Blue Wolf is required, in connection with its business combination, to provide all holders of its Public Shares with the opportunity to redeem their Ordinary Shares through a tender offer pursuant to the tender offer rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Offer is being made to provide Blue Wolf shareholders with such opportunity to redeem their Ordinary Shares in connection with consideration of our initial business combination. See “The Offer — Purpose of the Offer; Certain Effects of the Offer.” Of the approximately $80 million originally held in the trust account (the “Trust Account”) established to hold the proceeds of our initial public offering (the “IPO”), approximately $22.5 million remains therein, after approximately $57.8 million was released from the Trust Account and used to purchase approximately 5.8 million Ordinary Shares tendered by our shareholders in connection with the approval of the amendment of our Amended and Restated Memorandum and Articles of Association (the “Charter”) and the agreement governing the funds in the Trust Account. Also, as contemplated in our IPO prospectus, an aggregate of $2,415,000 of the underwriting commissions were deferred and deposited in the Trust Account, which fees have been modified to provide for a minimum fee of $1.0 million and a maximum fee of up to approximately $1.4 million payable upon consummation of our initial business combination. In addition, as of April 30, 2013, Blue Wolf had approximately $76,000 of cash and cash equivalents on hand outside of the Trust Account (which amounts reflect the balance of loan proceeds received from the Sponsor). Accordingly, $14,635,661 will be available to us to purchase 1,467,970 Ordinary Shares, and consistent with our Charter and the disclosure set forth in our IPO prospectus. As further required by the terms of the Agreement and Plan of Merger, we cannot consummate the Transaction unless the shareholders of Li3 approve the Transaction and retain an amount of cash no less than $5 million after payment of the Purchase Price for shares validly tendered in the Offer and after payment of our expenses. Therefore, and subject to the 2% Increase, if more than 1,467,970 Ordinary Shares (or approximately 34.5% of our publicly held Ordinary Shares) are validly tendered and not properly withdrawn, we will be unable to consummate the Transaction.
What if more than1,467,970 Ordinary Shares are validly tendered in this Offer?
In the event that more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, we may, and we expressly reserve our right to, accept for payment an additional amount of shares pursuant to the 2% Increase without amending the Offer or extending the Expiration Date. Any such purchases would only be made if it permitted us to accept for payment all Ordinary Shares validly tendered in this Offer. However, if more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, and we do not exercise our right pursuant to the 2% Increase to purchase additional Ordinary Shares, or if we are unable to satisfy the Merger Condition (as defined herein), we may amend, terminate or extend the Offer. If we terminate the Offer, we willNOT: (i) purchase any Ordinary Shares pursuant to this Offer or (ii) consummate the Transaction in accordance with the terms of the Agreement and Plan of Merger described in this Offer to Purchase. Ordinary Shares tendered pursuant to the Offer but not purchased in the Offer will be returned at our expense promptly following the expiration or termination of the Offer.
What will be the purchase price for the Ordinary Shares and what will be the form of payment?
The Share Purchase Price for the Offer is $9.97 per share. All Ordinary Shares we purchase pursuant to the Offer will be purchased at the Share Purchase Price. See “The Offer — Number of Ordinary Shares; Share Purchase Price; No Proration.” If your Ordinary Shares are purchased in the Offer, you will be paid the Share Purchase Price, in cash, without interest, promptly after the Expiration Date. Our Charter requires that we offer a price per Ordinary Share equal to the amount held in the Trust Account pending completion by Blue Wolf of an initial business combination as of the date that is two business days prior to commencement of the Offer but net of taxes payable, divided by the 2,255,881 Ordinary Shares sold as part of the Units in our IPO that are still outstanding (the “Public Shares”). Although we do not anticipate any change to the Share Purchase Price, if we need to adjust the Share Purchase Price to comply with our Charter, we will amend the Offer and, if necessary, extend the Expiration Date for at least 10 business days. Under no circumstances will we pay interest on the Share Purchase Price including but not limited to, by reason of any delay in making payment. See “The Offer — Number of Ordinary Shares; Share Purchase Price; No Proration” and “— Purchase of Shares and Payment of Purchase Price.”
Why is Blue Wolf tendering for the Ordinary Shares if Blue Wolf’s board recommends that I DO NOT tender my shares?
Blue Wolf cannot consummate the Transaction if the Maximum Tender Condition is not satisfied. Accordingly, Blue Wolf’s board recommends that youdo not tender your Ordinary Shares so the acquisition of Li3 can be consummated. However, Blue Wolf commenced this Offer to Purchase because Blue Wolf is required pursuant to its Charter to allow shareholders who do not support the Transaction an opportunity to tender their Ordinary Shares to us for purchase.
How is the Offer different from typical tender offers?
Typically an issuer or a third party commencing a tender offer wants to purchase the entire amount of the securities they are offering to purchase.In this case, Blue Wolf does not want its shareholders to tender any Ordinary Shares, and Blue Wolf’s board of directors recommends that existing shareholders not tender their Ordinary Shares after they review this Offer to Purchase. In fact, unlike most tender offers where an offeror’s purchase of securities enables them to consummate a business combination, here, your decision to tender your Ordinary Shares may make it less likely that we can consummate the Transaction with Li3 because if more than 1,467,970 Ordinary Share are validly tendered and not properly withdrawn in the Offer and our rights pursuant to the 2% Increase are not exercised, we will not be able to consummate the Transaction. In essence, the Offer functions as a “reverse” tender offer in which a shareholder can exercise their redemption rights for Ordinary Shares and we will only be able to consummate the Transaction if the Maximum Tender Condition is not satisfied. Accordingly, your decision to tender your Ordinary Shares in the Offer would make it less likely that we will be able to consummate the Transaction.
In addition, unlike a typical tender offer, there will be no proration in the event more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn in the Offer. Assuming no shares are purchased pursuant to the 2% Increase, if more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, we will terminate or extend the Offer. Shareholders have the right, pursuant to our Charter, to a pro rata portion of our Trust Account, absent a business combination, only in the event of our liquidation. Consequently, if we terminate the Offer, we will NOT: (i) purchase any Ordinary Shares pursuant to the Offer or (ii) consummate the Transaction in accordance with the terms of the Agreement and Plan of Merger, and we will promptly return all Ordinary Shares delivered pursuant to the Offer at our expense upon expiration or termination of the Offer.
What is the background of Blue Wolf?
Blue Wolf was formed on March 11, 2011, pursuant to the laws of the British Virgin Islands for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation or contractual control arrangement with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with one or more operating businesses. Blue Wolf consummated its IPO of 8,050,000 units, each unit consisting of one Ordinary Share and one warrant to purchase one Ordinary Share (a “Warrant” and, together with one Ordinary Share, a “Unit”) on July 20, 2011.The net proceeds of the IPO, together with $3,125,000from Blue Wolf’s sale of 4,166,667 Warrants (the “Sponsor Warrants”) to Blue Wolf MHC Ltd., a British Virgin Islands business company limited by shares which is owned by certain of our officers, directors, advisors and their respective affiliates (our “Sponsor”), plus deferred underwriting fees in connection with our IPO for an aggregate of approximately $80 million, were deposited in the Trust Account.
On April 15, 2013, Blue Wolf’s shareholders approved the amendment of our Charter to provide an extension of Blue Wolf’s corporate existence until July 22, 2013. Blue Wolf conducted a tender offer, funded with the proceeds then held in the Trust Account, in connection with the Charter amendment, pursuant to which it purchased approximately 5.8 million Public Shares for approximately $57.8 million. As a result, approximately $22.5 million remains in the Trust Account. If Blue Wolf does not consummate its initial business combination by July 22, 2013, it must liquidate the Trust Account to the holders of the Ordinary Shares issued in its IPO and dissolve.
Is there an Agreement and Plan of Merger related to the Offer?
Yes. On May 21, 2013, Blue Wolf and Blue Wolf Acquisition Sub, Inc., a wholly-ownedsubsidiary of Blue Wolf (“Merger Sub”), entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Agreement and Plan of Merger”) withLi3 Energy, Inc., a Nevada corporation (“Li3”) and, pursuant to which, among other things and subject to the terms and conditions contained in the Agreement and Plan of Merger, Merger Sub will merge with and into Li3 with Li3 surviving. Upon consummation of the Transaction, Blue Wolf intends to change its name to “Li3 Energy Corp.” by resolution of its board. Li3 will be required to obtain its shareholder approval of the Transaction. Blue Wolf will file a Registration Statement on Form F-4 with the SEC to register the distribution of the Ordinary Shares issuable by Blue Wolf to Li3’s stockholders. The Registration Statement, which will include a proxy statement/prospectus for Li3’s stockholders, must be declared effective by the SEC before the Transaction can be approved by Li3’s shareholders. Pursuant to its Charter, Blue Wolf is required, in connection with its business combination, to provide all holders of its Public Shares with the opportunity to redeem their Ordinary Shares through a tender offer pursuant to the tender offer rules promulgated under the Exchange Act. See “The Transaction” and “The Agreement and Plan of Merger.”
Who is Li3?
Li3 (OTCBB: LIEG), a Nevada corporation, is a South America-based exploration stage company in the lithium mining and energy sector which files public reports with the SEC. Li3 aims to acquire, develop and commercialize a significant portfolio of lithium brine deposits in the Americas. It is currently focused on exploring, developing and commercializing its 60% controlling interest in its flagship Maricunga Project located in the northeast section of the Salar de Maricunga in Region III of Atacama, in northern Chile. In Chile, its assets consist of 1,888 hectares exploitation mining concessions located within the Salar de Maricunga as well as 4,900 hectares of exploration mining concessions that are strategically located within close proximity to the salar that could serve as potential processing sites for the project. Together, its total Chilean land holdings consist of 6,788 hectares, and it believes it is one of the only companies with an advanced stage lithium and potassium project within the Salar de Maricunga. Li3 plans to continue exploring other synergistic opportunities to further augment and strengthen this property and its land portfolio throughout the region. With the completion of the NI 43–101 Compliant Measured Resource Report in May 2012, Li3’s goals are to: (a) advance Maricunga to the Feasibility Stage; (b) support the global implementation of clean and green energy initiatives; (c) meet growing lithium market demand; and (d) become a mid-tier, low cost supplier of lithium, potassium nitrate, and other strategic minerals, serving global clients in the energy, fertilizer and specialty chemical industries. See “Business of Li3.”
What is the Structure of the Transaction and the Merger Consideration?
Pursuant to the terms of the Agreement and Plan of Merger, among other things, Li3 will seek approval from its stockholders for the Transaction, in which Merger Sub will merge with and into Li3 with Li3 surviving as a wholly-owned subsidiary of Blue Wolf in exchange for consideration in the form of newly-issued Ordinary Shares of Blue Wolf. Concurrently with the Closing, Merger Sub and Li3 will file articles of merger with the Secretary of State of the State of Nevada, in accordance with the relevant provisions of the Nevada Revised Statutes (the “NRS”). The time when the Transaction shall become effective is herein referred to as the “Effective Time.”
In connection with the Transaction, at the Effective Time, Blue Wolf shall cause to be issued to the shareholders of record of Li3 one Ordinary Share for every 250 shares of Li3 common stock owned by them (the “Merger Consideration”). In addition, each option and warrant to purchase shares of Li3 common stock which is outstanding immediately prior to the Effective Time shall be converted into a right to acquire one Ordinary Share for every 250 shares of Li3 common stock subject to each such Li3 option (the “Converted Option”) or warrant (the “Converted Warrant”) and on the same contractual terms and conditions as were in effect immediately prior to the Effective Time.
Li3 will separately solicit its shareholders for approval of the Transaction. Blue Wolf will file a Registration Statement on Form F-4 with theSEC to register the distribution of the Merger Consideration. The Registration Statement, which will include a proxy statement/prospectus for Li3’s stockholders, must be declared effective by the SEC before the Transaction can be approved by Li3’s shareholders.
See “The Transaction,” “The Agreement and Plan of Merger,” “Description of Securities” and “Price Range of Securities and Dividends.”
The diagram below depicts our organizational structure immediately following the consummation of the Offer and the Transaction. The voting percentages provided below assume the following: (i) the issuance of 1,581,990 registered Ordinary Shares to Li3 shareholders as the Merger Consideration; (ii)that no Warrants are exercised (including the Sponsor Warrants and the Converted Warrants);(iii) that1,610,000 founder shares and 3,333,333Sponsor Warrants are forfeited pursuant to the Sponsor Agreement; (iv) that no Li3 Options are exercised;and (v) that the maximum number of Ordinary Shares are validly tendered in the Offer.
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Are there any restrictions on the transfer of the Merger Consideration?
Management believes, based upon discussions with Li3 and their largest individual stockholders, that stockholders of Li3 holding a majority of the issued and outstanding Li3 common stock will support and agree to approve the Transaction, and that such stockholders will further agree to lock up any Merger Consideration received by them in connection with the Transaction in accordance with the proposed terms of such an agreement (the “Lock-Up and Support Agreement”). These stockholders will agree to lock-up such shares for the earlier of (1) one year following the closing of the Transaction or (2)the date on which we consummate a liquidation, merger, share exchange or other similar transaction after the Transaction that results in all of our shareholders having the right to exchange their Ordinary Shares for cash, securities or other property(subject to earlier release if the stock price meets certain price targets). Pursuant to the Lock-Up and Support Agreements, during this period, none of such shareholders nor any permitted transferee will be able to(i) sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any of the Merger Consideration, whether any such transaction is to be settled by delivery of securities, cash or otherwise, or (iii) publicly announce any intention to effect any transaction specified in clause (i) or (ii). Execution of the Lock-Up and Support Agreements is a closing condition of the Agreement and Plan of Merger. See “The Agreement and Plan of Merger–Closing Conditions of the Transaction” for a further description of the proposed Lock-Up and Support Agreements.
Are there other agreements that will be entered into in connection with the Transaction?
Yes. In addition to the Agreement and Plan of Merger, on May 21, 2013, Blue Wolf and its Sponsor entered into the Sponsor Agreement. The terms of such agreement is described in greater detail below under the heading “Related Agreements.” Additionally, Blue Wolf and Li3 have agreed, as a closing condition to the Agreement and Plan of Merger, to enter into related agreements with certain of Li3’s shareholders, including the Lock-up and Support Agreements and the Investor Rights Agreement with POSCO (the counterparties to both of which have indicated their intention to execute the same). The terms of such agreements are described in greater detail below under the heading “The Agreement and Plan of Merger–Closing Conditions of the Transaction.”
What assumptions have we made when disclosing ownership information?
Unless otherwise expressly stated, this Offer to Purchase assumes that no more than 1,467,970 Ordinary Shares will be accepted for payment in this Offer, and that Blue Wolf will not elect to exercise its rights pursuant to the 2% Increase to purchase any additional shares.
We have made several assumptions with respect to ownership of our Ordinary Shares following the consummation of the Transaction. These assumptions impact certain calculations of post-transaction ownership and voting rights throughout this Offer to Purchase. Unless otherwise expressly stated, all such calculations relating to beneficial ownership and voting rights post-transaction assume: (i) the issuance of 1,581,990registered Ordinary Shares as Merger Consideration to Li3 shareholders; (ii) that no Warrants (including the Sponsor Warrants and Converted Warrants) are exercised; (iii) that 1,610,000 founder shares and 3,333,333 Sponsor Warrants are forfeited pursuant to the Sponsor Agreement; (iv) that no Converted Options are exercised; and (v) that 1,467,970 Ordinary Shares are validly tendered pursuant to the Offer.
Are the Offer and the Transaction conditioned on one another?
Yes. Pursuant to the Agreement and Plan of Merger, it is a condition to the consummation of the Transaction that Blue Wolf shall have conducted the Offer and satisfied each of the Maximum Tender Condition and the Merger Condition. If the Merger Condition is not satisfied upon a then scheduled Expiration Date, we will terminate or extend the Offer. In the event the Offer is terminated, we will promptly return any Ordinary Shares, at our expense, that were delivered pursuant to the Offer upon the expiration or termination of the Offer and we will not consummate the Transaction. See “The Agreement and Plan of Merger.”
What are the most significant conditions to the Offer?
Our obligation to purchase Ordinary Shares validly tendered and not properly withdrawn, subject to our right to accept for payment an additional amount of shares pursuant to the 2% Increase,prior to the Expiration Date is conditioned upon, among other things:
| · | no more than 1,467,970 Ordinary Shares having been validly tendered and not properly withdrawn prior to the Expiration Date. We refer to this condition, which is not waivable, as the “Maximum Tender Condition.” |
| · | the Transaction, in our reasonable judgment to be determined immediately prior to the Expiration Date, is capable of being consummated contemporaneously with the Offer, but in no event later than three business days after the Expiration Date. We refer to this condition, which is not waivable, as the “Merger Condition.” |
We refer to the conditions to the Offer, including the Merger Condition, as the “offer conditions.” See “The Agreement and Plan of Merger — Conditions to the Closing of the Transaction” and “The Offer — Conditions of the Offer.”
What are the most significant conditions to the Transaction?
Pursuant to the Agreement and Plan of Merger, the consummation of the Transaction is conditioned upon, among other things, (i) Blue Wolf shall have completed the Offerand accepted forpayment all Ordinary Sharesthat have been validly tendered and not properly withdrawn in the Offer; (ii) approval of the Transaction by Li3’s stockholders and (iii) standard transaction closing conditions (e.g., representations and warranties are true and correct, covenants and agreements have been performed, certificates and other instruments have been executed and delivered, antitrust and regulatory approvals have been obtained, no material adverse effect has occurred with respect to Blue Wolf or Li3, and no law or order is in effect prohibiting the Transaction). If any of the conditions to the Transaction are not met, Li3 or Blue Wolf may choose to exercise any applicable right to terminate the Agreement and Plan of Merger. See “Risk Factors — Risks Related to the Transaction” and “The Agreement and Plan of Merger — Conditions to the Closing of the Transaction.”
Does the Transaction require the approval of Li3’s stockholders?
Li3 will separately solicit its shareholders, and convene a meeting of its stockholders, for approval of the Transaction. Blue Wolf will file a Registration Statement on Form F-4 with theSEC to register the distribution of the Merger Consideration. The Registration Statement, which will include a proxy statement/prospectus for Li3’s stockholders, must be declared effective by the SEC before the Transaction can be approved by Li3’s shareholders. However, management believes, based upon discussions with Li3 and their largest individual stockholders, that stockholders of Li3 holding a majority of the issued and outstanding Li3 common stock will support and agree to approve the Transaction.
Will there be a single controlling shareholder of Blue Wolf following the completion of the Transaction?
No. However, immediately following the Transaction,the existing Blue Wolf shareholderswill hold voting securities representing between approximately 62.7% of our voting power, in the event no Ordinary Shares are validly tendered in the Offer, and approximately 42.9% of our voting power in the event 1,467,970 Ordinary Shares are accepted for payment in the Offer (in each case not including outstanding options and warrants). In addition, POSCO, an existing Li3 stockholder, will hold voting securities representing between approximately 9.5% of our voting power, in the event no Ordinary Shares are validly tendered in the Offer, and approximately 14.5% of our voting power in the event 1,467,970 Ordinary Shares are accepted for payment in the Offer.
See “Beneficial Ownership of Securities” for more information regarding our beneficial ownership following the Transaction.
Why are we making the Offer?
We are making the Offer in connection with the Transaction because the provisions of our Charter, as disclosed in the prospectus related to our IPO, and the Agreement and Plan of Merger require us to conduct the Offer to provide our shareholders an opportunity to redeem their Ordinary Shares for a pro-rata portion of our Trust Account upon our consummation of a business combination. We also represented that in connection with this redemption opportunity, we would provide our shareholders with offering documents that contained substantially the same financial and other information about our proposed business combination and redemption rights that would otherwise be required under Regulation 14A of the Exchange Act, which regulates the solicitation of proxies. Accordingly, we are making the Offer so that we may provide our shareholders with appropriate disclosure regarding the business and finances of Blue Wolf, Li3 and the post-transaction company so that our shareholders can decide whether to hold their Ordinary Shares, or ask that they be redeemed by us pursuant to this Offer if the offer conditions are satisfied.
Promptly following the scheduled Expiration Date, we will publicly announce whether the Maximum Tender Condition and Merger Condition, and the other conditions to this Offer have been satisfied or waived (as applicable) and whether the Offer has been completed, extended or terminated. If such conditions are satisfied or waived, promptly after the Expiration Date Blue wolf shall purchase and pay the Purchase Price for each Ordinary Share validly tendered and not properly withdrawn. Upon consummation of the Transaction, which shall occur no later than three business days following the Expiration Date, Li3 will become a wholly-owned subsidiary of Blue Wolf. The Transaction would be completed without a meeting of Blue Wolf’s shareholders pursuant to our Charter and BVI law. See “The Transaction”.
Why must we complete our business combination by July 22, 2013?
Pursuant to our Charter, we have until July 22, 2013 to complete a business combination. If we do not consummate a business combination within such time, we (i) will distribute the Trust Account, pro rata, to holders of our Public Shares by way of redemption and (ii) cease all operations except for the purposes of any winding up of our affairs. Consequently, if we do not consummate the Transaction, we will not be able to consummate a different business combination by July 22, 2013 because we will not have enough time to identify another target, perform due diligence, negotiate a definitive agreement related to the business combination and complete a new tender offer.
How will Blue Wolf fund the payment for the Ordinary Shares?
Blue Wolf will use a portion of the approximately $22.5 million which is currently held in the Trust Account and will become available to us upon consummation of the Transaction, to purchase the Ordinary Shares tendered in the Offer. See “The Offer — Source and Amount of Funds” and “The Agreement and Plan of Merger.”
How does Blue Wolf intend to allocate the approximate $22.5 million in the Trust Account and approximately $76,000 cash on hand?
Of the approximate $22.5 million in the Trust Account, Blue Wolf intends to: (i) retain an amount of cash no less than $5 million to satisfy the Merger Condition; (ii) use between $1.0 million and $1.4 million to pay the deferred IPO underwriting fees; (iii) use approximately $1.4 million to pay the fees and expenses in connection with the Offer and Transaction, although we may subsequently seek to defer a portion of such fees and expenses if needed to facilitate the consummation of the Transaction; and (iv) use up to $14,635,661 to purchase Ordinary Shares validly tendered and not properly withdrawn in this Offer. If sufficient cash is available from the Trust Account subsequent to the above payments, we would also intend to use approximately $400,000 to repay loans from our Sponsor before the remaining balance, if any, is allocated pursuant to the direction of the combined company, for general working capital or other purposes.
Depending on the results of the Offer, we expect that at least approximately $7,836,737 million (if 1,467,970 Ordinary Shares are tendered) to approximately $22,472,398 million (if no Ordinary Shares are tendered) of cash will be released to us from the Trust Account upon consummation of the Transaction.
As of April 30, 2013, Blue Wolf had approximately $76,000 of cash on hand outside of the Trust Account (which amounts reflect the balance of loan proceeds received from the Sponsor), which amount can be used for any purpose, including satisfaction of the Merger Condition, at the direction of Blue Wolf.
See “The Offer — Source and Amount of Funds.”
How long do I have to tender my Ordinary Shares?
You may tender your Ordinary Shares pursuant to the Offer until the Offer expires on the Expiration Date. Consistent with a condition of the Offer, Blue Wolf may need to extend the Offer depending on the timing and process of the SEC’s staff review of this Offer to Purchase and related materials. The Offer will expire on Wednesday, June 19, 2013, at 5:00 p.m., New York City time, unless we terminate or extend the Offer. We may extend the Offer for various reasons, including to provide sufficient time to enable Blue Wolf’s Registration Statement on Form F-4 to be declared effective or to enable Li3 to convene a meeting of its stockholders to approve the Transaction. See “The Offer — Number of Ordinary Shares; Share Purchase Price; No Proration” and “— Extension of the Offer; Termination; Amendment.” If a broker, dealer, commercial bank, trust company or other nominee holds your Ordinary Shares, it is likely the nominee has established an earlier deadline for you to act to instruct the nominee to accept the Offer on your behalf. We urge you to contact the broker, dealer, commercial bank, trust company or other nominee to find out the nominee’s deadline. See “The Offer — Procedures for Tendering Shares.”
Can the Offer be extended, amended or terminated and, if so, under what circumstances?
We may extend or amend the Offer to the extent we determine such extension or amendment is necessary or is required by applicable law or regulation, subject to certain restrictions in the Agreement and Plan of Merger. We may extend the Offer for various reasons, including to provide sufficient time to enable Blue Wolf’s Registration Statement on Form F-4 to be declared effective or to enable Li3 to convene a meeting of its stockholders to approve the Transaction. If we extend the Offer, we will delay the acceptance of any Ordinary Shares that have been validly tendered and not properly withdrawn pursuant to the Offer. We can also terminate the Offer if any of the offer conditions listed in “The Offer — Conditions of the Offer” occur, or the occurrence thereof has not been waived. See “The Offer — Extension of the Offer; Termination; Amendment.”
How will I be notified if the Offer is extended, amended or terminated?
If the Offer is extended, we will make a public announcement of the extension no later than 9:00 a.m., New York City time, on the first business day after the previously scheduled Expiration Date. We will announce any amendment to or termination of the Offer by promptly making a public announcement of the amendment or termination. See “The Offer — Extension of the Offer; Termination; Amendment.”
How do I tender my Ordinary Shares?
If you hold your Ordinary Shares in your own name as a holder of record and decide to tender your Ordinary Shares, you must deliver your Ordinary Shares by mail or physical delivery and deliver a completed and signed Letter ofTransmittal or an Agent’s Message (as defined in “The Offer — Procedures for Tendering Shares”) to Continental Stock Transfer & Trust Company (the “Depositary”) before 5:00 p.m., New York City time, on Wednesday, June 19, 2013, or such later time and date to which we may extend the Offer. Shareholders should not deliver any such materials to Blue Wolf or the Information Agent.
If you hold your Ordinary Shares in a brokerage account or otherwise through a broker, dealer, commercial bank, trust company or other nominee (i.e., in “street name”), you must contact your broker or other nominee if you wish to tender your Ordinary Shares. See “The Offer — Procedures for Tendering Shares” and the instructions to the Letter of Transmittal.
If you are an institution participating in The Depository Trust Company, you must tender your Ordinary Shares according to the procedure for book-entry transfer described in “The Offer — Procedures for Tendering Shares.”
You may contact Morrow & Co., LLC, the information agent for the Offer (the “Information Agent”), or your broker for assistance. The telephone numbers for the Information Agent are set forth on the back cover of this Offer to Purchase. See “The Offer — Procedures for Tendering Shares” and the instructions to the Letter of Transmittal.
Can I tender my Units or Warrants?
No. If you hold Units, comprised of one Ordinary Share and a Warrant, and desire to tender the Ordinary Shares included in such Units, you must separate the Ordinary Shares from the Warrants that comprise the Units prior to tendering your Ordinary Shares pursuant to the Offer. You may instruct your broker to do so, or if you hold Units registered in your own name, you must contact the Depositary directly and instruct them to do so. While this is typically done electronically the same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your Ordinary Shares to be separated in a timely manner before the Offer expires you will likely not be able to validly tender those Ordinary Shares prior to the expiration of the Offer. See “The Offer — Procedures for Tendering Shares.
Furthermore, our Warrants are not exercisable until 30 days after the consummation of the Transaction and therefore a Warrant holder will not be able to exercise his, her or its Warrants to purchase Ordinary Shares and then tender the Ordinary Shares pursuant to the Offer.
Until what time can I withdraw previously tendered Ordinary Shares?
You may withdraw Ordinary Shares that you have previously tendered pursuant to the Offer at any time prior to the Expiration Date, namely 5:00 p.m. on Wednesday, June 19, 2013. Although pursuant to Rule 13e-4(f)(2)(ii) promulgated under the Exchange Act, you would also have the right to withdraw your previously tendered Ordinary Shares at any time after 5:00 p.m., New York City time, on Thursday, July 18, 2013 if not accepted prior to such time, we will cease operations, distribute the proceeds held in our Trust Account to the holders of our Ordinary Shares purchased in our IPO and begin to liquidate Blue Wolf if we do not consummate the Transaction by July 22, 2013. Except as otherwise provided in “The Offer — Withdrawal Rights,” tenders of Ordinary Shares are irrevocable.
How do I properly withdraw Ordinary Shares previously tendered?
You must deliver, on a timely basis, a written notice of your withdrawal to the Depositary at the address appearing on the back cover page of this Offer to Purchase. Your notice of withdrawal must specify your name, the number of Ordinary Shares to be withdrawn and the name of the registered holder of such Ordinary Shares. Certain additional requirements apply if the certificates for Ordinary Shares to be withdrawn have been delivered to the Depositary or if your Ordinary Shares have been tendered under the procedure for book-entry transfer set forth in “The Offer — Procedures for Tendering Shares.” See “The Offer — Withdrawal Rights.”
Has Blue Wolf or its board of directors adopted a position on the Offer?
Our intention is to consummate the Transaction. Our board of directors has unanimously (i) approved our making the Offer, (ii) declared the advisability of and approved the Transaction, and (iii) determined that the Transaction is in the best interests of the shareholders of Blue Wolf and, if consummated, would constitute our initial business combination pursuant to our Charter. If the Maximum Tender Condition is not satisfied, we will be unable to consummate the Transaction. Our board of directors therefore unanimously recommends that you do not tender your Ordinary Shares pursuant to the Offer. If you tender your Ordinary Shares pursuant to the Offer, you will not be participating in the Transaction because you will no longer hold such Ordinary Shares in Blue Wolf upon the consummation of the Transaction. Because we can only satisfy the Merger Condition (assuming the Transaction is approved by Li3’s shareholders) and therefore consummate the Transaction if the Maximum Tender Condition is not satisfied, each Ordinary Share tendered may make it less likely that we can consummate the Transaction. The members of our board of directors will directly benefit from the Transaction and have interests in the Transaction that may be different from, or in addition to, the interests of holders of our Public Shares. See “Risk Factors — Risks Related to the Transaction” and “The Transaction — Certain Benefits of Blue Wolf’s Directors and Officers and Others in the Transaction.” You must make your own decision as to whether to tender your Ordinary Shares and, if so, how many Ordinary Shares to tender. In doing so, you should read carefully the information in this Offer to Purchase and in the Letter of Transmittal.
When and how will Blue Wolf pay for the Ordinary Shares I tender that are accepted for payment?
Blue Wolf will pay the Share Purchase Price in cash, without interest, for the Ordinary Shares accepted for payment by depositing the aggregate Purchase Price with the Depositary promptly after the expiration of the Offer provided that the offer conditions are satisfied or, if waivable, waived. The Depositary will act as your agent and will transmit to you the payment for all of your Ordinary Shares accepted for payment. See “The Offer — Purchase of Shares and Payment of Purchase Price.”
Will I have to pay brokerage fees and commissions if I tender my Ordinary Shares?
If you are a holder of record of your Ordinary Shares and you tender your Ordinary Shares directly to the Depositary, you will not incur any brokerage fees or commissions. If you hold your Ordinary Shares in street name through a broker, bank or other nominee and your broker tenders Ordinary Shares on your behalf, your broker may charge you a fee for doing so. We urge you to consult your broker or nominee to determine whether any charges will apply. See “The Offer — Procedures for Tendering Shares.”
What are the U.S. federal income tax consequences if I tender my Ordinary Shares?
The receipt of cash for your tendered Ordinary Shares will generally be treated for U.S. federal income tax purposes either as (i) a sale of your tendered Ordinary Shares or (ii) a corporate distribution. See “The Offer — Material U.S. Federal Income Tax Considerations.”
Will I have to pay stock transfer tax if I tender my Ordinary Shares?
We will not pay any stock transfer taxes in connection with this Offer. If you instruct the Depositary in the Letter of Transmittal to make the payment for the Ordinary Shares to the registered holder, you may incur domestic stock transfer tax. See “The Offer — Purchase of Shares and Payment of Purchase Price.”
Who do I contact if I have questions about the Offer?
For additional information or assistance, you may contact the Information Agent at the telephone numbers set forth on the back cover of this Offer to Purchase. You may request additional copies of the Offer, the Letter of Transmittal and other Offer documents from the Information Agent at Morrow & Co., LLC, 470 West Avenue, 3rd Floor, Stamford, CT 06902; telephone (800) 662-5200 (banks and brokerage firms: (203) 658-9400); email:mngl.info@morrowco.com.
How will the Offer and issuance of the Merger Consideration affect the number of our outstanding shares and holders?
Immediately following the Transaction, we will have 4,240,371Ordinary Shares outstanding in the event no Ordinary Shares are tendered in this Offer, and 2,772,401 Ordinary Shares outstandingin the event 1,467,970 Ordinary Shares are accepted in the Offer.See “The Offer — Purpose of the Offer; Certain Effects of the Offer” and “Beneficial Ownership of Securities.”
To the extent any of our shareholders validly tender their Ordinary Shares (without subsequently properly withdrawing such tendered Ordinary Shares) and that tender is accepted, the number of our holders following the Transaction would be reduced. See “The Offer — Purpose of the Offer; Certain Effects of the Offer.”
Will our Sponsor, officers or directors tender their Ordinary Shares in the Offer?
No. Our Sponsor, and each of our officers and directors in their individual capacities, has agreed not to tender any Ordinary Shares pursuant to the Offer. See “The Offer — Purpose of the Offer; Certain Effects of the Offer” and “Related Agreements—Sponsor Agreement.”
What will happen if I do not tender my Ordinary Shares?
Shareholders who choose not to tender their Ordinary Shares will retain their Ordinary Shares. See “The Offer — Purpose of the Offer; Certain Effects of the Offer” and “Beneficial Ownership of Securities.”
If I object to the price being offered for my Ordinary Shares, will I have appraisal rights?
No. No appraisal rights will be available to you in connection with the Offer or the Transaction. See “Appraisal Rights.” Li3’s public stockholders will have dissenters’ rights in connection with the business combination in accordance with the provisions of Nevada law.
What is the recent market price for the Ordinary Shares?
As of May 17, 2013, the last reported closing price on the Nasdaq Capital Market (“Nasdaq”) of Blue Wolf’s Ordinary Shares was $10.75. You are urged to obtain current market quotations for the Ordinary Shares before deciding whether to tender your Ordinary Shares. See “Price Range of Securities and Dividends.”
Will the Ordinary Shares be listed on a stock exchange following the Transaction?
Blue Wolf’s Ordinary Shares are currently listed on Nasdaq. Although there can be no assurance concerning our ability to meet Nasdaq’s continued qualification standards in the future, we commenced this Offer pursuant to our Charter to provide our shareholders with an opportunity to redeem their Ordinary Shares in connection with the Transaction, and not for the purpose of causing our Ordinary Shares to be delisted from Nasdaq. We intend for our securities to continue to be listed on Nasdaq subsequent to the consummation of the Transaction.We also intend to apply for the listing of our securities on the TSX or TSX Venture in Canada subsequent to the closing of the Transaction. See “Risk Factors — Risks Related to the Offer” and “— Risks Related to Blue Wolf.”
What interests do the directors and executive officers of Blue Wolf have in the Transaction?
Directors and executive officers of Blue Wolf have interests in the Transaction that may be different from, or in addition to, the interests of Blue Wolf shareholders. These interests include:
| · | Our Sponsor owns 2,012,500 Ordinary Shares, which it acquired for $25,000 and which have an aggregate value of $21,634,375 based on the closing price of the Ordinary Shares on Nasdaq of $10.75 as of May 17, 2013. It has waived its right to receive distributions with respect to its shares upon Blue Wolf’s liquidation, which will occur if Blue Wolf is unable to consummate the Transaction by July 22, 2013. Accordingly, the Sponsor’s Ordinary Shares will be worthless if Blue Wolf is forced to liquidate. |
| · | Our Sponsor owns 4,166,667 Sponsor Warrants, which it acquired for $3,125,000 and which have an aggregate value of $416,666.70 based on the closing price of the Warrants on Nasdaq of $0.10 as of May 17, 2013. In the event of Blue Wolf’s liquidation, the Sponsor Warrants will expire worthless. |
| · | As of the date of this Offer to Purchase, our Sponsor has made loans to us in the aggregate amount of $400,000. In the event of liquidation, we will not be able to repay the loans to our Sponsor. |
| · | Each of our current directors and officers will be reimbursed from our funds held outside of the Trust Account for out-of-pocket expenses incurred by him in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations, but only if the business combination is consummated. In the event we consummate the Transaction, all such expenses will be paid by us in full. |
| · | If Blue Wolf liquidates in the event it is unable to consummate the Transaction, Messrs. Kraus and Edwards may be liable to us in the event any claims by a vendor for services rendered or a prospective target business with which we have discussed entering into a business combination reduce the amounts in the Trust Account below $9.97 per share except in certain circumstances. See “Certain Relationships and Related Transactions.” |
These interests may influence the Blue Wolf directors and executive officers in the negotiation of the Agreement and Plan of Merger, the Related Agreements and the approval of the Transaction. See “Risk Factors — Risks Related to the Transaction,” “The Transaction — Certain Benefits of Blue Wolf’s Directors and Officers and Others in the Transaction.”
Who do I contact if I have questions about the Offer?
For additional information or assistance, you may contact the Information Agent at the address and telephone numbers set forth on the back cover of this Offer to Purchase. You may request additional copies of this Offer to Purchase, the Letter of Transmittal and other Offer documents from the Information Agent at Morrow & Co., LLC, 470 West Avenue, 3rd Floor, Stamford, CT 06902; telephone (800) 662-5200 (banks and brokerage firms: (203) 658-9400); email:mngl.info@morrowco.com.
FORWARD-LOOKING STATEMENTS
Some of the statements in this Offer to Purchase constitute “forward-looking statements.” When used in this Offer to Purchase, the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “potential” and “should,” as they relate to us are intended to identify these forward-looking statements. All statements by us regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives and similar matters are forward-looking statements.
Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors (many of which are beyond our control), set forth in this section and elsewhere in this Offer to Purchase, that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Our future results may differ materially from those expressed in these forward-looking statements.
We undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of the Offer to Purchase, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
These risks, uncertainties and other important factors include, but are not limited to, the statements set forth under “Risk Factors” and the following:
| · | the risk that more than 1,467,970 Ordinary Shares will be validly tendered and not properly withdrawn prior to the Expiration Date which would then cause us to (i) be unable to satisfy the Maximum Tender Condition and the Merger Condition, (ii) be unable to consummate the Transaction and (iii) withdraw the Offer; |
| · | the risk that Blue Wolf’s Registration Statement on Form F-4 is not declared effective prior to July 22, 2013, or even if effective, Li3 may not have sufficient time subsequent to effectiveness to seek stockholder approval of the Transaction under Nevada law, or even if so, that Li3 stockholders do not approve the Transaction. |
| · | the risk that governmental and regulatory review of the tender offer documents may delay the Transaction or result in the inability of the Transaction to be consummated by July 22, 2013and the length of time necessary to consummate the proposed Transaction; |
| · | the risk that a condition to consummation of the Transaction may not be satisfied or waived; |
| · | the risk that the anticipated benefits of the Transaction may not be fully realized or may take longer to realize than expected; |
| · | the risk that any projections, including earnings, revenues, expenses, margins, mineral reserve estimates or any other financial items are not realized; |
| · | changing legislation and regulatory environments including those in foreign jurisdictions in which Li3 intends to operate; |
| · | the ability to list and comply with Nasdaq’s continuing listing standards, including having the requisite number of round lot holders or stockholders and meeting the independent director requirements for the board of directors and its committees; |
| · | Li3’s mineral operations are subject to Chilean law and government regulation. Even if Li3 discovers lithium in a commercially exploitable quantity, these laws and regulations could restrict or prohibit the exploitation of lithium; |
| · | the risk that lithium, iodine and nitrates prices are subject to unpredictable fluctuations; and |
| · | the risk that Li3 may be unable to amend the mining claims that it is seeking to acquire to cover the primary minerals that Li3 plans to develop. |
You should carefully consider these risks, in addition to the risks factors set forth in the section titled “Risk Factors” and other information in this Offer to Purchase and in (i) Blue Wolf’s other filings with the SEC, includingthe final prospectus related to our IPO dated July 14, 2011 (Registration No. 333-173419) and our Annual Report on Form 10-K/A (File No. 001-35234) for the fiscal year ended February 29, 2012 and (ii) Li3’s filings with the SEC, includingits Registration Statement on Form S-1 (Registration No. 333-175329), Registration Statement on Form S-1 (Registration No. 333-185714) and its Annual Report on Form 10-K (File No. 000-54303) for the fiscal year ended June 30, 2012. The documents filed with the SEC, including those referred to above, also discuss some of the risks that could cause actual results to differ from those contained or implied in the forward-looking statements. See “Where You Can Find More Information.”
RISK FACTORS
You should carefully consider the following risk factors in addition to the other information included in this Offer to Purchase, including matters addressed in the section entitled “Forward-Looking Statements” before you decide whether to tender Ordinary Shares in the Offer. We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business. The following discussion should be read in conjunction with the financial statements and notes to the financial statements included herein, as well as in the final prospectus related to our IPO dated July 14, 2011 (Registration No. 333-173419) and our Annual Report on Form 10-K for the fiscal year ended February 29, 2012 (File No. 001-35234).
Risks Related to the Offer
Holders of our Ordinary Shares may fail to understand that they should NOT tender their Ordinary Shares if they support the Transaction. To the extent the Maximum Tender Condition is not satisfied, we will be unable to consummate the Transaction.
There is a risk that holders of Ordinary Shares will tender their Ordinary Shares despite the fact that they support the Transaction. We are a blank check, or special purpose acquisition company (“SPAC”), and the Offer is designed to afford holders of Ordinary Shares with the opportunity to redeem their shares if they do not approve of our proposed business combination, Unlike a typical third party or issuer tender offer in which the offeror desires that shareholders tender securities that are the subject of the tender offer, confusion may arise stemming from the fact that we have commenced the Offer but we do not want our shareholders to tender their Ordinary Shares in the Offer. Furthermore, our board of directors recommends that shareholders not tender Ordinary Shares pursuant to the Offer. If shareholders approve of the proposed Transaction and desire to retain their Ordinary Shares, the shareholders should not tender any of their Ordinary Shares which results in more than 1,467,970 Ordinary Shares being validly tendered and not properly withdrawn, we will terminate or extend the Offer. If we terminate the Offer, we will be unable to consummate the Transaction and be required to liquidate if we cannot consummate a business combination by July 22, 2013.
There is no guarantee that your decision whether or not to tender your Ordinary Shares will put you in a better future economic position.
We can give no assurance as to the price at which a shareholder may be able to sell its Ordinary Shares in the future following the completion of the Offer. Certain events following the consummation of the Transaction may cause an increase in our share price, and may result in a lower value realized now than you might realize in the future had you not agreed to tender your Ordinary Shares. Similarly, if you do not tender your Ordinary Shares, you will bear the risk of ownership of your Ordinary Shares after the consummation of the Transaction, and there can be no assurance that you can sell your shares in the future for a greater amount than the Share Purchase Price. You should consult your own individual tax and/or financial advisor for assistance on how this may affect your individual situation.
If certain conditions to the Offer are not met, Blue Wolf will not have access to the funds in the Trust Account to purchase any shares which are validly tendered and not properly withdrawn and will terminate the Offer.
Upon the consummation of the Transaction, we plan to use the cash available from the funds held in the Trust Account to purchase the Ordinary Shares validly tendered and not properly withdrawn pursuant to the Offer. Accordingly, if the conditions to the Offer are not satisfied, including the Maximum Tender Condition and the Merger Condition, we will not be able to access the funds held in the Trust Account and thus will terminate or extend the Offer. See “The Tender Offer — Conditions of the Offer.”
Following the Offer, the amount of cash available to us for working capital purposes may be reduced, additional sources of financing may not be available and our purchase of shares in the Offer will cause our public float to be reduced. As a result, our stock price could decline and our shareholders may be disadvantaged by reduced liquidity in our securities.
Although our board of directors has unanimously determined that the Transaction and making the Offer are in the best interests of our shareholders, the Offer exposes us to a number of risks including:
| · | use of funds to purchase Ordinary Shares in the Offer and to pay expenses of the IPO, Offer and Transaction will reduce the funds available as working capital for the continuation of Li3’s business through the combined company; |
| · | we may not be able to replenish our cash reserves by raising debt or equity financing in the future on termsacceptable to us, or at all; and |
| · | our “public float,” which is the number of shares owned by non-affiliate shareholders and available for trading in the securities markets, may be reduced, which may reduce the volume of trading in our shares and may result in lower stock prices and reduced liquidity in the trading of our shares following completion of the Offer. |
If Li3’s stockholders do not approve the Transaction, we willbe unable to consummate the Transaction and willterminate the Offer.
Li3’s shareholders will be required to approve the Transaction. Li3 will separately solicit its shareholders for approval of the Transaction. Blue Wolf will file a Registration Statement on Form F-4 with the SEC to register the distribution of the Merger Consideration. The Registration Statement, which will include a proxy statement/prospectus for Li3’s stockholders, must be declared effective by the SEC before the Transaction can be approved by Li3’s shareholders. There is no assurance that the Form F-4 will be declared effective by the SEC with sufficient time to convene a meeting of Li3’s stockholders prior to July 22, 2013. Even if the Form F-4 is declared effective by the SEC with sufficient time to convene a meeting of Li3’s stockholders prior to July 22, 2013, there is a risk that Li3’s stockholders will not approve the Transaction at the meeting of stockholders. In the event Li3’s stockholders do not approve the Transaction for any reason, we willbe unable to consummate the Transaction and willterminate the Offer.
Risks Related to Blue Wolf
Your only opportunity to affect the investment decision regarding the Transaction will be limited to the exercise of your right to redeem your Ordinary Shares from us for cash.
Since our board of directors may consummate a business combination without seeking shareholder approval in accordance with our Charter and the Agreement and Plan of Merger, shareholders will not have the right or opportunity to vote on the Transaction. Accordingly, your only opportunity to affect the investment decision regarding the Transaction may be limited to exercising your redemption rights within the period of time set forth in this Offer, as amended from time to time. In addition, your election to exercise your redemption rights could still be rejected if the conditions to this Offer are not satisfied. See “The Offer.”
If the Transaction is not consummated, we will not have sufficient time to consummate a different business combination and will be required to liquidate.
Pursuant to our Charter, we have until July 22, 2013 to complete a business combination. If we are unable to consummate the Transaction, we will not have sufficient time to identify another target, perform due diligence, negotiate a definitive agreement related to the business combination and complete a tender offer by July 22, 2013. Additionally, we would have fewer funds at our disposal to pay for the costs associated with consummating a different business combination. Consequently, if we do not consummate the Transaction, we may not be able to consummate a different business combination by July 22, 2013. If we are unable to consummate our business combination by July 22, 2013, we will, as promptly as reasonably possible but no later than five business days thereafter, distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata to holders of our Public Shares by way of redemption and cease all operations except for the purposes of winding up of our affairs, as further described herein.
If we are unable to consummate a business combination, our public shareholders will be forced to wait until July 22, 2013or longer before receiving distributions from our Trust Account.
We have until July 22, 2013 to complete a business combination. If we are unable to consummate our business combination by July 22, 2013, we will, as promptly as reasonably possible but no later than five business days thereafter, distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata to our public shareholders by way of redemption and cease all operations except for the purposes of winding up of our affairs, as further described herein. Any redemption of Public Shares from the Trust Account shall be effected automatically by function of our Charter prior to any voluntary winding up. If we are required to wind-up, liquidate the Trust Account and distribute such amount therein, pro rata, to our public shareholders, as part of any liquidation process, such winding up, liquidation and distribution must comply with the applicable provisions of the BVI Business Companies Act, 2004 (the “Companies Act”). In that case, investors may be forced to wait beyond July 22, 2013 before the redemption proceeds of our Trust Account become available to them, and they receive the return of their pro rata portion of the proceeds from our Trust Account. We have no obligation to return funds to investors prior to the date of our redemption or liquidation unless we consummate our business combination prior thereto and only then in cases where investors have sought to redeem their Ordinary Shares. Only upon our redemption or any liquidation will public shareholders be entitled to distributions if we are unable to complete our business combination.
Upon our liquidation, distributions from out Trust Account may be delayed while the liquidator determines the extent of potential creditor claims.
Pursuant to, among other documents, our Charter, if we do not complete our business combination by July 22, 2013, this will trigger an automatic redemption of our Ordinary Shares using the available funds in the Trust Account pursuant to our Charter, resulting in our repayment of available funds in the Trust Account together with our subsequent voluntary liquidation as may be determined by our directors. In connection with such a voluntary liquidation, the liquidator would give notice to our creditors inviting them to submit their claims for payment, by notifying known creditors (if any) who have not submitted claims and by placing a public advertisement locally in the British Virgin Islands and in Blue Wolf’s principal place of business or in the place the liquidator believes such advertising is most likely to come to the attention of Blue Wolf’s creditors , and taking any other steps he considers appropriate, after which our assets would be distributed.
As soon as our affairs are fully wound-up, if we were to liquidate, the liquidator must complete his or her statement of account and will then notify the Registrar of Corporate Affairs in the British Virgin Islands (the “Registrar”) that the liquidation has been completed. However, the liquidator may determine that he or she requires additional time to evaluate creditors’ claims (particularly if there is uncertainty over the validity or extent of the claims of any creditors). Also, a creditor or shareholder may file a petition with the British Virgin Islands court which, if successful, may result in our liquidation being subject to the supervision of that court. Such events might delay distribution of some or all of our assets to our public shareholders.
In any liquidation proceedings of Blue Wolf under British Virgin Islands law, the funds held in our Trust Account may be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any such claims deplete the Trust Account we may not be able to return to our public shareholders the redemption amounts payable to them.
Our independent directors may decide not to enforce indemnification obligations against Messrs. Kraus and Edwards, resulting in a reduction in the amount of funds in the Trust Account available for distribution to our public shareholders.
In the event that the proceeds in the Trust Account are reduced below approximately $9.97 per share and Messrs. Kraus or Edwards asserts that he is unable to satisfy his obligations or that he has no indemnification obligations related to a particular claim, our independent directors would determine whether to take legal action against such person to enforce his indemnification obligations. While we currently expect that our independent directors would take legal action on our behalf against such person to enforce his indemnification obligations to us, it is possible that our independent directors in exercising their business judgment may choose not to do so in any particular instance. If our independent directors choose not to enforce these indemnification obligations, the amount of funds in the Trust Account available for distribution to our public shareholders may be reduced below approximately $9.97 per share.
We may redeem your unexpired Warrants prior to their exercise at a time that is disadvantageous to you, thereby making your Warrants worthless.
We have the ability to redeem outstanding Warrants at any time after they become exercisable and prior to their expiration, at a price of $0.01 per warrant, provided that the last reported sales price of the Ordinary Shares equals or exceeds $18.00 per share for any 20 trading days within a 30 trading-day period ending on the third business day prior to proper notice of such redemption provided that on the date we give notice of redemption and during the entire period thereafter until the time we redeem the Warrants, we have an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”) covering the Ordinary Shares issuable upon exercise of the Warrants and a current prospectus relating to them is available. If and when the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding Warrants could force you (1) to exercise your Warrants and pay the exercise price therefore at a time when it may be disadvantageous for you to do so, (2) to sell your Warrants at the then-current market price when you might otherwise wish to hold your Warrants or (3) to accept the nominal redemption price which, at the time the outstanding Warrants are called for redemption, is likely to be substantially less than the market value of your Warrants. None of the Sponsor Warrants will be redeemable by us so long as they are held by members of the Sponsor or their permitted transferees.
We have not registered the Ordinary Shares issuable upon exercise of the warrants under the Securities Act or states securities laws, and such registration may not be in place when an investor desires to exercise its warrants, thus precluding such investor from being able to exercise its warrants and causing such warrants to expire worthless.
We have not registered the Ordinary Shares issuable upon exercise of the warrants under the Securities Act or any state securities laws. If the Ordinary Shares issuable upon exercise of the warrants are not registered under the Securities Act, we will be required to permit holders to exercise their warrants on a cashless basis under certain circumstances specified in the warrant agreement. However, no warrant will be exercisable for cash or on a cashless basis, and we will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the Ordinary Shares upon such exercise is registered or qualified under the securities laws of the state of the exercising holder, unless an exemption is available. If the issuance of the shares upon exercise of the warrants is not so registered or qualified, such warrant may have no value and expire worthless. In such event, holders who acquired their warrants as part of a purchase of units will have paid the full unit purchase price solely for the ordinary shares included in the units. If and when the warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying ordinary shares for sale under all applicable state securities laws.
An active market for our securities may not develop following the Transaction, which would adversely affect the liquidity and price of our securities.
An active trading market for our securities may never develop following the Transaction or, if developed, it may not be sustained. Additionally, if our securities are delisted from Nasdaq, , and are quoted on the OTC Bulletin Board, an inter-dealer automated quotation system for equity securities not listed on a national exchange, the liquidity and price of our securities may be more limited than if we were listed on Nasdaq or another national or foreign exchange. You may be unable to sell your securities unless a market can be established and sustained.
As a foreign private issuer, we are permitted to rely on exemptions from certain NASDAQ corporate governance standards and other Exchange Act requirements applicable to U.S. issuers. This may afford less protection to holders of our securities.
As a foreign private issuer, we are permitted to follow home country corporate governance practices instead of certain corporate governance rules of the Nasdaq Capital Market. The corporate governance practice in our home country, the British Virgin Islands, does not require the implementation of various Nasdaq Capital Market corporate governance rules. Accordingly, we intend to rely on our home country corporate governance practice including, among other things, the composition and responsibilities of its board of directors and board committees (including the audit, compensation and nominating committees), the participation of independent directors in the determination of executive compensation and the nomination of directors, the requirement of annual meetings of shareholders, the review and oversight of related-party transactions, the scheduling of executive sessions, the availability and content of a code of conduct, the number of shareholders representing a quorum at shareholders’ meetings and any other home country practice that would be permitted by the Nasdaq Capital Market under its rules from time to time. Furthermore, we intend to follow home country practice instead of Rule 5635 of the Nasdaq Capital Market, which requires shareholder approval for certain issuances of securities, including acquisitions of stock or assets of third parties resulting in the issuance of 20% or more of an issuer’s outstanding shares, issuances resulting in a change of control of an issuer and certain equity compensation plans.
As a foreign private issuer, we will also be exempt from those rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, selective disclosure rules pursuant to Regulation FD and our officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic and current reports with the SEC as frequently or as promptly as U.S. issuers. Because of these exemptions, our shareholders are not afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.
We do not currently intend to hold an annual meeting of shareholders until after our consummation of a business combination.
We are not required under BVI law to hold an annual meeting of shareholders and we do not currently intend to hold an annual meeting of shareholders until after we consummate our initial business combination. If our shareholders want us to hold a meeting prior to such consummation, they may requisition the directors to hold one upon the written request of members entitled to exercise at least 30 percent of the voting rights in respect of the matter for which the meeting is requested. Under British Virgin Islands law, we may not increase the required percentage to call a meeting above such 30 percent level. Until we hold an annual meeting of shareholders, public shareholders may not be afforded the opportunity to elect directors and to discuss company affairs with management.
Our securities may not continue to be listed on Nasdaq in the future, which could limit investors’ ability to make transactions in our securities and subject us to additional trading restrictions.
Our securities are listed on Nasdaq. In order to maintain that listing, we must satisfy minimum financial and other requirements. If and when we consummate the Transaction, we will be required to comply with Nasdaq’s initial listing standards, which are more rigorous than Nasdaq’s continued listing requirements. We may not be able to meet those listing requirements.
If we fail to meet all applicable Nasdaq requirements and Nasdaq delists our securities from trading on its exchange, we expect our securities could be quoted on the OTC Bulletin Board or the “pink sheets.” If this were to occur, we could face significant material adverse consequences, including:
| · | limited availability of market quotations for our securities; |
| · | reduced liquidity of our securities; |
| · | a determination that our shares are a “penny stock” which will require brokers trading in our shares to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our shares; |
| · | a limited amount of news and analyst coverage for our company; and |
| · | a decreased ability to issue additional securities or obtain additional financing in the future. |
Furthermore, The National Securities Markets Improvement Act of 1996 (“NSMIA”) is a federal statute which prevents or preempts states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our securities are listed on Nasdaq, they are covered securities for the purpose of NSMIA. If our securities were no longer listed on Nasdaq and therefore not “covered securities,” we would be subject to regulation in each state in which we offer our securities.
You may face difficulties in protecting your interests, and your ability to protect your rights through the United States federal courts may be limited, because we are incorporated under British Virgin Islands law.
We are a company incorporated under the laws of the British Virgin Islands. As a result, it may be difficult for investors to enforce judgments obtained in the United States courts against our directors or officers.
Our corporate affairs will be governed by our Charter, theBVI Business Companies Act, 2004 of the British Virgin Islands (the “Companies Act”) and the common law of the British Virgin Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under British Virgin Islands law are governed by the Companies Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived from English common law, and while the decisions of the English courts are of persuasive authority, they are not binding on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law may not be as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, while statutory provisions exist in British Virgin Islands law for derivative actions to be brought in certain circumstances, shareholders in BVI companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred.
The British Virgin Islands courts are also unlikely:
| · | to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws where that liability is in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company; and |
| · | to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. |
There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will in certain circumstances recognize such a foreign judgment and treat it as a cause of action in itself which may be sued upon as a debt at common law so that no retrial of the issues would be necessary provided that:
| · | the U.S. court issuing the judgment had jurisdiction in the matter and the company either submitted to such jurisdiction or was resident or carrying on business within such jurisdiction and was duly served with process; |
| · | the U.S. judgment is final and for a liquidated sum; |
| · | the judgment given by the U.S. court was not in respect of penalties, taxes, fines or similar fiscal or revenue obligations of the company; |
| · | in obtaining judgment there was no fraud on the part of the person in whose favor judgment was given or on the part of the court; |
| · | recognition or enforcement of the judgment would not be contrary to public policy in the British Virgin Islands; and |
| · | the proceedings pursuant to which judgment was obtained were not contrary to natural justice. |
In appropriate circumstances, a British Virgin Islands court may give effect in the British Virgin Islands to other kinds of final foreign judgments such as declaratory orders, orders for performance of contracts and injunctions.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a U.S. company.
Our Charter permits the board of directors to create additional classes of securities, including shares with rights, preferences, designations and limitations as they determine which may have an anti-takeover effect.
Our Charter permits the board of directors to designate rights, preferences, designations and limitations attaching to the preferred shares as they determine in their discretion, without shareholder approval with respect to the terms or the issuance. If issued, the rights, preferences, designations and limitations of the preferred shares would be set by the board of directors and could operate to the disadvantage of the outstanding ordinary shares. Such terms could include, among others, preferences as to dividends and distributions on liquidation, or could be used to prevent possible corporate takeovers. Notwithstanding the foregoing, any such issuance should not affect the redemption or liquidation rights of our ordinary shareholders.
Risks Related to the Transaction
Our working capital will be reduced to the extent Ordinary Shares are tendered in connection with the Offer or to the extent our cash and cash equivalents are lower than expected.
The approximately $22.5 million in funds to be released from the Trust Account to us upon consummation of the Transaction and Blue Wolf’s cash and cash equivalents on hand immediately prior to the consummation of the Transaction will be used to (i) pay the Share Purchase Price to shareholders of Blue Wolf who have validly tendered and not properly withdrawn their Ordinary Shares pursuant to the Offer, and (ii) then, subject to the discretion of its board of directors, allocate any funds released to it towards the payment of its obligations pursuant to the Agreement and Plan of Merger and/or to third parties (e.g., professionals, advisors, printers, etc.) who have rendered services to us in connection with the Transaction, in addition tobetween $1.0 million and up to approximately $1.4 millionin deferred underwriting fees from our IPO and repayment of all outstanding loans from our Sponsor. The remaining funds, in an amount no less than $5 million (after payment of the Purchase Price for shares validly tendered in the Offer and payment of Blue Wolf’s expenses), will be used for working capital by the combined company.
If the Transaction is consummated and amount remaining amount of funds is insufficient to fund our post-Transaction working capital requirements, we would need to sell debt or equity securities or borrow the funds necessary to satisfy such requirements following the consummation of the Transaction. There is no assurance that such funds would be available to us on terms favorable to us or at all.
Directors and executive officers of Blue Wolf have potential conflicts of interest in structuring, negotiating and the approval of the Transaction.
When considering whether to tender your Ordinary Shares pursuant to the Offer, Blue Wolf shareholders should be aware that directors and executive officers of Blue Wolf have interests in the Transaction that may be different from, or in addition to, the interests of Blue Wolf shareholders. These interests include:
| · | Our Sponsor owns 2,012,500 Ordinary Shares, which it acquired for $25,000 and which have an aggregate value of $21,634,375 based on the closing price of the Ordinary Shares on Nasdaq of $10.75 as of May 17, 2013. It has waived its right to receive distributions with respect to its shares upon Blue Wolf’s liquidation, which will occur if Blue Wolf is unable to consummate the Transaction by July 22, 2013. Accordingly, the Sponsor’s Ordinary Shares will be worthless if Blue Wolf is forced to liquidate. |
| · | Our Sponsor owns 4,166,667 Sponsor Warrants, which it acquired for $3,125,000 and which have an aggregate value of $416,666.70 based on the closing price of the Warrants on Nasdaq of $0.10 as of May 17, 2013. In the event of Blue Wolf’s liquidation, the Sponsor Warrants will expire worthless. |
| · | As of the date of this Offer to Purchase, our Sponsor has made loans to us in the aggregate amount of $400,000. In the event of liquidation, we will not be able to repay the loans to our Sponsor. |
| · | Each of our current directors and officers will be reimbursed from our funds held outside of the Trust Account for out-of-pocket expenses incurred by him in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations, but only if the business combination is consummated. In the event shareholders we consummate the Transaction, all such expenses will be paid by us in full. |
| · | If Blue Wolf liquidates in the event it is unable to consummate the Transaction, Messrs. Kraus and Edwards may be liable to us in the event any claims by a vendor for services rendered or a prospective target business with which we have discussed entering into a business combination reduce the amounts in the Trust Account below $9.97 per share except in certain circumstances. See “Business of Blue Wolf—Introduction—Redemption of Public Shares And Liquidation If No Initial Business Combination.” |
These interests may influence the Blue Wolf directors and executive officers in the negotiation of the Agreement and Plan of Merger, the Related Agreements and the approval of the Transaction. See “Risk Factors — Risks Related to the Transaction,” “The Transaction — Certain Benefits of Blue Wolf’s Directors and Officers and Others in the Transaction.”
None of the Merger Consideration issued in the Transaction will be held in escrow. Consequently, Blue Wolf may not be able to be compensated for indemnifiable damages that it may sustain.
None of the Merger Consideration issued in the Transaction will be held in escrow to cover the indemnification obligations of Li3to Blue Wolf against losses that Blue Wolf may sustain and that result from, arise out of or relate to any breach by Li3 or Merger Sub of any of their representations, warranties, or the covenants or agreements contained in the Agreement and Plan of Merger. As a consequence, Blue Wolf may not be able to be compensated for indemnifiable damages that it may sustain.
The exercise of discretion by Blue Wolf’s directors and executive officers in agreeing to changes to the terms of or waivers of closing conditions in the Agreement and Plan of Merger or the Offer may result in a conflict of interest when determining whether such changes or waivers are appropriate and in the Blue Wolf shareholders’ best interest.
In the period leading up to the consummation of the Transaction, events may occur that, pursuant to the Agreement and Plan of Merger, would require Blue Wolf to agree to amend the Agreement and Plan of Merger, to consent to certain actions taken by Li3 or Merger Sub or to waive rights that Blue Wolf is entitled to under the Agreement and Plan of Merger. Such events could arise because of changes in the course of Li3’s business, a request by Li3 to undertake actions that would otherwise be prohibited by the terms of the Agreement and Plan of Merger or the occurrence of other events that would have a material adverse effect on Li3’s business and would entitle Blue Wolf to terminate the Agreement and Plan of Merger. In any of such circumstances, it would be in the discretion of Blue Wolf, acting through its board of directors, to grant its consent or waive its rights. The existence of the financial and personal interests of the directors and executive officers described elsewhere in this Offer to Purchase may result in a conflict of interest on the part of one or more of the directors or executive officers between what he may believe is best for Blue Wolf and its shareholders and what he may believe is best for himself in determining whether or not to take the requested action. As of the date of this Offer to Purchase, Blue Wolf does not believe there will be any changes or waivers that its directors and executive officers would be likely to make prior to consummation of the Transaction. While certain changes could be made without notification to shareholders, if there is a change to the terms of the Transaction that would have a material impact on the shareholders, Blue Wolf may be required to circulate a new or amended Offer to Purchase or supplement thereto prior to the Expiration Date of the Offer.
If the Transaction’s benefits do not meet the expectations of investors and/or shareholders, the market price of our securities may decline.
The market price of Blue Wolf’s securities, including its Ordinary Shares, prior to the consummation of the Transaction or the market price of our securities following the consummation of the Transaction may decline as a result of the Transaction if we do not achieve the perceived benefits of the Transaction as rapidly, or to the extent anticipated by investors and/or shareholders. Accordingly, shareholders may experience a loss as a result of a decline in the market price of our securities prior to or following the consummation of the Transaction. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
The conversion or exercise of our outstanding convertible securities after the Transaction will result in substantial dilution and could have an adverse effect on the market prices of our securities.
Upon the consummation of the Transaction and issuance of the1,581,990 Ordinary Shares as Merger Consideration, Blue Wolf’s existing shareholders will own:
| · | approximately 62.7% of the outstanding shares of Blue Wolf assuming no tender of Ordinary Shares in connection with the Offer; or |
| · | approximately 42.9% of the outstanding shares of Blue Wolf assuming 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, and are purchased, in the Offer. |
In addition, should our options and warrants outstanding upon the consummation of the Transaction be exercised, there would be an additional 9,534,440 Ordinary Shares eligible for trading in the public market. Such securities, if exercised, will substantially increase the number of our issued and outstanding Ordinary Shares. Therefore, the sale, or even the possibility of sale, of the Ordinary Shares underlying these warrants and options could have an adverse effect on the market price for our securities.
See “Beneficial Ownership of Securities — Voting Interests of Existing Blue Wolf Shareholders Following the Transaction.”
We have not obtained an opinion from an independent investment banking firm as to whether the acquisition of Li3 represents fair value to our shareholders.
We are not required to obtain an opinion from an independent investment banking firm as to whether the price we are paying in connection with our initial business combination represents fair value to our shareholders. Pursuant to our Charter, our board of directors determined that the acquisition of Li3 represented fair value based upon standards generally accepted by the financial community to value comparable businesses, such as future earnings and cash flow, and the price for which comparable businesses are currently valued by the public equity markets.
Risks Related to Li3
You should carefully consider the risks described below, together with all of the other information included herein, before making an investment decision. If any of the following risks actually occurs, Li3’s business, financial condition or results of operations could suffer.
Li3 is an exploration stage company and currently has no revenues. Its business plan depends on its ability to explore for and develop mineral reserves and place any such reserves into extraction. Because Li3 has a limited operating history, it is difficult to predict its future performance.
Although Li3 was formed in June 2005, it has been and continues to be an exploration stage company. Therefore, it has limited operating and financial history available to help potential investors evaluate its past performance and the risks of investing in Li3. Moreover, Li3’s limited historical financial results may not accurately predict its future performance. Companies in their initial stages of development present substantial business and financial risks and may suffer significant losses. As a result of the risks specific to Li3’s business and companies with limited operating histories in general, it is possible that Li3 may not be successful in implementing its business strategy.
Li3 has generated no revenues to date and does not anticipate generating any revenues in the near term. Li3’s activities to date have been limited to capital formation, organization, acquisition of interests in mining properties and limited exploration on its projects, including digging and sampling of test pits and brine analysis on its Maricunga property. Li3 has yet to generate positive earnings and there can be no assurance that it will ever operate profitably. Li3’s success is significantly dependent on a successful exploration, mining and production program. Its operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. Li3 may be unable to locate exploitable quantities of mineral resources or operate on a profitable basis. Li3 is in the exploration stage and potential investors should be aware of the difficulties normally encountered by enterprises in the exploration stage. If Li3’s business plan is not successful, and it is not able to operate profitably, investors may lose some or all of their investment.
Li3’s past losses raise doubt about its ability to continue as a going concern.
Li3’s consolidated financial statements contained herein have been prepared assuming Li3 will continue as a going concern. As of March 31, 2013, Li3 had no source of current revenue, a cash balance of $2,349,834, negative working capital of $1,240,015 and cumulative negative cash flows from operations of $21,477,783 during the period from June 24, 2005 (inception) through March 31, 2013. Li3 had negative cash flows from operations of $5,906,682 during the nine months ended March 31, 2013. On August 17, 2012, Li3 received $9,499,990 in net funding from POSCO Canada Ltd. (“POSCAN”). On April 16, 2013, the Company made a $2,000,000 initial cash payment to acquire additional property in the Maricunga Salar.
Li3 does not believe its cash on hand is sufficient to maintain its basic operations, which do not include future exploration and acquisition activities, and requires immediate cash flow for which it is seeking interim funding.
Li3 has sustained and continues to sustain losses as a result of its operations and cannot predict if and when it may generate profits. In the event Li3 identifies commercial reserves of lithium or other minerals, it will require substantial additional capital to develop those reserves. Li3 expects to finance its future operations primarily through future equity or debt financings. However, as discussed in Li3’s consolidated financial statements, there exists substantial doubt about Li3’s ability to continue as a going concern because there is no assurance that it will be able to obtain such capital through an equity or debt financing, or any combination thereof, on satisfactory terms or at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Mineral operations are subject to applicable law and government regulation, which could restrict or prohibit the exploitation of that mineral resource.
Both mineral exploration and extraction in Chile require obtaining mining concessions as well as permits from various foreign, federal, state, provincial and local governmental authorities, as the case may be, 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 Li3 will be able to obtain or maintain any of the mining rights and permits required for the continued exploration of its mineral properties or for the construction and operation of a mine on its properties (especially but not limited to extracting lithium) nor that it will be able to obtain or maintain any of such rights and permits at economically viable costs.
In Chile, the Chilean Organic Law on Mining Concessions (“LOCM”) and the Chilean Mining Code (“CMC”) provide that lithium may not be granted in a mining concession without prejudice of the mining concessions validly granted before lithium was declared as a mineral the exploration and exploitation of which could not be the object of a mining concession. As a result, only mining exploitation concessions initiated before January 1, 1979 are authorized for the exploitation of lithium. For all other cases, the CMC establishes the reserve of lithium to 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 Chile for each case. Additionally, Law 16,319, which created the Chilean Nuclear Energy Commission (the “NEC”), provides in its article 8th that, for reasons of national interest, any act or contract in connection with lithium will require the previous authorization of NEC (or have NEC as a party thereto). NEC is entitled to subject any such authorization to the fulfillment by the applicant of certain conditions. Once any such authorization is granted, NEC is not authorized to amend it or terminate it, nor the applicant to resign it, for reasons other than those set forth in the resolution granting it.
Since the constitution process of the Litio 1-6 Mining Concessions was initiated in 2000, the Maricunga Companies are not authorized to exploit lithium in the area covered by such concessions, unless they also obtain a CEOL authorizing such exploitation. Since the constitution process of the Cocina Mining Concessions was initiated in 1937, Minera Li (a wholly-owned subsidiary of Li3), as the owner of the Cocina Mining Concessions, is authorized to exploit lithium in the area covered by the Cocina Mining Concessions.
Lithium exploitation both in the area covered by the Cocina Mining Concessions as well as in the area covered by the Litio 1-6 Mining Concessions (in case in the future it becomes legally possible to exploit lithium in this latter area) shall require the NEC authorization. To the best of our understanding (i) NEC provided its authorization when requested to do so in the past, subjecting the applicant to commercially reasonable production quotas; and (ii) the third party whose option to acquire the Cocina Mining Concessions (via acquiring 100% shares of the Cocina Company) recently expired, obtained a NEC authorization for the exploitation of lithium from the area covered by such concessions subject to a production quota of 50,000 tons; and (iii) NEC granted an authorization to whomever were awarded with the CEOL public offer, provided that such entity informs the NEC on the price, purchaser, volume and use of each sale of lithium; informs the NEC, on an annual basis, on the volume sold, the amount of metallic lithium, the volume of extracted brine to produce the volume of lithium sold as well as the density and lithium volume in the brine; and sells or otherwise commercializes all the lithium produced in the best market conditions.
Even though the authorization that NEC granted to the third party is not transferable and the authorization that NEC granted to whomever were awarded with the CEOL public offer should be considered extinguished as a consequence of the ineffectiveness of the CEOL public offer (and for as long as it remains ineffective), those authorizations shed light on the type of conditions that NEC may impose on Minera Li or the Maricunga Companies should any of them request an authorization from NEC to extract lithium from the area covered by the Cocina Mining Concessions or the Litio 1-6 Mining Concessions (in case lithium exploitation from these latter concessions is authorized). Moreover, the granting of the NEC authorization (as well as the conditions such authorization could be subject to) should be decided exclusively on the grounds that it is related to the “production, acquisition, transfer, transport, and specific use of atomic energy and fertile fissionable and radioactive materials”, since that is the purpose of the NEC, which, in turn, determines NEC’s scope of authority.
The Chilean Government’s Ministry of Mining established its first ever auction for the award of lithium, production quotas and licenses (Special Lithium Operations Contracts, or “CEOL”) which would permit the exploitation of an aggregate of 100,000 tons of lithium metal (approximately 530,000 tons of lithium carbonate equivalent) over a 20 year period, subject to a seven percent royalty (in addition to paying taxes in accordance with the ordinary Chilean tax regime. In September 2012, Li3 formed a consortium consisting of Li3, POSCO, Daewoo International Corp, and Mitsui & Co. (the “Consortium”) for the purpose of participating in such CEOL auction. As required under the rules established by the Ministry of Mining, on September 14, 2012, the Consortium submitted its bid for the CEOLs.
On September 24, 2012, the Ministry of Mining opened the bids and informed Li3 that the Consortium’s bid was not the winning bid. The Consortium made the second highest offer.
On September 25, 2012, the Ministry of Mining issued a resolution awarding the CEOL public offer to the highest bidder.
On September 28, 2012, the Consortium filed a petition to the Ministry of Mining requesting (i) to exclude the highest bidder from the CEOL bidding process since it did not comply with certain of the requirements set forth in the CEOL public offer in order to participate in such process (ii) and to award the CEOL public offer to the Consortium instead.
On October 1, 2012, the Ministry of Mining resolved (i) to invalidate the September 25, 2012 resolution since the highest bidder had not complied with the rules of the CEOL public offer; and (ii) not to award the CEOL public offer to any of the other bidders.
On October 5, 2012, Li3 submitted a “Request for Reconsideration” to the Chilean Government, requesting it to reconsider the invalidation of the CEOL public offer and award the CEOL to the Consortium as the second highest bidder during the September 2012 bidding process.
On October 17, 2012, the Chilean Government ratified its decision to invalidate the CEOL process and not to accept any of the bids.
On October 22, 2012, Li3 submitted another “Request for Reconsideration” to the Chilean Government. The Chilean Government had 30 days to answer Li3´s request.
On November 19, 2012, the Ministry of Mining ratified its decision to invalidate the September 25, 2012 resolution and rejected Minera Li’s request that the CEOL public offer should be awarded to the Consortium.
On January 16, 2013, Li3 submitted a letter to the Chilean Comptroller requesting to review the CEOL process. This is deemed to be the last administrative recourse before pursuing judicial remedies. Li3 is awaiting a response from the Chilean Controller to its letter. A negative response would imply that Li3 is not authorized to exploit lithium from the area covered by the Litio 1-6 Mining Concessions since such concessions do not authorize to exploit lithium. Accordingly, there can be no assurance that Li3 will be able to obtain the permits necessary to exploit any minerals that its exploration activities discover in a timely manner or at all. Any such delay or failure would have a material adverse effect on the development horizon for Maricunga and its prospects.
Li3’s option on the Alfredo Property has expired, and Li3 may have a continuing obligation in the event Li3 develops future iodine nitrate properties in Chile.
On August 3, 2010, Li3 signed an agreement to acquire Alfredo Holdings, Ltd. which held an option to acquire six mining concessions in Pozo Almonte, Chile. Li3 allowed the option to expire because Li3 determined that the project was not economically viable. Pursuant to an amendment to the agreement with the Alfredo Sellers, if and when certain milestones are achieved with respect to any future Li3 Chilean iodine nitrate project, Li3 must make additional payments to the Alfredo Sellers in an aggregate amount of up to $5.5 million. There can be no assurance that financing sufficient to make such payments will be available to Li3 when needed. Li3 is not currently planning to explore, exploit or develop any iodine nitrate project in Chile.
All of Li3’s properties are in the exploration stage. Investment in exploration projects increases the risks inherent in its mining activities. There is no assurance that Li3 can establish the existence of any mineral resource on any of its properties in commercially exploitable quantities, and its mining operations may not be successful.
Li3 has not established that any of its mineral properties contains any meaningful levels of mineral reserves. There can be no assurance that future exploration and mining activities will be successful.
A mineral reserve is defined by the SEC in its Industry Guide 7 (which can be viewed at http://www.sec.gov/divisions/corpfin/forms/industry.html.secguide7) as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Li3 may never establish any mineral reserves.
Even if Li3 does eventually discover a meaningful mineral reserve on one or more of its properties, Li3 may not be able to develop its properties into producing mines and extract those resources. Both mineral exploration and development involve a high degree of risk and few properties which are explored are ultimately developed into producing mines. Furthermore, Li3 cannot be sure that an overall exploration success rate or extraction operations within a particular area will ever come to fruition and, in any event, production rates inevitably decline over time. The commercial viability of an established mineral deposit will depend on a number of factors including, by way of example, the size, grade and other attributes of the mineral deposit, the proximity of the resource to infrastructure such as a smelter, roads and a point for shipping, government regulation and market prices. Most of these factors will be beyond Li3’s control, and any of them could increase costs and make extraction of any identified mineral resource unprofitable.
Li3 owes certain of its shareholders approximately $630,000 in cash as a result of certain registration rights penalties. While Li3 intends to obtain waivers from each of these shareholders to ameliorate this debt, there is no guarantee that Li3 will be able to do so in terms that are favorable to Li3.
On March 22, 2011, Li3’s board of directors approved a private placement 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).Li3 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 this offering, Li3 agreed to file a registration statement with the SEC within 75 days after the closing date to register the shares of common stock and the shares of common stock underlying the warrants under the Securities Act, and to use its best efforts to cause such registration statement to become effective within 150 days after the filing date, all at Li3’s expense. Pursuant to the registration rights agreement, in the event Li3 did not meet these deadlines, Li3 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).Li3 was required to file the registration statement by June 21, 2011, however the registration statement was not filed until July 1, 2011, and Li3 recorded a monetary penalties accrual of $38,750, which has not yet been paid as of March 31, 2013. Li3 was required to cause the registration statement to become effective by November 28, 2011, however the registration statement was not effective until March 19, 2012, and Li3 increased the monetary penalties accrual to $518,243, (plus accrued interest of $111,401, included in accrued expenses, which is calculated at 18% per annum for registration rights penalties considered past due), and the penalty has not yet been paid as of March 31, 2013. Although Li3 intends to seek a waiver for these monetary penalties, there is no assurance Li3 will be successful in obtaining a waiver.
Li3 has limited financial resources and may not be able to fund its anticipated exploration activities. If Li3 is unable to fund its exploration activities, its potential profitability will be adversely affected.
Li3’s anticipated exploration activities will require financial resources substantially in excess of its current working capital. If Li3 is not able to finance its exploration activities, then Li3 will be unable to identify commercially exploitable resources even if present on its properties. If Li3 fails to adequately support its exploration activities, it could have a material adverse effect on its results of operations. There can be no assurance that capital will be available to Li3 when needed, on favorable terms or at all.
If Li3 establishes the existence of a mineral resource on any of its properties in a commercially exploitable quantity, Li3 will require additional capital in order to develop the property into a producing mine. If Li3 is unable to obtain additional funding, its business operations will be harmed and if Li3 does obtain additional financing, existing shareholders may suffer substantial dilution.
If Li3 does discover mineral resources in commercially exploitable quantities on any of its properties, Li3 will be required to expend substantial sums of money to establish the extent of the resource, develop processes to extract it and develop extraction and processing facilities and infrastructure. Although Li3 may derive substantial benefits from the discovery of a major deposit, there can be no assurance that such a resource will be large enough to justify commercial operations, nor can there be any assurance that Li3 will be able to raise the funds required for development on a timely basis.
Li3 currently does not have any contracts or firm commitments for additional financing. There can be no assurance that additional financing will be available in amounts or on terms acceptable to Li3, if at all. An inability to obtain additional capital would restrict Li3’s ability to grow and could diminish its ability to continue to conduct its business operations. If Li3 is unable to obtain additional financing, Li3 will likely be required to curtail exploration and development plans and possibly cease operations. Any additional equity financing may involve substantial dilution to then existing shareholders.
Newer battery and/or fuel cell technologies could decrease demand for lithium over time which could significantly impact Li3’s prospects and future revenues.
Many materials and technologies are being researched and developed with the goal of making batteries lighter, more efficient, faster charging and less expensive. Some of these technologies could be successful and could impact demand for lithium batteries in personal electronics, electric and hybrid vehicles and other applications. Advances in nanotechnology, in particular, offer the prospect of significantly better batteries in the future. For example, researchers at Stanford University have recently demonstrated ultra-lightweight, bendable batteries and super capacitors made from paper coated with ink made of carbon nanotubes and silver nanowires; the material charges and discharges very quickly, making it potentially useful in hybrid and electric vehicles, which need rapid power for acceleration and would benefit from quicker charging than is available with current technologies. Li3 cannot predict which new technologies may ultimately prove to be commercializable and on what time horizon. While lithium battery technology is currently among the best available for electronics, vehicles and other applications, commercialized battery technologies that offer superior weight, capacity, charging time and/or cost could significantly adversely affect the demand for lithium in the future and thus could significantly adversely impact Li3’s prospects and future revenues.
Mineral exploration and development is subject to extraordinary operating risks. Li3 does not currently insure against these risks. In the event of a cave-in or similar occurrence, Li3’s liability may exceed its resources, which could have an adverse impact on Li3.
Mineral exploration, development and production involve many risks which even a combination of experience, knowledge and careful evaluation may not be able to overcome. Li3’s operations will be subject to all the hazards and risks inherent in the exploration for mineral resources and, if Li3 discovers a mineral resource in commercially exploitable quantity, its operations could be subject to all of the hazards and risks inherent in the development and production of resources, including liability for pollution, cave-ins or similar hazards against which Li3 cannot insure or against which Li3 may elect not to insure. Any such event could result in work stoppages and damage to property, including damage to the environment. Li3 does not currently maintain any insurance coverage against these operating hazards. The payment of any liabilities that arise from any such occurrence would have a material adverse impact on Li3.
Lithium, iodine and nitrates prices are subject to unpredictable fluctuations, making it difficult to predict the economic viability of Li3’s exploration properties and projects.
Li3 may derive revenues, if any, either from the extraction and sale of lithium, iodine and potassium nitrate, as well as other potentially economic salts produced from the lithium salar brines, or from the sale of our mineral resource properties. The price of these commodities may fluctuate widely, and is affected by numerous factors beyond Li3’s control, including international, economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional consumptive patterns, speculative activities, increased production due to new extraction developments and improved extraction and production methods and technological changes in the markets for the end products. The effect of these factors on the price of these minerals, and therefore the economic viability of any of Li3’s exploration properties and projects, cannot accurately be predicted.
The mining industry is highly competitive, and Li3 faces competition from many established global companies. Li3 may not be able to compete effectively with these companies which may adversely affect Li3’s prospects.
The markets in which Li3 operates are highly competitive. The mineral exploration, development, and production industry is largely un-integrated. Li3 competes against numerous well-established national and foreign companies in every aspect of the mineral mining industry. Some of Li3’s competitors have longer operating histories and greater technical facilities, and significantly greater recognition in the market and financial and other resources, than Li3. Li3 may not compete effectively with other exploration companies in locating and acquiring mineral resource properties, and customers may not buy any or all of the mineral products that Li3 expects to produce.
If Li3 is unable to make payments due on July 16, 2013 to the sellers of SLM Cocina Diecinueve de la Hoyada de Maricunga, a Chilean based company (“SLM”) and the owner of certain mining concessions in Chile, the sellers could execute on their mortgage and retain the concessions.
On April 16, 2013, Li3 entered into a purchase agreement with Jose Resk Nara and Carlos Alfonso Iribarren to purchase all of the outstanding shares of SLM, which became become a wholly owned subsidiary of Li3. SLM owns the group of mining concessions “Cocina 19 through 27”.
Pursuant to the purchase agreement, Li3 agreed to pay the sellers $7.3 million, of which $2.0 million was paid on the closing date, $2.0 million is to be paid 90 days following the closing date or July 16, 2013, $1.8 million is to be paid 180 days after the closing date, and $100,000 is to be paid annually on the anniversary of the closing date for fifteen years beginning in 2014.If Li3 is unable to make the July 16, 2013 payment, or any of the other payments due to the sellers, the sellers could execute on their mortgage. At execution, the concession could go to public auction and could be acquired by a third party, or retained by the seller if nobody offers the minimum auction price.
Because Li3 is small and has limited capital, Li3 may have to limit its exploration and developmental mining activity which may adversely affect Li3’s prospects.
Because Li3 is a small exploration stage company and does not have much capital, Li3 may have to limit its exploration and production activity. As such, Li3 may not be able to complete an exploration program that is as thorough as Li3 would like. In that event, existing reserves may go undiscovered. Without finding reserves, Li3’s ability to generate revenues and its prospects will be adversely affected.
Compliance with environmental and other government regulations could be costly and could negatively impact production and adversely affect Li3’s operating results.
Li3’s operations are subject to numerous federal, state and local laws and regulations governing the operation and maintenance of our facilities and the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations:
| · | require that Li3 acquire permits before commencing extraction operations, including, but not limited to, the approval of the pertinent project’s environmental impact study (as applicable). With respect to mineral extracting activities taking place within the area of the Salar de Maricunga, this approval will probably be particularly difficult to obtain since that area is part of a Zone of National Touristic Interest denominated Salar de Maricunga-Volcán Ojos del Salado; |
| · | restrict the substances that can be released into the environment in connection with mining and extraction activities; |
| · | limit or prohibit mining activities on protected areas such as wetland or wilderness areas; and |
| · | require remedial measures to mitigate pollution from former operations, such as dismantling abandoned production facilities. |
Under these laws and regulations, Li3 could be liable for personal injury and clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. Li3 does not believe that insurance coverage for environmental damages that occur over time is available at a reasonable cost, and Li3 does not maintain any such insurance. Also, Li3 does not believe that insurance coverage for the full potential liability that could be caused by sudden and accidental environmental damages is available at a reasonable cost. Accordingly, Li3 may be subject to liability or Li3 may be required to cease production (subsequent to any commencement) from properties in the event of environmental damages.
The Maricunga Project requires, as a condition precedent for commencing any extracting activity, the approval by the Chilean environmental authorities of its environmental impact study. The process to obtain the approval of an environmental impact study includes, among other things, requiring the opinion of all relevant authorities with environmental powers. Once the environmental impact study is approved, no sectional environmental permit can be denied.
The developer of the Maricunga Project also needs to obtain all non-environmental permits necessary to carry out exploration and exploitation mining activities in the area. The environmental impact assessment system regulated in law 19 300 considers the inclusion of the mitigation measures to protect the habitat of vulnerable animals in the area which should be included by Li3 in the environmental impact study or statement, as applicable.
Li3 may be legally required to obtain water rights as a condition precedent to commencing any extraction of minerals from the Maricunga Project.
The Maricunga Project, if successful, involves extracting mineral (lithium and potash) from the Salar de Maricunga. The Salar de Maricunga has a high presence of semi superficial water. Li3 may be legally required to obtain water rights as a condition precedent to commencing any extraction of minerals from the Maricunga Project.
Li3 may be unable to amend the mining claims that Li3 is seeking to acquire to cover the primary minerals that Li3 plans to develop.
Li3’s business plan includes acquisition, exploration and development of lithium brine properties. However, Li3 may pursue this goal by acquiring salt-mining claims and/or options or other interests in salt-mining claims or other types of claims, which Li3 intends to seek to have amended to cover lithium extraction. There can be no assurance that Li3 will be successful in amending any such claims timely, economically or at all. See Risk Factors - “Mineral operations are subject to applicable law and government regulation” above.
Li3 may have difficulty managing growth in its business which could have a material adverse effect on Li3’s business, financial condition and results of operations and its ability to timely execute its business plan.
Because of the relatively small size of Li3’s business, growth in accordance with its long-term business plans, if achieved, will place a significant strain on its financial, technical, operational and management resources. As Li3 increases its activities and the number of projects Li3 is evaluating or in which Li3 participates, there will be additional demands on its financial, technical, operational and management resources. The failure to continue to upgrade its technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the recruitment and retention of required personnel could have a material adverse effect on Li3’s business, financial condition and results of operations and its ability to timely execute its business plan.
If Li3 is unable to keep its key management personnel, then Li3 is likely to face significant delays at a critical time in its corporate development and its business is likely to be damaged which could have a material adverse affect on Li3’s business, financing condition and operations.
Li3’s success depends upon the skills, experience and efforts of its management and other key personnel, including its Chief Executive Officer. As a relatively new company, much of Li3’s corporate, scientific and technical knowledge is concentrated in the hands of a few individuals. Li3 does not have employment agreements with any of its employees other than its Chief Executive Officer, Chief Financial Officer and Vice President. Li3 does not maintain key-man life insurance on any of its management or other key personnel. The loss of the services of one or more of its present management or other key personnel could significantly delay its exploration and development activities as there could be a learning curve of several months or more for any replacement personnel. Furthermore, competition for the type of highly skilled individuals Li3 require is intense and Li3 may not be able to attract and retain new employees of the caliber needed to achieve its objectives. Failure to replace key personnel could have a material adverse effect on Li3’s business, financial condition and operations.
Difficult conditions in the global capital markets may significantly affect Li3’s ability to raise additional capital to continue operations.
The ongoing worldwide financial and credit upheaval may continue indefinitely. Because of reduced market liquidity, Li3 may not be able to raise additional capital when Li3 needs it. Because the future of Li3’s business will depend on its ability to explore and develop the mineral resources on its existing properties and to complete the acquisition of one or more additional mineral resource properties for which, most likely, Li3 will need additional capital, Li3 may not be able to complete such development and acquisition projects or develop or acquire revenue producing assets. As a result, Li3 may not be able to generate income and, to conserve capital, Li3 may be forced to curtail its current business activities or cease operations entirely.
INFORMATION ABOUT THE COMPANIES
Blue Wolf
Blue Wolf, incorporated in the British Virgin Islands on March 11, 2011, is organized as a blank check business company limited by shares (meaning the public shareholders have no liability, as members of Blue Wolf, for the liabilities of Blue Wolf) formed for the purpose of acquiring, engaging in share exchange, share reconstruction and amalgamation or contractual control arrangement with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with one or more businesses or assets.If Blue Wolf does not consummate an initial business combination by July 22, 2013, it (i) will distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata, to holders of the Public Shares by way of redemption and (ii) will cease all operations except for the purposes of any winding up of its affairs. This redemption of Public Shares from the Trust Account will be done automatically by function of our Charter and prior to any voluntary winding up, although at all times subject to the Companies Act.Prior to the IPO, our efforts were limited to organizational activities and the IPO.Subsequent to the IPO, our efforts have been limited to the search for a suitable business combination.
A registration statement for the IPO was declared effectiveJuly 14, 2011. On July 20, 2011, we sold 8,050,000 Units at a price of $10.00 per Unit in the IPO. Each Unit consists of one Ordinary Share and one Warrant to purchase one Ordinary Share.Simultaneously with the consummation of our IPO, we consummated the private sale of 4,166,667 Sponsor Warrants to our Sponsor for $3.125 million. Each Warrant entitles the holder to purchase from us one ordinary share at an exercise price of $12.00 per share commencing 30 days after the consummation of an initial business combination, provided that we have an effective registration statement covering the Ordinary Shares issuable upon exercise of the Warrants and such shares are registered or qualified under the securities laws of the state of the exercising holder. The Warrants expire five years from the date of the initial business combination, unless earlier redeemed. The Warrants will be redeemable in whole and not in part at a price of $0.01 per Warrant upon a minimum of 30 days notice after the Warrants become exercisable, only in the event that the last sale price of our Ordinary Shares exceeds $18.00 per share for any 20 trading days within a 30-trading day period. If the Warrants are redeemed by us, management will have the option to require all holders that wish to exercise Warrants to do so on a cashless basis.
Subsequent to the IPO,the net proceeds from our IPO and the sale of the Sponsor Warrants of approximately $80,237,500 ($9.97 per share), including deferred underwriting commissions, wasdeposited in an interest-bearing Trust Account and invested only inUnited States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended, (the “Investment Company Act”), having a maturity of 180 days or less or in money market funds investing solely in U.S. Treasuries and meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act. See “Business of Blue Wolf.”
On April 15, 2013, Blue Wolf’s shareholders approved the extension of Blue Wolf’s corporate existence until July 22, 2013. Blue Wolf conducted a tender offer in connection with the extension, pursuant to which it purchased approximately 5.8 million Public Shares for an aggregate purchase price of approximately $57.8 million who. As a result, approximately $22.5 million remains in the Trust Account.
Blue Wolf’s Ordinary Shares, Warrants and Units are currently traded on Nasdaq under the symbols “MNGL,” “MNGLW” and “MNGLU,” respectively. See “Price Range of Securities and Dividends.”
Our executive offices are located atSuite 409, Central Tower, 2 Sukhbaatar Square, Sukhbaatar District 8, Ulaanbaatar 14200, Mongolia, and our telephone number is 976-7010-0248.
Li3
Li3 (OTCBB: LIEG), a Nevada corporation, is a South America-based exploration stage company in the lithium mining and energy sector which files public reports with the SEC. Li3 aims to acquire, develop and commercialize a significant portfolio of lithium brine deposits in the Americas. It is currently focused on exploring, developing and commercializing its 60% controlling interest in its flagship Maricunga Project located in the northeast section of the Salar de Maricunga in Region III of Atacama, in northern Chile. In Chile, its assets consist of 1,888 hectares located within the Salar de Maricunga as well as 4,900 hectares of other prospective land holdings that are strategically located within close proximity to the salar that could serve as potential processing sites for the project. Together, its total Chilean land holdings consist of 6,788 hectares, and it believes it is one of the only companies with an advanced stage lithium and potassium project within the Salar de Maricunga. Li3 plans to continue exploring other synergistic opportunities to further augment and strengthen this property and its land portfolio throughout the region. With the completion of the NI 43–101 Compliant Measured Resource Report in May 2012, Li3’s goals are to: (a) advance Maricunga to the Feasibility Stage; (b) support the global implementation of clean and green energy initiatives; (c) meet growing lithium market demand; and (d) become a mid-tier, low cost supplier of lithium, potassium nitrate and other strategic minerals, serving global clients in the energy, fertilizer and specialty chemical industries. See “Business of Li3.”
Li3’s corporate office is located atMarchant Pereira 150, Of. 803, Providencia, Santiago de Chile, Chile, and its telephone number is+56 (2) 2896-9100.
Selected Historical Financial Information
Blue Wolf Mongolia Holdings Corp.
Blue Wolf is providing the following selected financial information to assist you in your analysis of the financial aspects of the Transaction. The statement of operations data for the four months ended June 30, 2012 and the period from March 11, 2011 (date of inception) through February 29, 2012 and the balance sheet data as of June 30, 2012 and February 29, 2012 have been derived from Blue Wolf’s audited financial statements included elsewhere in this Offer to Purchase. The statement of operations data for the nine months ended March 31, 2013 and the balance sheet data as of March 31, 2013 have been derived from Blue Wolf’s unaudited financial statements included elsewhere in this Offer to Purchase. The selected financial information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Blue Wolf” and Blue Wolf’s financial statements and related notes to those financial statements included elsewhere in this Offer to Purchase.
| | | | | | | | March 11, 2011 | |
| | Nine months | | | Four months | | | (date of inception) | |
| | ended March 31, | | | Ended June 30, | | | To February 29, | |
| | 2013 | | | 2012 | | | 2012 | |
Statement of Operations Data (unaudited): | | | | | | | | | | | | |
Revenue | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | |
General and administrative expenses | | | 607,559 | | | | 166,702 | | | | 401,940 | |
Loss from operations | | | (607,559 | ) | | | (166,702 | ) | | | (401,940 | ) |
Interest income | | | 4,595 | | | | 2,660 | | | | 4,287 | |
Change in fair value of warrant liability | | | 2,443,333 | | | | 855,167 | | | | 977,333 | |
Net loss | | $ | 1,840,369 | | | $ | 691,125 | | | $ | 579,680 | |
| | | | | | | | | | | | |
Weighed average number of ordinary shares, excluding shares subject to possible redemption – basic and diluted | | | 3,234,334 | | | | 3,531,758 | | | | 3,020,601 | |
| | | | | | | | | | | | |
Net income per ordinary share, excluding shares subject to possible redemption - basic and diluted | | $ | 0.57 | | | $ | 0.20 | | | $ | 0.19 | |
| | | | | | | | | | | | |
Balance Sheet Data (at end of period) (unaudited): | | | | | | | | | | | | |
Cash (including investments held in trust account) | | $ | 80,298,131 | | | $ | 80,475,848 | | | $ | 80,634,412 | |
Total assets (including investments held in trust account) | | $ | 80,305,098 | | | $ | 80,537,893 | | | $ | 80,722,741 | |
Total shareholders' equity | | $ | 5,000,010 | | | $ | 5,000,004 | | | $ | 5,000,010 | |
Li3 Energy, Inc.
Li3 is providing the following selected financial information to assist you in your analysis of the financial aspects of the Transaction. The statement of operations data for each of the years ended June 30, 2012, 2011, 2010, 2009 and 2008 and the balance sheet data as of June 30, 2012, 2011, 2010, 2009 and 2008 have been derived from Li3’s audited financial statements included elsewhere in this Offer to Purchase. The statement of operations data for the nine months ended March 31, 2013 and 2012 and the balance sheet data as of March 31, 2013 and 2012 have been derived from Li3’s unaudited financial statements included elsewhere in this Offer to Purchase. The selected financial information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Li3” and Li3’s financial statements and related notes to those financial statements included elsewhere in this Offer to Purchase.
| | (unaudited) | | | | | | | | | | |
| | For the Nine Months Ended March 31, | | | For the Year Ended June 30, | |
| | 2013 | | | 2012 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| | (Dollars in thousands, except for share data) | |
SELECTED BALANCE SHEET DATA | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total current assets | | $ | 2,450 | | | $ | 47 | | | $ | 37 | | | $ | 1,097 | | | $ | 359 | | | $ | 10 | | | $ | 25 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mineral rights | | | 63,741 | | | | 64,041 | | | | 63,741 | | | | 64,041 | | | | 340 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | 66,339 | | | | 64,547 | | | | 63,963 | | | | 65,138 | | | | 703 | | | | 18 | | | | 37 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable and accruals | | | 1,815 | | | | 2,604 | | | | 3,949 | | | | 803 | | | | 1,650 | | | | 9 | | | | 5 | |
Convertible debt | | | 1,779 | | | | 1,615 | | | | 1,783 | | | | 373 | | | | - | | | | - | | | | . | |
Notes payable | | | 95 | | | | 395 | | | | 1,245 | | | | 95 | | | | 95 | | | | 95 | | | | 50 | |
Derivative liabilities – warrant instruments | | | 5,849 | | | | 10,597 | | | | 7,654 | | | | 15,245 | | | | 8,030 | | | | - | | | | - | |
Total liabilities | | | 9,539 | | | | 15,211 | | | | 14,631 | | | | 16,516 | | | | 9,775 | | | | 104 | | | | 55 | |
Total equity of Li3 Energy, Inc | | | 33,865 | | | | 25,883 | | | | 26,212 | | | | 23,126 | | | | (9,072 | ) | | | (86 | ) | | | (18 | ) |
Non-controlling interests | | | 22,933 | | | | 23,453 | | | | 23,121 | | | | 25,496 | | | | - | | | | - | | | | - | |
Total equity | | $ | 56,798 | | | $ | 49,336 | | | $ | 49,332 | | | $ | 48,622 | | | $ | (9,072 | ) | | $ | (86 | ) | | $ | (18 | ) |
| | (unaudited) | | | | | | | | | | |
| | For the Nine Months Ended March 31, | | | For the Year Ended June 30, | |
| | 2013 | | | 2012 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| | (Dollars in thousands, except for share data) | |
SELECTED INCOME STATEMENT DATA | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Exploration expenses | | | (457 | ) | | | (5,609 | ) | | | (6,194 | ) | | | (560 | ) | | | (2,336 | ) | | | - | | | | - | |
Mineral rights impairment expense | | | - | | | | - | | | | (300 | ) | | | (4,120 | ) | | | (4,719 | ) | | | - | | | | - | |
General and administrative expenses | | | (3,700 | ) | | | (4,988 | ) | | | (6,996 | ) | | | (5,449 | ) | | | (2,762 | ) | | | (63 | ) | | | (96 | ) |
Change in fair value of derivative liability – warrant instruments | | | 6,454 | | | | 7,838 | | | | 10,780 | | | | (6,116 | ) | | | (6,224 | ) | | | - | | | | - | |
Interest expense, net | | | (299 | ) | | | (880 | ) | | | (1,151 | ) | | | (410 | ) | | | (3 | ) | | | (5 | ) | | | (0 | ) |
Net income (loss) | | | 1,804 | | | | (4,448 | ) | | | (4,687 | ) | | | (19,219 | ) | | | (16,049 | ) | | | (68 | ) | | | (96 | ) |
Net loss attributable to non-controlling interests | | | 188 | | | | 2,043 | | | | 2,375 | | | | - | | | | - | | | | - | | | | - | |
Net income (loss) attributable to Li3 Energy, Inc | | | 1,991 | | | | (2,405 | ) | | | (2,312 | ) | | | (19,219 | ) | | | (16,049 | ) | | | (68 | ) | | | (96 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PER COMMON SHARE DATA | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.01 | | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.16 | ) | | $ | (0.19 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) |
Diluted earnings per share | | $ | 0.01 | | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.16 | ) | | $ | (0.19 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) |
Basic weighted average common shares | | | 380,373,535 | | | | 310,810,095 | | | | 313,997,372 | | | | 123,690,841 | | | | 83,014,592 | | | | 121,052,721 | | | | 7,645,677 | |
Diluted weighted average common shares | | | 395,841,166 | | | | 310,810,095 | | | | 313,997,372 | | | | 123,690,841 | | | | 83,014,592 | | | | 121,052,721 | | | | 7,645,677 | |
Selected Unaudited Condensed COMBINED Pro Forma Financial Information
The following unaudited condensed combined pro forma balance sheet data as of March 31, 2013 and the unaudited condensed combined pro forma statements of operations data for the nine months ended March 31, 2013 are based on the separate historical financial statements of Blue Wolf and Li3, included elsewhere in this Offer to Purchase, after giving effect to the Transaction.
The unaudited condensed combined pro forma statement of operations for the nine months ended March 31, 2013 gives pro forma effect to the Transaction as if it had occurred on July 1, 2012, and the unaudited condensed combined pro forma statement of operations for the year ended June 30, 2012 gives pro forma effect to the Transaction as if it had occurred on July 1, 2011. The unauditedcondensed combined pro forma balance sheets as of March 31, 2013 and June 30, 2012 give pro forma effect to the Transaction as if it had occurred on each such date, respectively.
Blue Wolf’s management has concluded that Li3 will be the accounting acquirer and the Transaction will be accounted for as a recapitalization by Li3 based on the evaluation of the facts and circumstances of the Transaction. Li3 is the larger of the two entities and is the operating company within the combining companies. Following the Transaction, the board of directors of Blue Wolf shall consist of seven members, four of whom shall be appointed by Li3 and three of whom shall be appointed by Blue Wolf. Although, depending on the amount of shares tendered, there is a possibility that a larger portion of the voting rights in the combined entity is likely to be held by pre-Transaction Blue Wolf shareholders, this was not considered determinative, as all other important elements considered in determining which party has control, including board of directors representation and management continuity, were not aligned with this voting interest. Additionally, the Blue Wolf shareholders are expected to represent a diverse group of shareholders at completion of the Transaction and we are not aware of any voting or other agreements that suggest that they can act as one party.See the section entitled “The Transaction — Accounting Treatment” for more information.
The historical financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the Transaction, are factually supportable and, in the case of the unaudited condensed combined pro forma statement of operations data, are expected to have a continuing impact on the combined results. The adjustments presented on the unaudited condensed combined pro forma financial information have been identified and presented in “Unaudited Condensed Combined Pro Forma Financial Data” to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the Transaction.
This information should be read together with the financial statements of Blue Wolf and Li3 and the respective notes thereto, “Unaudited Condensed Combined Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Blue Wolf,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Li3” included elsewhere in this Offer to Purchase.
The unaudited condensed combined pro forma financial statements have been prepared assuming (a) the issuance of 1,581,990 registered Ordinary Shares as Merger Consideration and (b) if 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, and are purchased by Blue Wolf,and, withrespect to the number of outstanding Ordinary Shares, the following:
| · | Assuming No Tender of Ordinary Shares: This presentation assumes that no Blue Wolf shareholders validly tender their Ordinary Shares pursuant to the Offer. |
| · | Assuming Maximum Allowable Tender of Ordinary Shares: This presentation assumes that Blue Wolf shareholders validly tender and do not properly withdraw, and that Blue Wolf purchases, 1,467,970 Ordinary Shares at a price of $9.97 per Ordinary Share pursuant to the Offer. |
The unaudited condensed combined pro forma financial information is presented for informational purposes only and is subject to a number of uncertainties and assumptions and do not purport to represent what the combined companies’ actual performance or financial position would have been had the Transaction occurred on the dates indicated and does not purport to indicate the financial position or results of operations as of any future date or for any future period.
Blue Wolf Mongolia Holdings Corp. and Li3 Energy, Inc.
Unaudited Condensed Combined Pro Forma Balance Sheet Data
As of March 31, 2013
| | Combined Pro Forma (Assuming No Tender) | | | Combined Pro Forma (Assuming Maximum Tender) | |
| | | | | | |
Cash and cash equivalents | | $ | 21,288,339 | | | $ | 6,908,044 | |
Total assets | | | 85,284,971 | | | | 70,904,676 | |
Total current liabilities | | | 3,776,346 | | | | 3,776,346 | |
Total long-term liabilities | | | 10,735,890 | | | | 10,735,890 | |
Common stock subject to rescission | | | 3,041 | | | | 3,041 | |
Total non-controlling interest | | | 22,932,695 | | | | 22,932,695 | |
Total stockholders' equity | | | 70,769,694 | | | | 56,389,399 | |
Total liabilities and stockholders' equity | | $ | 85,284,971 | | | $ | 70,904,676 | |
Blue Wolf Mongolia Holdings Corp. and Li3 Energy, Inc.
Unaudited Condensed Combined Pro Forma Statements of Operations Data
For the Nine Months Ended March 31, 2013
| | Combined Pro Forma (Assuming No Tender) | | | Combined Pro Forma (Assuming Maximum Tender) | |
| | | | | | |
Operating expenses | | $ | (4,163,090 | ) | | $ | (4,163,090 | ) |
Loss from operations | | | 4,163,090 | | | | 4,163,090 | |
| | | | | | | | |
Other income (expense) | | | 8,410,007 | | | | 8,410,007 | |
Net income before taxes | | | 4,246,917 | | | | 4,246,917 | |
| | | | | | | | |
Less: net loss attributable to the non-controlling interest | | | 187,898 | | | | 187,898 | |
Net income attributable to stockholders | | $ | 4,434,815 | | | $ | 4,434,815 | |
| | | | | | | | |
Weighted Average common shares outstanding - Basic | | | 4,179,875 | | | | 2,711,905 | |
Weighted Average common shares outstanding - Diluted | | | 4,241,746 | | | | 2,773,776 | |
Earnings per share attributable to stockholders - Basic | | $ | 1.06 | | | $ | 1.64 | |
Earnings per share attributable to stockholders - Diluted | | $ | 1.05 | | | $ | 1.60 | |
COMPARATIVE SHARE INFORMATION
The following table sets forth selected historical equity ownership information for Blue Wolf and Li3 and unaudited condensed combined pro forma per share ownership information after giving effect to the Transaction, assuming (a) the issuance of 1,581,990 registered Ordinary Shares as Merger Consideration, and (b) the existence of 4,240,371 Ordinary Shares if no Ordinary Shares are validly tendered in the Offer or 2,772,401 Ordinary Shares if 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, and are purchased by Blue Wolf,and, withrespect to the number of outstanding Ordinary Shares, the following:
| · | Assuming No Tender of Ordinary Shares: This presentation assumes that no Blue Wolf shareholders validly tender their Ordinary Shares pursuant to the Offer. |
| · | Assuming Maximum Allowable Tender of Ordinary Shares: This presentation assumes that Blue Wolf shareholders validly tender and do not properly withdraw, and that Blue Wolf purchases, 1,467,970 Ordinary Shares at a price of $9.97 per Ordinary Share pursuant to the Offer. |
Blue Wolf is providing this information to aid you in your analysis of the financial aspects of the Transaction. The historical information should be read in conjunction with “Selected Historical Financial Information” included elsewhere in this Offer to Purchase, the historical financial statements of Blue Wolf and the related notes thereto and the historical financial statements of Li3 and the related notes thereto each included elsewhere in this Offer to Purchase. The unaudited pro forma per share information is derived from, and should be read in conjunction with, the unaudited condensed combined pro forma financial data and related notes included elsewhere in this Offer to Purchase.
The unaudited condensed combined pro forma per share information reflects the Transaction being accounted for as a as a recapitalization by Li3. See “The Transaction — Accounting Treatment” for more information.
Unaudited Condensed Combined Pro Forma Per Share Information
| | Li3 Energy, Inc. | | | Blue Wolf Holdings Corp. and Subsidiary | | | Consolidated Pro Forma (Assuming No Tender) | | | Consolidated Pro Forma (Assuming Maximum Tender) | |
| | | | | | | | | | | | |
Book value per share at March 31, 2013(2)(3) | | $ | 0.09 | | | $ | 7.22 | | | $ | 11.28 | | | $ | 12.07 | |
Nine months ended March 31, 2013 | | | | | | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | 0.00 | | | $ | 0.57 | | | $ | 1.05 | | | $ | 1.60 | |
Diluted earnings (loss) per share | | $ | 0.00 | | | $ | 0.57 | | | $ | 1.05 | | | $ | 1.60 | |
| (1) | As of March 31, 2013, Li3 had 394,041,586 outstanding shares of common stock that were used to calculate both the book value per share and the basic and diluted earnings per share. |
| (2) | Book value per share of Blue Wolf is computed by dividing the sum of total shareholders’ equity plus Ordinary Shares subject to possible redemption by the 10,062,500 Ordinary Shares (which includes 1,467,970 Ordinary Shares subject to possible redemption and 2,012,500 Ordinary Shares currently held by our Sponsor) outstanding at the balance sheet date. |
| (3) | Book value per share for the pro forma columns is computed by dividing the sum of total shareholders’ equity by the Ordinary Shares assumed to be outstanding after the Transaction. Combined Pro Forma (assuming no tender of Ordinary Shares) assumes 4,240,371 shares are outstanding and equals the sum of 4,268,381 Ordinary Shares currently outstanding and 1,581,990 Ordinary Shares to be issued to Li3’s shareholders, less 1,610,000 Ordinary Shares forfeited bythe Sponsor. Combined Pro Forma (assuming maximum allowable tender of Ordinary Shares) assumes 2,772,401 shares are outstanding and is (i) the sum of 4,268,381 Ordinary Shares currently outstanding and 1,581,990 Ordinary Shares to be issued to Li3’s shareholders less (ii) the maximum allowable tender of 1,467,970 Ordinary Shares and 1,610,000 Ordinary Shares forfeited bythe Sponsor. |
| (4) | Basic earnings (loss) per share in the pro forma columns is computed using the following weighted average shares:4,240,371 Ordinary Shares (assuming no tender of Ordinary Shares), and2,772,401 Ordinary Shares (assuming maximum allowable tender of Ordinary Shares), as presented in the Unaudited Condensed Combined Pro Forma Statements of Operations for the nine months ended March 31, 2013 included elsewhere in this Offer to Purchase. |
| (5) | Diluted earnings (loss) per share in the pro forma columns is computed using the following weighted average shares:4,240,371 Ordinary Shares (assuming no tender of Ordinary Shares), and2,772,401Ordinary Shares (assuming maximum allowable tender of Ordinary Shares), as presented in the Unaudited Condensed Combined Pro Forma Statements of Operations for the nine months ended March 31, 2013 included elsewhere in this Offer to Purchase. |
The Transaction
General Description of the Transaction
On May 21, 2013, Blue Wolf, Merger Sub and Li3 entered into the Agreement and Plan of Merger, pursuant to which Merger Sub will merge with and into Li3. The Agreement and Plan of Merger and the consideration to be delivered in connection therewith are described below in greater detail under “The Agreement and Plan of Merger” and “The Agreement and Plan of Merger—Merger Consideration,” respectively.The description of the Agreement and Plan of Merger is qualified in its entirety by reference to the full text of the Agreement and Plan of Merger, which is attached hereto as Annex I.Upon consummation of the Transaction, Blue Wolf intends to change its name to “Li3 Energy Corp.” by resolution of its board.
Merger Consideration
Upon consummation of the Transaction, each 250 shares of Li3 owned by Li3 shareholders will automatically convert into one Ordinary Share of Blue Wolf. In addition, each option and warrant to purchase shares of Li3 common stock which is outstanding immediately prior to the consummation of the Transaction will automatically convert into a right to acquire one Ordinary Share for every 250 shares of Li3 common stock subject to each such Li3 option or warrant on the same terms and conditions as were in effect immediately prior to the consummation of the Transaction. Such Merger Consideration will representbetween approximately 37.3% of our voting power, in the event no Ordinary Shares are validly tendered in the Offer, and approximately 57.1% of our voting power in the event 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn and are accepted in the Offer. See “The Agreement and Plan of Merger — Structure of the Transaction; —Consideration to be Paid” for a further description of the Merger Consideration.
Please see the diagram in “Summary Term Sheet and Questions and Answers” that depicts our organizational structure immediately following this Offer and the Transaction.
The Offer
Under the terms of the Agreement and Plan of Merger and its Charter, Blue Wolf will conduct, prior to the consummation of the Transaction, a tender offer to provide its shareholders with the opportunity to redeem their Ordinary Shares for cash equal to $9.97 per Ordinary Share, upon and subject to the consummation of the Transaction. See “The Offer.”
Shareholder Approvals
The approval of the Transaction by Blue Wolf’s shareholders is not required.Li3 will separately solicit its shareholders, and convene a meeting of its stockholders, for approval of the Transaction. Blue Wolf will file a Registration Statement on Form F-4 with the SEC to register the distribution of the Merger Consideration. The Registration Statement, which will include a proxy statement/prospectus for Li3’s stockholders, must be declared effective by the SEC before the Transaction can be approved by Li3’s shareholders. However, management believes, based upon discussions with Li3 and their largest individual stockholders, that stockholders of Li3 holding a majority of the issued and outstanding Li3 common stock will support and agree to approve the Transaction.
Related Agreements
In addition to the Agreement and Plan of Merger, on May 21, 2013, Blue Wolf and its Sponsor entered into the Sponsor Agreement. The terms of such agreement is described in greater detail below under the heading “Related Agreements.” Additionally, Blue Wolf and Li3 have agreed, as a closing condition to the Agreement and Plan of Merger, to enter into related agreements with certain of Li3’s shareholders, including the Lock-up and Support Agreements and the Investor Rights Agreement with POSCO (the counterparties to both of which have indicated their intention to execute the same). The terms of such agreements are described in greater detail below under the heading “The Agreement and Plan of Merger–Closing Conditions of the Transaction.”
Background of the Transaction
The terms of the Agreement and Plan of Merger are the result of negotiations between the representatives of Blue Wolf and Li3. The following is a brief description of the background of these negotiations and the related transactions.
Blue Wolf is a blank check or special purpose acquisition company formed as a British Virgin Islands business company limited by shares on March 11, 2011 specifically for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation or contractual control arrangement with, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with one or more operating businesses or assets, which we refer to throughout as our initial business combination. In March 2011, our Sponsor purchased an aggregate of 2,012,500 founder shares for an aggregate purchase price of $25,000, or approximately $0.012 per share.
A registration statement for Blue Wolf’s IPO was declared effective on July 14, 2011. On July 20, 2011, Blue Wolf consummated its IPO of 8,050,000 Units, including the underwriters’ exercise of their over-allotment option in full. The Units were sold at an offering price of $10.00 per Unit. Simultaneously with the consummation of the IPO, Blue Wolf consummated the private sale to our Sponsor of 4,166,667 Sponsor Warrants at $0.75 per warrant (for an aggregate purchase price of $3,125,000). Upon the closing of the IPO and the private placement, $80,237,500 ($9.97 per share) was placed in a Trust Account, including deferred underwriting commissions, which will be paid only upon the consummation of our business combination.
Each Unit consists of one Ordinary Share of Blue Wolf and one Warrant. Each Warrant entitles its holder to purchase from Blue Wolf one Ordinary Share at an exercise price of $12.00 commencing 30 days following the completion of a business combination, and will expire five years from the date of the consummation of the business combination. The Warrants may be redeemed by Blue Wolf at a price of $0.01 per Warrant upon 30 days prior notice after the Warrants become exercisable if, and only if, the volume weighted average price of Ordinary Shares equals or exceeds $18.00 per share (subject to adjustment for splits, dividends, recapitalizations and other similar events) for any 20 trading days within a 30 trading day period ending three business days before Blue Wolf sends the notice of redemption. The Units commenced public trading on July 15, 2011, and the Ordinary Shares and Warrants commenced separate trading on August 3, 2011.
The underwriters’ exercise of their over-allotment option in full established that 591,912 founder shares are subject to forfeiture based on share price performance subsequent to an initial business combination. The founder shares were originally subject to forfeiture as follows: (1) 304,924 founder shares were subject to forfeiture in the event the last sales price of our shares does not equal or exceed $15.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of our initial business combination and (2) 286,988 founder shares were subject to forfeiture in the event the last sales price of our shares does not equal or exceed $12.50 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of our initial business combination. In connection with the Transaction, the Sponsor entered into an agreement with Blue Wolf concurrent with the execution of the Agreement and Plan of Merger pursuant to which it has agreed to forfeit 80% of its founder shares (including all of the founder shares that were originally subject to forfeiture) and 80% of its Sponsor Warrants. The remaining founder shares held by the Sponsor subsequent to the closing of the Transaction will not be subject to any forfeiture provisions currently in effect. See “Related Agreements—Sponsor Agreement.”
Prior to the consummation of its IPO, neither Blue Wolf, nor anyone on its behalf, contacted any prospective target business or had any substantive discussions, formal or otherwise, with respect to such a transaction with Blue Wolf.
Subsequent to the consummation of the IPO, Blue Wolf commenced consideration of potential target companies with the objective of consummating an initial business combination. Blue Wolf met with over 50 potential targets identified by directors, officers and representatives of Blue Wolf, including Composite Capital LLC (“Composite”), a boutique investment advisory firm with offices in Greenwich, CT and Ulaanbaatar, Mongolia. Composite assisted Blue Wolf officers and directors with the identification, analysis and evaluation of potential targets. Composite, an entity owned by Messrs. Kraus and Edwards, is a stockholder of the Sponsor. Blue Wolf reviewed the potential acquisition targets based on the same criteria discussed below and used in evaluating the Transaction, which include management capabilities, growth opportunities, financial results, competitive position and industry dynamics. Blue Wolf narrowed its focus based on the interest expressed by the potential targets and their suitability as merger partners. Discussions between Blue Wolf and targets that expressed interest progressed to a point of sufficient mutual interest that Blue Wolf entered into non-disclosure agreements with 16 of such targets.
On May 17, 2012, a new regulation called the Law of Mongolia on the Regulation of Foreign Investment in Business Entities Operating in Sectors of Strategic Importance became effective in Mongolia. The enactment of this law was in response to an April 1, 2012 announcement by Aluminum Corporation of China Limited (“ChinAlCo”), a sovereign- controlled company, that it would launch a tender offer to purchase up to 60% of South Gobi Resources Ltd., a publicly-listed coal producer operating in Mongolia, and by Ivanhoe Mines Ltd. that it had entered into an agreement with ChinAlCo to tender their 57.6% ownership stake in South Gobi Resources to ChinAlCo. The law provides for a mandatory approval process for certain acquisitions of Mongolian companies by foreign investors. As a result of the passage of this law, a period of uncertainty ensued as to the regulatory regime that would evolve in Mongolia related to this law. In August 2012, in light of the limited time for Blue Wolf to complete an initial business combination and in consideration of the uncertain investment climate in Mongolia, Blue Wolf’s board of directors decided that Blue Wolf should broaden the scope of its search for potential targets to include public and private companies outside Mongolia.
Based on the criteria described herein, Blue Wolf’s analysis of the potential targets progressed to the due diligence phase with six companies, with the sixth company being Li3. The first company was eliminated in August 2012 as its owners determined that a merger with Blue Wolf would create adverse tax consequences. Later in August 2012, in light of the limited time for Blue Wolf to complete an initial business combination and in consideration of the deteriorating investment climate in Mongolia, Blue Wolf’s board of directors decided that Blue Wolf should broaden the scope of its search for potential targets to include public and private companies outside Mongolia. In November 2012, the second company was eliminated because some of its key owners did not want the company to be publicly listed. In December 2012, Blue Wolf executed a letter of intent for a business combination with a third company, which was eliminated in January 2013 because its audited financial statements would not meet SEC requirements. On January 15, 2013, the Blue Wolf directors approved the execution of a letter of intent for a business combination with a fourth company which was eliminated in February 2013 due to its inability to obtain audited financial statements that meet SEC requirements. On March 9, 2013, Blue Wolf terminated discussions with a fifth company because it could not reach agreement on basic terms with its largest shareholder and lender.
On February 1, 2013, Myron Manternach, an investor in Blue Wolf’s Sponsor, called Marc Lubow, Executive Vice President of Li3, to discuss a possible transaction with Li3.
On February 4, 2013, Mr. Manternach attended a conference call with Li3’s management team, including Mr. Lubow, Luis Saenz, CEO, and Luis Santillana, CFO. Later that day, Mr. Manternach and Li3 management attended a conference call with legal counsel of Blue Wolf and Li3. After the call, Mr. Manternach emailed a draft non-disclosure agreement and a preliminary letter of intent and pro forma analysis for a merger.
On February 5, 2013, Blue Wolf executed the non-disclosure agreement with Li3. Blue Wolf began conducting due diligence and was given access to Li3’s online data room. Later that day, a conference call was held between Mr. Manternach, Li3 management, Blue Wolf legal counsel and Li3 legal counsel to discuss the letter of intent and the structure and process for a potential merger. After the call, Mr. Manternach emailed the group a brief presentation that included information about Blue Wolf, a preliminary pro forma analysis for a potential merger between Blue Wolf and Li3, and a preliminary timeline for a merger.
On February 6, 2013, Mr. Saenz sent an email to Mr. Manternach and stated that Li3 held a board call to discuss a potential merger between Blue Wolf and Li3 and that the board did not reach a consensus in favor of the merger on the terms shown in the preliminary letter of intent and pro forma analyses.
On March 3, 2013, Mr. Saenz sent an email to Mr. Manternach and stated that Li3 had gained support of additional directors for a merger with Blue Wolf and that Li3 wanted to move forward with a merger in anticipation that all Li3 directors will ultimately support a merger on the terms shown in the preliminary letter of intent.
On March 4, 2013, Lee Kraus, Chairman and CEO of Blue Wolf, called Mr. Saenz to discuss the terms of the preliminary letter of intent and to gauge Li3’s level interest and ability to pursue a merger with Blue Wolf. Later that day, a conference call was held with Mr. Kraus, Mr. Manternach, Li3 management, and legal counsel of Blue Wolf and Li3.
On March 7, 2013, after a series of communications with Li3 management and their legal counsel, Blue Wolf executed a non-binding letter of intent for a merger with Li3.
On March 11, 2013, Mr. Manternach sent to Li3 management a preliminary draft Memorandum of Understanding (“MOU”) for a merger between Blue Wolf and Li3. The MOU was similar to the letter of intent, except that it included additional exclusivity and termination provisions allowing for Blue Wolf to conduct a tender offer and convene a meeting of its shareholders to vote on certain amendments to its charter, including an extension of Blue Wolf’s corporate existence.
On March 11, 2013, Blue Wolf held a conference call with its board of directors in which the board unanimously approved execution of the MOU and negotiations with Li3 for a potential merger. In making its decision, the board considered a range of factors, including the key terms of the MOU, and Li3’s valuation, management and corporate governance. The directors considered Li3’s valuation implied by the terms of the MOU, the valuation implied by Li3’s publicly traded stock price, and the valuation based on a discounted cash flow analysis of the Maricunga Project and Li3’s corporate costs. Cash flow projections for the Maricunga Project were based on management estimates of production, capital costs and operating costs. The directors considered the attractiveness of entering the lithium industry, including the outlook for supply, demand and price; the cost competitiveness of the project and potential development options, including joint ventures and partnerships; and the potential value of the Maricunga Project based on a discounted cash flow analysis in different development scenarios. The board also considered several risks associated with the project, including political risk and uncertainty in Li3’s ability to obtain an exploitation license from the Chilean government, and other uncertainties typical of early stage mining companies, such as the lack of feasibility studies prepared by independent consulting firms.
On March 14, 2013, Nicholas Edwards, President of Blue Wolf, Mr. Kraus and Mr. Manternach attended a lunch in New York City with Harvey McKenzie, an Li3 director, Mr. Santillana, Mr. Lubow and Li3’s legal counsel.
On March 18, 2013, after a series of communications and negotiations with Li3 management and their legal counsel, Blue Wolf executed an MOU for a merger with Li3.
On March 20, 2013, Blue Wolf announced the execution of the MOU for a merger with Li3. Blue Wolf filed with the SEC a proxy solicitation for shareholder approval for certain amendments to its charter, including an extension of Blue Wolf’s corporate existence. Blue Wolf filed with the SEC a Schedule TO for a tender offer concurrent with the proxy solicitation.
On April 9, 2013, Mr. Kraus and Mr. Saenz attended meetings and conference calls with investors in New York City to discuss the proxy solicitation and tender offer. The meetings were arranged by representatives of Deutsche Bank Securities.
On April 15, 2013, at a meeting of shareholders of Blue Wolf, the Blue Wolf shareholders approved (a) amendments to the Charter to (i) extend the date by which Blue Wolf must consummate its initial business combination from April 20, 2013 to July 22, 2013 and (ii) to remove the requirement that Blue Wolf acquire a target business that has a fair market value equal to at least 80% of the value of the funds held in the Trust Account and (b) an amendment to the Investment Management Trust Agreement (the “IMTA”), by and between Blue Wolf and Continental Stock Transfer & Trust Company entered into at the time of the IPO to (i) permit the withdrawal from the Trust Account of an amount sufficient to purchase the Ordinary Shares validly tendered and not withdrawn in the concurrent tender offer and (ii) extend the date on which to liquidate the Trust Account in accordance with the IMTA to July22, 2013.
Public shareholders of Blue Wolf were afforded the opportunity through a tender offer concurrent with the proxy solicitation with respect to the extension to redeem their Public Shares through a tender offer. On April 16, 2013, the expiration date for the tender offer, an aggregate of5,794,119Ordinary Shares were validly tendered and thereafter purchased pursuant to the tender offer for aggregate consideration of $57.8 million, leaving approximately $22.5 million in the Trust Account.
Subsequent to the approval of the charter amendments and the completion of the tender offer, Blue Wolf, Li3 and their respective counsels negotiated the terms of a definitive agreement.
On May 9, 2013, Li3 filed its Form 10-Q for the quarter ended March 31, 2013. Mr. Manternach sent Li3 management a revised pro forma merger analysis reflecting updated information from the Form 10-Q and Li3 management estimates of cash, debt and remaining acquisition related liabilities for the period ending July 22, 2013.
On May 15, 2013, Blue Wolf and Li3 completed negotiations of the definitive agreement. Blue Wolf also completed its financial due diligence, including a review of Li3’s potential use of proceeds. Blue Wolf and Li3 management also completed a joint investor presentation. In advance of a conference call the next day, Blue Wolf emailed the definitive agreement and investor presentation prepared for the Transaction to its board of directors.
On May 16, 2013, the directors of Blue Wolf held a conference call to review the Li3 transaction and consider the definitive agreement for the Transaction. Mr. Kraus, Mr. Edwards and Mr. Manternach discussed the investor presentation developed for the Transaction. The presentation included an overview of the mechanics and key terms of the transaction, a description of Li3 and its lithium assets in Chile, a description of the Maricunga Project and the terms of the recent acquisition of Cocina, Li3 management’s estimate of capital requirements during the next 18 months, pro forma analyses for transaction proceeds and share ownership, updated lithium market statistics and forecasts, and comparable valuation analyses prepared by Li3 management. The board of directors recognized that estimates by their very nature may change in material elements and that they are merely a good faith estimate of how the market or business may perform in the future based upon a series of assumptions. The board also considered several risks, including Li3’s limited balance sheet liquidity and the risk that depending on tender offer redemption levels, the transaction may not retain enough proceeds to fund all of Li3’s capital needs for the next 18 months.
Blue Wolf’s Board of Directors’ Reasons for the Approval of the Transaction
Blue Wolf’s board of directors has unanimously (i) approved our making the Offer, (ii) declared the advisability of the Transaction and approved the Agreement and Plan of Merger and (iii) determined that the Transaction is in the best interests of the shareholders of Blue Wolf and if consummated would constitute our initial business combination pursuant to our Charter.
Blue Wolf’s board of directors considered a wide variety of factors in connection with its evaluation of the Transaction. In light of the complexity of those factors, its board of directors, as a whole, did not consider it practicable to, nor did it attempt to, quantify or otherwise assign relative weights to the specific factors it considered in reaching its decision. Individual members of Blue Wolf’s board of directors may have given different weight to different factors.
Blue Wolf’s board of directors considered the growth prospects and risks for lithium market demand, growth prospects and risks for lithium market supply, the potential value of Li3’s lithium mining assets and its ability to enter the lithium market and effectively compete as a low cost producer, potential opportunities for Li3 to obtain lithium exploitation licenses for the Maricunga Project in Chile, the potential opportunity to develop the Maricunga Project in partnership with POSCO, the opportunity to develop a potash project if Li3 is unable to obtain lithium exploitation licenses for the Maricunga Project, Li3’s balance sheet and historical investment performance, capabilities of management and its ability to raise capital and develop and operate lithium projects, corporate governance, reporting transparency and risk management. These factors were considered by Blue Wolf’s board of directors in evaluating the combined company’s relative valuation and its prospects for generating risk-adjusted total returns. All of the factors above, including other various risks discussed in the section entitled “Risk Factors”, were considered by Blue Wolf’s board of directors in reaching its determination that the Transaction is in the best interests of Blue Wolf’s shareholders and to approve the Transaction.
In considering the Transaction, Blue Wolf’s board of directors gave consideration to the following positive factors (although not weighted or in any order of significance):
| § | Li3 is focused on lithium mining, which the board believes to be an attractive industry. The supply of lithium is highly concentrated among four lithium mining companies which account for 80% of the industry’s estimated total supply of 175,000 tonnes of lithium carbonate in 2012. Supply growth is constrained by significant barriers to entry, including limited availability of economic lithium resources and significant capital requirements and time required to develop lithium resources and build lithium production facilities. Demand is expected to accelerate as technological developments improve lithium battery cost/performance and drive the adoption of lithium batteries for a broad range of applications, especially electric vehicles and electric grid energy storage. |
| § | Li3 has potentially valuable lithium mining assets that could allow it to enter the lithium market as a low cost producer. |
| § | The Maricunga Project has a NI 43-101 compliant lithium brine resource with a relatively high concentration of lithium and relatively low concentrations of impurities. Based on the characteristics of its resource, the Maricunga Project has the potential to produce lithium at lower costs than that of hard rock-based producers and at costs that are competitive with other brine-based producers. |
| § | Li3 has multiple potential opportunities to obtain lithium exploitation licenses for the Maricunga Project. These opportunities include participation in government auctions of licenses, acquisitions, and partnerships. |
| § | The potential opportunity to develop the Maricunga Project in partnership with POSCO, which could provide the project with process technology and services. Under an MOU signed with Li3 in 2011, POSCO has built and operated a pilot plant and demonstrated its ability to extract lithium from brine produced from the Salar de Maricunga. During 2011 and 2012, POSCO invested a total of $18million in two tranches of equity of Li3. POSCO currently owns 25.4% of Li3’s outstanding shares and remains its largest shareholder and is entitled to designate a member on Li3’s board of directors. |
| § | The opportunity to develop a potash project if Li3 is unable to obtain lithium exploitation permits. The acquisitionof the mining concessions “Cocina 19 through 27.” The exploitation of these properties is not subject to obtaining a CEOL permit for the exploitation of lithium in Chile. |
| § | Li3 has a strong core management team and board of directors.As an SEC-registered company and current SEC filer, Li3 has established corporate governance, reporting transparency and risk management practices. |
Blue Wolf’s board of directors also considered the following negative factors (although not weighted or in any order of significance), many of which can also be found in the section entitled “Risk Factors”:
| § | Li3 currently is not licensed for the exploitation of lithium in Chile. Without these licenses, Li3 will be unable to develop and operate the Maricunga Project for the production of lithium. In 2012, Li3 participated in a government auction for lithium exploitation licenses. Due to irregularities with the auction, the government cancelled the auction. Li3 has lodged a formal protest against the cancellation and the government’s decision not to award the licenses to Li3 as the second highest bidder in the auction. Li3 is also pursuing acquisitions and partnerships in order to obtain lithium exploitation licenses. |
| § | Chile is considered a relatively attractive mining jurisdiction with a stable fiscal economy and body of law; however, the recent cancellation of the lithium auction indicates that Chile has political and legal risks that may prove to be detrimental to Li3’s ability to pursue its plans to develop a lithium business. |
| § | Li3 is an exploration stage mining company. While the company has an NI 43-101 compliant resource, it does not have SEC-compliant proven and probable reserves. Moreover, the company has not completed an economic feasibility study of the Maricunga Project for the production of lithium and/or potash and other potential co-products. |
| § | Li3 has a relatively weak balance sheet and limited access to the capital markets. As of March 31, 2013, the company had $2.4 million of cash and $2.0 million of debt due in September 2013. Without the Blue Wolf merger and/or access to the capital markets, Li3 may be unable to fund acquisitions and develop the Maricunga Project. |
| § | Li3’s auditors have expressed doubt in Li3’s ability to continue as a going concern. |
Interest of Blue Wolf Shareholders in the Transaction
Upon consummation of the Transaction and issuance of the Merger Consideration to Blue Wolf’s shareholders, holders of Blue Wolf’s Ordinary Shares prior to the Transaction will own approximately between 62.7% of our outstanding shares following consummation of the Transaction, in the event no Ordinary Shares are tendered in the Offer, and approximately 42.9% of our outstanding shares following consummation of the Transaction, in the event 1,467,970 Ordinary Shares are accepted in the Offer. These figures assume: (i) the issuance of 1,581,990 registered Ordinary Shares as Merger Consideration to Li3 shareholders; (ii) that no Warrants (including the Sponsor Warrants and Converted Warrants) are exercised; (iii) that 1,610,000 founder shares and 3,333,333 Sponsor Warrants are forfeited pursuant to the Sponsor Agreement; (iv) that no Converted Options are exercised; and (v) that 1,467,970 Ordinary Shares are validly tendered pursuant to the Offer. See “Beneficial Ownership of Securities.”
Certain Benefits of Blue Wolf’s Directors and Officers and Others in the Transaction
Blue Wolf’s directors and officers have interests in the Transaction that are different from, or in addition to, your interests as a shareholder. These interests include, among other things:
| · | Our Sponsor owns 2,012,500 Ordinary Shares, which it acquired for $25,000 and which have an aggregate value of $21,634,375 based on the closing price of the Ordinary Shares on Nasdaq of $10.75 as of May 17, 2013. It has waived its right to receive distributions with respect to its shares upon Blue Wolf’s liquidation, which will occur if Blue Wolf is unable to consummate the Transaction by July 22, 2013. Accordingly, the Sponsor’s Ordinary Shares will be worthless if Blue Wolf is forced to liquidate. |
| · | Our Sponsor owns 4,166,667 Sponsor Warrants, which it acquired for $3,125,000 and which have an aggregate value of $416,666.70 based on the closing price of the Warrants on Nasdaq of $0.10 as of May 17, 2013. In the event of Blue Wolf’s liquidation, the Sponsor Warrants will expire worthless. |
| · | As of the date of this Offer to Purchase, our Sponsor has made loans to us in the aggregate amount of $400,000. In the event of liquidation, we will not be able to repay the loans to our Sponsor. |
| · | Each of our current directors and officers will be reimbursed from our funds held outside of the Trust Account for out-of-pocket expenses incurred by him in connection with activities on our behalf, such as identifying potential target businesses and performing due diligence on suitable business combinations, but only if the business combination is consummated. In the event shareholders we consummate the Transaction, all such expenses will be paid by us in full. |
| · | If Blue Wolf liquidates in the event it is unable to consummate the Transaction, Messrs. Kraus and Edwards may be liable to us in the event any claims by a vendor for services rendered or a prospective target business with which we have discussed entering into a business combination reduce the amounts in the Trust Account below $9.97 per share except in certain circumstances. See “Business of Blue Wolf—Introduction—Redemption of Public Shares And Liquidation If No Initial Business Combination.” |
These interests may influence the Blue Wolf directors and executive officers in the negotiation of the Agreement and Plan of Merger, the Related Agreements and the approval of the Transaction. See “Risk Factors — Risks Related to the Transaction.”
Accounting Treatment
Blue Wolf’s management has concluded that Li3 will be the accounting acquirer and the Transaction will be accounted for as a recapitalization by Li3 based on the evaluation of the facts and circumstances of the Transaction. Li3 is the larger of the two entities and is the operating company within the combining companies. Following the Transaction, the board of directors of Blue Wolf shall consist of seven members, four of whom shall be appointed by Li3 and three of whom shall be appointed by Blue Wolf. Although, depending on the amount of shares tendered, there is a possibility that a larger portion of the voting rights in the combined entity is likely to be held by pre-Transaction Blue Wolf shareholders, this was not considered determinative, as all other important elements considered in determining which party has control, including board of directors representation and management continuity, were not aligned with this voting interest. Additionally, the Blue Wolf shareholders are expected to represent a diverse group of shareholders at completion of the Transaction and we are not aware of any voting or other agreements that suggest that they can act as one party.
THE AGREEMENT AND PLAN OF MERGER
This section of the Offer to Purchase describes the material provisions of the Agreement and Plan of Merger but does not purport to describe all of the terms of the Agreement and Plan of Merger. The following summary is qualified in its entirety by reference to the complete text of the Agreement and Plan of Merger, which is incorporated herein by reference. Shareholders and other interested parties are urged to read the Agreement and Plan of Merger, a copy of which is attached as Annex I hereto, in its entirety because it is the primary legal document that governs the Transaction. Capitalized terms used herein and not otherwise defined have the meanings set forth in the Agreement and Plan of Merger.
The Agreement and Plan of Merger has been included to provide information regarding the terms of the Transaction. In your review of the representations and warranties contained in the Agreement and Plan of Merger and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances under which a party to the Agreement and Plan of Merger may have the right to not close the Transaction if the representations and warranties of another party prove to be untrue due to a change in circumstance or otherwise, and allocate risk between the parties to the Agreement and Plan of Merger, rather than establishing matters of fact. The representations and warranties and other provisions of the Agreement and Plan of Merger should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this Offer to Purchase and the Annex.
The Agreement and Plan of Merger contains representations, warranties and covenants that the respective parties made to each other as of the date of the Agreement and Plan of Merger or other specific dates. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Agreement and Plan of Merger. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this Offer to Purchase, may have changed since the date of the Agreement and Plan of Merger and subsequent developments or new information qualifying a representation or warranty to the extent material to an investment decision have been included in this Offer to Purchase. The representations, warranties and covenants in the Agreement and Plan of Merger are also modified in important part by the underlying disclosure schedules which are not filed publicly and which are subject to a contractual standard of materiality different from that generally applicable to shareholders and were used for the purpose of allocating risk among the parties rather than establishing matters as facts. Blue Wolf and Li3 do not believe that these schedules contain information that is material to an investment decision.
Nature of Transaction
The nature of Li3’s business is primarily the implementation, or exploration, stage of a project rather than a fully developed operating business generating revenue, which stage will be achieved once Li3 develops one of its assets and obtains all applicable permits from the Chilean regulatory authorities.
Structure of Transaction
On May 21, 2013, Blue Wolf, Merger Sub and Li3 entered into the Agreement and Plan of Merger pursuant to which Blue World will acquire Li3. The Agreement and Plan of Merger is described below in greater detail under “The Agreement and Plan of Merger.” Pursuant to the terms of the Agreement and Plan of Merger, Merger Sub will merge with and into Li3 with Li3 surviving as a wholly-owned subsidiary of Blue Wolf. Concurrently with the Closing, the parties will file articles of merger with the Secretary of State of the State of Nevada, in accordance with the relevant provisions of the NRS. The time when theTransactionshall become effective is referred to as the “Effective Time.”
Prior to and/or concurrently with the closing of the Transaction, Blue Wolf will have:
| (i) | completed the Offer pursuant to Rule 13e-4 and Regulation 14E of the Exchange Act. Through the tender offer, shareholders of Blue Wolf will be provided with the opportunity to redeem their Ordinary Shares for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, upon the consummation of the Transaction; and |
| (ii) | filed a registration statement with the SEC to register the Merger Consideration and such registration statement shall have been declared effective on or prior to the Effective Time. |
Transaction Consideration to be Delivered
In connection with the Transaction, at the Effective Time, the Company shall cause to be issued to the shareholders of record of Li3 one Ordinary Share for every 250 shares of Li3 common stock owned by them at the Effective Time (the “Merger Consideration”). In addition, each option and warrant to purchase shares of Li3 common stock which is outstanding immediately prior to the Effective Time shall be converted into a right to acquire one Ordinary Share for every 250 shares of Li3 common stock subject to each such Li3 option or warrant and on the same contractual terms and conditions as were in effect immediately prior to the Effective Time. Any fractional shares shall be rounded up to the nearest whole number.
Sponsor Agreement
Concurrent with the execution of the Agreement and Plan of Merger, Blue Wolf’s Sponsor entered into an agreement with Blue Wolf pursuant to which it has agreed to forfeit 1,610,000 (or 80%) of its founder shares(including all of the founder shares that were originally subject to forfeiture)and 3,333,333 (or 80%) of its Sponsor Warrants.The remaining founder shares held by the Sponsor subsequent to the closing of the Transaction will not be subject to any forfeiture provisions currently in effect. See “Related Agreements—Sponsor Agreement” for a further description of the terms of such agreement.
Closing and Effective Time of the Transaction
The Transaction is expected to be consummated no later than one business day following the satisfaction or waiver of the conditions described below under the subsection entitled “Conditions to Closing of the Transaction,” unless Blue Wolf and Li3 agree in writing to hold the Closing at another time but no later than July 22, 2013.
Conditions to Closing of the Transaction
The obligations of the parties to the Agreement and Plan of Merger to consummate the Transaction are subject to the satisfaction (or waiver by each other party) of the following specified conditions set forth in the Agreement and Plan of Merger before consummation of the Transaction:
| · | the Blue Wolf registration statement registering the Merger Consideration shall have been declared effective by the SEC under the Securities Act and no stop order suspending the effectiveness of the registration statement shall have been issued by the SEC and no proceeding for that purpose shall have been initiated by the SEC; |
| · | the Offershall have been completed and Blue Wolf shall have accepted for payment the Ordinary Shares validly tendered and not validly withdrawn pursuant to the Offer; |
| · | the applicable waiting period (and any extension thereof) under any antitrust laws, if any, shall have expired or been terminated; |
| · | all consents required to be obtained from, or made with, any governmental authority in order to consummate the transactions contemplated by the Agreement and Plan of Merger shall have been obtained or made; |
| · | no governmental authority or regulatory agency shall have enacted, issued, promulgated, enforced or entered any law (whether temporary, preliminary or permanent) or order that is then in effect and which has the effect of making the Transaction illegal or otherwise preventing or prohibiting consummation of the Transaction; |
| · | there shall be no pending action against any party or any affiliate, or any of their respectiveproperties or assets, or any officer or director, in his or her capacity as such, of any party or any of their affiliates, with respect to the consummation of the Transaction or the transactions contemplated thereby which could reasonably be expected to have a material adverse effect; and |
| · | the Li3 shareholder approval of the Transaction shall have been obtained in accordance with the NRS and Li3’s articles of incorporation. |
The obligation of Blue Wolf to consummate the Transaction is subject to satisfaction of the following conditions (or waiver in writing by Blue Wolf):
| · | each of the representations and warranties of Li3 shall be true and correct ; |
| · | Li3 having performed in all material respects all of its obligations and complied in all material respects with all of its agreements and covenants to be performed or complied with under the Agreement and Plan of Merger; |
| · | Li3 having delivered to Blue Wolf a certificate, dated the closing date, signed by an executive officer of Li3 in such capacity certifying as to the satisfaction of certain of Li3’s conditions; |
| · | Li3 having delivered to Blue Wolf a true copy of the resolutions of Li3’s board of directors authorizing the execution of the Agreement and Plan of Merger and the consummation of the transactions contemplated therein; |
| · | no material adverse effect shall have occurred with respect to Li3 since the date of the Agreement and Plan of Merger; |
| · | Blue Wolf shall have received an opinion from Li3’s counsel in form and substance reasonably satisfactory to it, addressed to Blue Wolf and dated as of the closing date; |
| · | Blue Wolf shall have received a certificate of good standing of Li3 issued by the appropriate Governmental Authority; |
| · | Li3 shall have procured all of the third party consents required in order to effect the Closing; |
| · | Shareholders of Li3 holding a majority of the issued and outstanding Li3 common stock shall have entered into Lock-Up and Support Agreements with Blue Wolf and Li3 pursuant to which such Li3 shareholders agree to: (a) vote in favor of the Transaction and (b) be restricted from offering, issuing, granting any option on, selling, transferring or otherwise disposing of any shares of Li3 common stock or the Merger Consideration they receive until the earlier of (1) one year after the consummation of the Transaction or (2) the date on which we consummate a liquidation, merger, share exchange or other similar transaction after the Transaction that results in all of our shareholders having the right to exchange their Ordinary Shares for cash, securities or other property (the “Lock-up Period”); provided, however, if the trading price of the Ordinary Shares reaches or exceeds $11.50 for any 20 trading days within any 30 trading day period during the Lock-Up Period, 50% of each shareholder’s Merger Consideration will be released from the lock-up and, if the trading price reaches or exceeds $15.00 for any 20 trading days within any 30 trading day period during the Lock-up Period, the remaining 50% of each shareholder’s Merger Consideration shall be released from the lock-up; and |
| · | Blue Wolf and Li3 shall have entered into an investor rights agreement modifying Li3’s previous agreement with POSCO, pursuant to which POSCO will be entitled to certain rights as a shareholder of combined company, including without limitation, preemptive rights, consent rights, information rights and the right to nominate one director to the board of directors. |
The obligation of Li3 to consummate the Transaction is subject to satisfaction of the following conditions (or waiver in writing by Li3):
| · | each of the representations and warranties of Blue Wolf being true and correct ; |
| · | Blue Wolf having performed in all material respects all of its obligations and complied in all material respects with all of its agreements and covenants to be performed or complied with under the Agreement and Plan of Merger; |
| · | Blue Wolf having delivered to Li3 a certificate, dated the closing date, signed by an executive officer of Blue Wolf in such capacity certifying as to the satisfaction of certain of Blue Wolf’s conditions; |
| · | Blue Wolf having delivered to Li3 a true copy of the resolutions of Blue Wolf’s board of directors authorizing the execution of the Agreement and Plan of Merger and the consummation of the transactions contemplated therein; |
| · | no material adverse effect shall have occurred with respect to Blue Wolf since the date of the Agreement and Plan of Merger; |
| · | Li3 shall have received a certificate of good standing of Blue Wolf issued by the appropriate Governmental Authority; |
| · | Li3 shall have received an opinion of counsel from Blue Wolf’s counsel in form and substance reasonably satisfactory to it, addressed to Li3 and dated as of the closing date; |
| · | Blue Wolf havingno less than $5 million after payment of the Purchase Price for shares validly tendered in the Offer and after payment of Blue Wolf’s expenses; and |
| · | Blue Wolf shall have caused the directors set forth in the Agreement and Plan of Merger to be appointed to the board of directors as of the closing date. |
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Termination
The Agreement and Plan of Merger may be terminated prior to the Closing as follows:
| · | by mutual written agreement of Blue Wolf and Li3; |
| · | by written notice by either Blue Wolf or Li3 if any of the closing conditions set forth in the Agreement and Plan of Merger have not been satisfied by Blue Wolf or Li3, as the case may be (or waived by Blue Wolf or Li3, asthe case may be) by July 22, 2013. Notwithstanding the foregoing, the right to terminate shall not be available to Blue Wolf or Li3 if the failure by Blue Wolf, on one hand, or Li3, on the other hand, to fulfill any obligation under the Agreement and Plan of Merger has been the cause of, or resulted in, the failure of the Closing to occur on or before July 22, 2013; |
| · | by written notice by Blue Wolf, if (1) there has been a material breach by Li3 of any of itsrepresentations, warranties, covenants or agreements contained in the Agreement and Plan of Merger, or if any material representation or warranty of Li3 shall have become untrue or inaccurate, and (2) the breach or inaccuracy is incapable of being cured or is not cured within 20 days of notice of such breach or inaccuracy; and |
| · | by written notice by Li3, if (1) there has been a material breach by Blue Wolf of any of its material representations, warranties, covenants or agreements contained in the Agreement and Plan of Merger, or if any material representation or warranty of Blue Wolf shall have become untrue or inaccurate and (2) the breach or inaccuracy is incapable of being cured or is not cured within 20 days of notice of such breach or inaccuracy. |
Effect of Termination
If the Agreement and Plan of Merger is terminated, it shall become void, and there shall be no liability on the part of any party thereto or any of their respective affiliates or directors, officers, employees, agents or other representatives of any of them, and all rights and obligations of each party thereto shall cease; except for liability for any fraud committed of the Agreement and Plan of Merger prior to termination.
Fees and Expenses
All expenses incurred in connection with the Agreement and Plan of Merger and the Transaction shall be paid by the party incurring such expense; provided, however, in the event the Agreement and Plan of Merger is terminated for any reason, Li3 shall pay Blue Wolf a termination fee of up to a maximum of $150,000 for expenses documented and actually incurred by Blue Wolf in connection with the preparation of the Agreement and Plan of Merger, the registration statement and the proxy solicitation and tender offer conducted by Blue Wolf prior to the execution of the Agreement and Plan of Merger.
Management Following the Transaction
Immediately following the Closing, the board of directors of Blue Wolf shall consist of seven members, four of whom shall be appointed by Li3 and three of whom shall be appointed by Blue Wolf. The following persons will serve as directors of Blue Wolf following the Closing: Luis Francisco Saenz, Patrick Cussen (Chairman), Harvey McKenzie, SungWon Lee, Patricio Campos, Myron Manternach and Jonathan Lee. Following the Closing, the following persons shall serve as the officers of Blue Wolf: Luis Francisco Saenz (President and Chief Executive Officer) and Luis Santillana (Chief Financial Officer). See “Management Following the Transaction.”
Tender Offer
The Agreement and Plan of Merger obligates Blue Wolf to consummate prior to the Closing a tender offer pursuant to Rule 13e-4 and Regulation 14E of the Exchange Act. Through the Tender Offer, shareholders of Blue Wolf will be provided with the opportunity to redeem their Ordinary Shares for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, upon the consummation of the Transaction. The obligation of Blue Wolf to purchase Ordinary Shares validly tendered and not properly withdrawn pursuant to the Offer will be subject to, among others, the Maximum Tender Condition and the Merger Condition.
Representations and Warranties
The Agreement and Plan of Merger contains a number of representations that each of Blue Wolf and Li3 have made to each other. These representations and warranties, among others, relate to the following: (i) Due Organization and Good Standing; (ii) Capitalization; (iii) Subsidiaries; (iv) Authorization; Binding Agreement; (v) Governmental Approvals; (vi) No Violations; (vii) SEC Filings and Financial Statements; (viii) Absence of Certain Changes; (ix) Absence of Undisclosed Liabilities; (x) Compliance with Laws; (xi) Regulatory Agreements; Permits; Qualifications; (xii) Litigation; (xiii) Restrictions on Business Activities; (xiv) Material Contracts; (xv) Intellectual Property; (xvi) Employee Benefit Plans; (xvii) Taxes and Returns; (xviii) Finders and Investment Bankers; (xix) Title to Property; Assets; (xx) Employee Matters; (xxi) Environmental Matters; (xxii)Transactions with Affiliates; (xxiii) Insurance; (xxiv) Books and Records; (xxv) Accounts Receivable; (xxvi) Title to Mining Concessions; (xxvii) Listing; (xxviii) Investment Company Act and (xxix) Information Supplied.
Certain of the representations and warranties are qualified by materiality or material adverse effect. For the purposes of the Agreement and Plan of Merger, material adverse effect means any occurrence, state of facts, change, event, effect or circumstance that, individually or in the aggregate, has, or would reasonably be expected to have, a material adverse effect on the assets, liabilities, business, results of operations or financial condition of a party and its subsidiaries, taken as a whole, other than any occurrence, state of facts, change, event, effect or circumstance to the extent resulting from certain limited circumstances, including: (i) political instability, acts of terrorism or war, changes in national, international or world affairs, or other calamity or crisis, including without limitation as a result of changes in the international or domestic markets, so long as such party is not disproportionately affected thereby, (ii) any change affecting the United States economy generally or the economy of any region in which such party conducts business that is material to the business of such party, so long as such party is not disproportionately affected thereby, (iii) the announcement of the execution of the Agreement and Plan of Merger, or the pendency of the consummation of the transactions contemplated thereby, (iv) any change in United States generally accepted accounting principles or interpretation thereof after the date of the Agreement and Plan of Merger or (v) the execution and performance of or compliance with the Agreement and Plan of Merger.
Covenants of the Parties
Each of Blue Wolf and Li3 has agreed to use their commercially reasonable efforts to take all necessary actions to effect the Transaction and to comply as promptly as practicable with all requirements of Governmental Authorities applicable to the Transaction. Li3 also covenanted to conduct its business in a manner consistent with past practice, to consult with Blue Wolf and obtain the permission of the other party before, among other things, amending any of its organizational documents, modifying its outstanding equity interests, terminating or waiving any material right under any material contract, closing or materially reducing any of its activities, assuming additional obligations or liabilities other than in the ordinary course of business consistent with past practice. In addition, Blue Wolf and Li3 shall prepare and Blue Wolf shall file a registration statement under the Securities Act registering the Merger Consideration. The registration statement will include a proxy statement/prospectus which Li3 shall cause to be mailed to its stockholders in connection with convening a meeting of stockholders to approve the Transaction. The Agreement and Plan of Merger also contains covenants related to notifications, exchange listing, access to information, and confidentiality. Furthermore, the Agreement and Plan of Merger also contains covenants which restrict and govern the activities of Li3 with respect to the solicitation or receipt of Acquisition Proposals.
Trust Account Waiver
Li3 agreed that it does not now and shall not at any time hereafter have any right, title, interest or claim of any kind in or to any monies in the Trust Account, or make any claim against the Trust Account (including any distributions therefrom), regardless of whether such claim arises as a result of, in connection with or relating in any way to, any proposed or actual business relationship between Blue Wolf and Li3, the Agreement and Plan of Merger or any other matter, and regardless of whether such claim arises based on contract, tort, equity or any other theory of legal liability (any and all such claims are collectively referred to hereafter as the “Trust Claims”). Li3 irrevocably waived any Trust Claims it may have against the Trust Account (including any distributions therefrom) now or in the future as a result of, or arising out of, any negotiations, contracts or agreements with Blue Wolf and will not seek recourse against the Trust Account (including any distributions therefrom) for any reason whatsoever (including, without limitation, for an alleged breach of the Agreement and Plan of Merger). Li3 agreed and acknowledged that such irrevocable waiver is material to the Agreement and Plan of Merger and specifically relied upon by Blue Wolf to induce it to enter into the Agreement and Plan of Merger, and Li3 further intends and understands such waiver to be valid, binding and enforceable under applicable law. To the extent Li3 or any of its affiliates commences any action or proceeding based upon, in connection with, relating to or arising out of any matter relating to Blue Wolf, which proceeding seeks, in whole or in part, monetary relief against Blue Wolf, Li3 (on behalf of itself and its respective affiliates) acknowledged and agreed that its or their sole remedy shall be against funds held outside of the Trust Account and that such claim shall not permit Li3 (or its affiliates or any party claiming on its behalf or in lieu of them) to have any claim against the Trust Account (including any distributions therefrom) or any amounts contained therein. In the event that Li3 or any of its affiliates commences any action or proceeding based upon, in connection with, relating to or arising out of any matter relating to Blue Wolf, which proceeding seeks, in whole or in part, relief against the Trust Account (including any distributions therefrom) or the Blue Wolf public shareholders, whether in the form of money damages or injunctive relief, Blue Wolf shall be entitled to recover from Li3 or any of its affiliates commencing any such action or proceeding, as the case may be, the associated legal fees and costs in connection with any such action or proceeding, in the event Blue Wolf prevails in such action or proceeding.
Public Announcements
Blue Wolf and Li3 agreed not to make any public announcement with respect to the Agreement and Plan of Merger or the Transaction without the prior written consent of the other parties, except to the extent required by applicable law or the rules and regulations of a securities exchange, and in such case the party making such announcement shall provide the other parties with reasonable time to comment on, and arrange for any required filing with respect to, such release or announcement in advance of such issuance.
Related Agreements
This section of the Offer to Purchase describes the material provisions of the Related Agreements but does not purport to describe all of the terms thereof. The following summary is qualified in its entirety by reference to the complete text of each of the Related Agreements.The Related Agreements were filed as exhibits to Blue Wolf’s Form 6-K, dated May 21, 2013. Shareholders and other interested parties are urged to read such agreements in their entirety. See “Where You Can Find More Information.”
Sponsor Agreement
Blue Wolf’s Sponsor entered into an agreement with Blue Wolf concurrent with the execution of the Agreement and Plan of Merger pursuant to which it has agreed to forfeit 1,610,000 (or 80%) of its founder shares(including all of the founder shares that were originally subject to forfeiture)and3,333,333 (or80%) of its Sponsor Warrants.The remaining founder shares held by the Sponsor subsequent to the closing of theTransactionwill not be subject to any forfeiture provisions currently in effect.
Additional Agreements
Prior to the closing of the Transaction, Blue Wolf, Li3 and stockholders of Li3 holding a majority of the issued and outstanding Li3 common stock will enter into Lock-Up and Support Agreements related to the Transaction. See “The Agreement and Plan of Merger–Closing Conditions of the Transaction” for a further description of the Lock-Up and Support Agreements.
Additionally, prior to the closing of the Transaction, Blue Wolf and Li3 will enter into an investor rights agreement with POSCO. See “The Agreement and Plan of Merger–Closing Conditions of the Transaction” for a further description of the investor rights agreement.
The Offer
Number of Ordinary Shares; Share Purchase Price; No Proration
Number of Ordinary Shares
Upon the terms and subject to certain conditions of the Offer, we will purchase up to 1,467,970 Ordinary Shares validly tendered and not properly withdrawn, in accordance with the “Withdrawal Rights” described below, before the Expiration Date, at a Share Purchase Price of $9.97 per share, net to the seller in cash, without interest, for an aggregate Purchase Price of up to $14,635,661, as further described below under the heading “Share Purchase Price.”
In accordance with the rules of the SEC, in the event that more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn in this Offer, we may, and we expressly reserve our right to, accept for payment an additional amount of shares pursuant to the 2% Increase without amending the Offer or extending the Expiration Date.
The Offer is not conditioned on any minimum number of Ordinary Shares being tendered. The Offer is, however, subject to certain other conditions, including theMaximum Tender Condition andthe Merger Condition. See “The Offer — Conditions of the Offer.”
Only Ordinary Shares validly tendered and not properly withdrawn will be purchased pursuant to the Offer. All Ordinary Shares tendered and not purchased pursuant to the Offer will be returned to the tendering shareholders at our expense promptly following our termination of the Offer or the Expiration Date.
Share Purchase Price
The Share Purchase Price is $9.97 per share. Pursuant to our Charter, the Share Purchase Price has been calculated based on the aggregate amount on deposit in the Trust Account as of two business days prior to the commencement of the Offer including interest (not otherwise released to Blue Wolf) but net of taxes payable, divided by the total number of outstanding Ordinary Shares sold as part of the Units in our IPO. We expressly reserve the right, in our sole discretion, to increase the Share Purchase Price, subject to applicable law and our Charter. We are required to conduct the Offer in accordance with the terms of our Charter. See “The Offer — Extension of the Offer; Termination; Amendment.”
If we modify the price that may be paid for Ordinary Shares from $9.97, then the Offer must remain open for at least 10 business days following the date that notice of the modification is first published, sent or given. For the purposes of the Offer, a “business day” means any day other than a Saturday, Sunday or U.S. federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City time. See “The Offer — Extensions of the Offer; Termination; Amendment.”
No Proration
There will be no proration in the event of over-subscription of the Offer.
In order for the Transaction to be consummated, and without giving effect to any purchases pursuant to the 2% Increase, no more than 1,467,970 Ordinary Shares can be validly tendered and not properly withdrawn pursuant to the Offer.If more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn, and we do not exercise our right pursuant to the 2% Increase to purchase additional Ordinary Shares, or if we are unable to satisfy the Merger Condition, we may amend, terminate or extend the Offer. Accordingly, we will not offer proration in the Offer. If we terminate the Offer, we will NOT: (i) purchase any Ordinary Shares pursuant to the Offer or (ii) consummate the Transaction in accordance with the terms of the Agreement and Plan of Merger, and we will promptly return all Ordinary Shares delivered pursuant to the Offer at our expense upon expiration or termination of the Offer. See “The Agreement and Plan of Merger — Conditions to the Closing of the Transaction” for a description of conditions to consummation of the Transaction.
This Offer to Purchase and the Letter of Transmittal will be mailed to record holders of the Ordinary Shares and will be furnished to brokers, dealers and other nominee shareholders and similar persons whose names, or the names of whose nominees, appear on Blue Wolf’s shareholder list or, if applicable, who are listed as participants in a clearing agency’s security position listing for subsequent transmittal to beneficial owners of Ordinary Shares.
Purpose of the Offer; Certain Effects of the Offer
Blue Wolf, Li3 and the other parties thereto executed the Agreement and Plan of Merger on May 21, 2013. In connection with the announcement of the Transaction on May 21, 2013, Blue Wolf announced that it would offer to purchase up to 1,467,970 of its outstanding Ordinary Shares as contemplated by the Offer. The Offer provides our shareholders an opportunity to have Blue Wolf redeem their Ordinary Shares for a pro-rata portion of our Trust Account as required by our Charter, and as disclosed in the prospectus for our IPO.
Our Sponsor, and each of our officers and directors in their individual capacities, has agreed not to tender, and Blue Wolf will not purchase, any of their Ordinary Shares pursuant to the Offer.
Our intention is to consummate the Transaction. Ourboard of directors has unanimously (i) approved the Offer, (ii) declared the advisability of the Transaction and approved the Agreement and Plan of Merger and the other Transactions contemplated thereby and (iii) determined that the Transaction is in the best interests of the shareholders of Blue Wolf and, if consummated, would constitute our initial business combination pursuant to our Charter. If you tender your Ordinary Shares pursuant to the Offer, you will not be participating in the Transaction because you will no longer hold such Ordinary Shares in Blue Wolf following the consummation of the Transaction. Therefore, our board of directors unanimously recommends that you donot accept the Offer with respect to your Ordinary Shares. The members of our board of directors will directly benefit from the Transaction and have interests in the Transaction that may be different from, or in addition to, the interests of Blue Wolf shareholders. See “The Transaction — Certain Benefits of Blue Wolf’s Directors and Officers and Others in the Transaction.” You must make your own decision as to whether to tender your Ordinary Shares pursuant to the Offer and, if so, how many Ordinary Shares to tender. In doing so, you should read carefully the information in this Offer to Purchase and in the Letter of Transmittal, including the purposes and effects of the Offer. You should discuss whether to tender your Ordinary Shares with your broker, if any, or other financial advisor.
Certain Effects of the Offer
Approximately $14,635,661 will be required to purchase Ordinary Shares in the Offer at the Share Purchase Price of $9.97 per share if the Offer is fully subscribed. In addition, we estimate approximately $1.4 million will be required to pay fees and expenses specifically related to the Offer and Transaction, including costs for legal, accounting, printing and EDGAR filings, services of the Information Agent and Depositary for distribution and handling of Offer materials and other services related to the Offer. In addition, we will be required to pay between $1.0 million and up to approximately $1.4 million in deferred underwriting fees and $400,000 in repayment of outstanding loans from our Sponsor. The purchase of Ordinary Shares in the Offer will be funded by Blue Wolf from the IPO proceeds held in our Trust Account, which will be released to us upon consummation of the Transaction. Assuming LI3’s shareholders timely approve theTransactionand the Transaction is successfully completed, we believe that our anticipated financial condition, cash flow and access to capital will provide us with adequate financial resources to meet our working capital requirements and to fund our activities.
Our securities are registered under the Exchange Act, which requires, among other things, that we furnish certain information to our shareholders and the SEC. We believe that our purchase of Ordinary Shares pursuant to the Offer will not result in the Ordinary Shares becoming eligible for termination of registration under the Exchange Act, and we have no intention to terminate such registration following the Offer. Our securities are currently listed on Nasdaq and, following the Transaction, although there can be no assurance that we will continue to meet the appropriate listing standards, we intend that such securities continue to be so listed on Nasdaq. See “Risk Factors —Risks Related to Blue Wolf.”
Ordinary Shares acquired pursuant to the Offer will be held as treasury shares, subject to future transfer by Blue Wolf unless otherwise retired, provided that Blue Wolf may not hold in treasury more than 50% of its total issued shares under the Act.
Except as disclosed in this Offer to Purchase, including without limitation under the headings “The Transaction,” “The Agreement and Plan of Merger,” “Related Agreements,” “The Offer—Material U.S. Federal Income Tax Considerations— Non-Participation in the Offer”and “Price Range of Securities and Dividends,” Blue Wolf currently has no active plans, proposals or negotiations underway that relate to or would result in:
| · | any extraordinary transaction, such as a merger, reorganization or liquidation involving Blue Wolf; |
| · | any purchase, sale or transfer of a material amount of assets of Blue Wolf; |
| · | any material change in Blue Wolf’s present dividend rate or policy, indebtedness or capitalization; |
| · | any other material change in Blue Wolf’s business; |
| · | any class of equity securities becoming eligible for termination of registration under Section 12(g)(4) of the Exchange Act; |
| · | the acquisition by any person of any material amount of additional securities of Blue Wolf, or the disposition of any material amount of securities of Blue Wolf; or |
| · | any changes to Blue Wolf’s Charter. |
Notwithstanding the foregoing, we reserve the right to change our plans and intentions at any time, as we deem appropriate.
Procedures for Tendering Shares
Valid Tender of Ordinary Shares
For a shareholder to make a valid tender of Ordinary Shares pursuant to the Offer, the Depositary must receive, at its address set forth on the back cover of this Offer to Purchase, and prior to the Expiration Date, the certificates for the Ordinary Shares you wish to tender, or confirmation of receipt of the Ordinary Shares pursuant to the procedure for book-entry transfer described below, together with a validly completed and duly executed Letter of Transmittal, including any required signature guarantees, or an Agent’s Message (as defined below) in the case of a book-entry transfer, and any other required documents.
If a broker, dealer, commercial bank, trust company or other nominee holds your Ordinary Shares, you must contact your broker or nominee to tender your shares. It is likely they have an earlier deadline for you to act to instruct them to tender shares on your behalf. We urge shareholders who hold Ordinary Shares through nominees to consult their nominees to determine whether transaction costs may apply if shareholders tender Ordinary Shares through the nominees and not directly to the Depositary.
Units and Warrants
The Offer is only for Ordinary Shares. No Units or Warrants tendered will be accepted and will be promptly returned. We have outstanding Units comprised of an Ordinary Share and a Warrant. You may tender Ordinary Shares that are included in Units, but to do so you must separate such Ordinary Shares from the Units prior to tendering them.
To separate your Ordinary Shares from the Units, you must instruct your broker to do so for Units held by a broker, dealer, commercial bank, trust company or other nominee on your behalf. Your broker must send written instructions by facsimile to our transfer agent, Continental Stock Transfer & Trust Company, Attention: Joel Kass at (212) 616-7617. Such written instructions must include the number of Units to be split and the nominee holding such Units. Your broker must also initiate electronically, using Depository Trust Company’s (“DTC”) DWAC (Deposit Withdrawal at Custodian) System, a withdrawal of the relevant Units and a deposit of an equal number of Ordinary Shares and Warrants. This must be completed far enough in advance of the Expiration Date to permit your broker to tender pursuant to the Offer the Ordinary Shares received upon the split up of the Units. While this is typically done electronically the same business day, you should allow at least one full business day to accomplish the separation. If you fail to cause your Ordinary Shares to be separated in a timely manner before the Offer expires, you will likely not be able to validly tender your Ordinary Shares prior to the Expiration Date.
If you hold Units registered in your own name, you must deliver the certificate for such Units to our transfer agent, Continental Stock Transfer & Trust Company at 17 Battery Place, 8th Floor, New York, New York 10004, Attention: Joel Kass, with written instructions to separate such Units into Ordinary Shares and Warrants. This must be completed far enough in advance of the Expiration Date to permit the mailing of the certificates for Ordinary Shares back to you so that you may then tender pursuant to the Offer the share certificates received upon the split up of the Units.
Signature Guarantees
No signature guarantee will be required on a Letter of Transmittal if:
(i) the registered holder of the Ordinary Shares (including, for purposes hereof, any participant in DTC whose name appears on a security position listing as the owner of the Ordinary Shares) tendered and the holder has not completed either the box entitled “Special Delivery Instructions” or the box entitled “Special Payment Instructions” on the Letter of Transmittal; or
(ii) Ordinary Shares are tendered for the account of a bank, broker, dealer, credit union, savings association or other entity that is a member in good standing of the Securities Transfer Agents Medallion Program or an “eligible guarantor institution,” as the term is defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing constituting an “eligible institution”). See Instruction 1 to the Letter of Transmittal.
Except as described above, all signatures on any Letter of Transmittal for shares tendered must be guaranteed by an eligible institution. If a certificate is registered in the name of a person other than the person executing a Letter of Transmittal, or if payment is to be made, or Ordinary Shares not purchased or tendered are to be issued and returned, to a person other than the registered holder, then the certificate must be endorsed or accompanied by an appropriate stock power, in either case signed exactly as the name of the registered holder or owner appears on the certificate, with the signatures on the certificate guaranteed by an eligible institution.
In all cases, payment for Ordinary Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for the Ordinary Shares tendered (or a timely confirmation of the book-entry transfer of the securities into the Depositary’s account at DTC, as described above), a properly completed and duly executed Letter of Transmittal, including any required signature guarantees, or an Agent’s Message (as defined below) in the case of a book-entry transfer, and any other documents required by the Letter of Transmittal.
Method of Delivery
The method of delivery of all documents, including certificates for Ordinary Shares, the Letter of Transmittal and any other required documents, is at the sole election and risk of the tendering shareholder. Ordinary Shares will be deemed delivered only when actually received by the Depositary (including, in the case of a book-entry transfer, by book-entry confirmation). If delivery is by mail, we recommend registered mail with return receipt requested, properly insured. In all cases, sufficient time should be allowed to ensure timely delivery.
Book-Entry Delivery
For purposes of the Offer, the Depositary will establish an account with respect to the Ordinary Shares at DTC within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in DTC’s system may make book-entry delivery of securities by causing DTC to transfer those Ordinary Shares into the Depositary’s account in accordance with DTC’s procedures for that transfer. Although delivery of Ordinary Shares may be effected through a book-entry transfer into the Depositary’s account at DTC, a properly completed and duly executed Letter of Transmittal with any required signature guarantees, or an Agent’s Message, and any other required documents must be transmitted to and received by the Depositary at its address on the back cover of this Offer to Purchase prior to the Expiration Date. For the purposes of the Offer, a “business day” means any day other than a Saturday, Sunday, or U.S. federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City time.
The confirmation of a book-entry transfer of shares into the Depositary’s account at DTC is referred to herein as “book-entry confirmation.” Delivery of documents to DTC in accordance with DTC’s procedures will not constitute delivery to the Depositary.
The term “Agent’s Message” means a message transmitted by DTC to, and received by, the Depositary and forming a part of a book-entry confirmation, stating that DTC has received an express acknowledgement from the DTC participant tendering shares that such DTC participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Blue Wolf may enforce such agreement against the DTC participant.
Return of Unpurchased Ordinary Shares
If any tendered shares are not purchased, or if less than all Ordinary Shares evidenced by a shareholder’s certificates are tendered, certificates for unpurchased Ordinary Shares will be returned promptly after the expiration or termination of the Offer or, in the case of shares tendered by book-entry transfer at DTC, the securities will be credited to the appropriate account maintained by the tendering shareholder at DTC, in each case without expense to the shareholder.
Tendering Shareholders’ Representations and Warranties; Tender Constitutes an Agreement
It is a violation of Rule 14e-4 promulgated under the Exchange Act for a person acting alone or in concert with others, directly or indirectly, to tender securities for such person’s own account unless at the time of tender and at the Expiration Date such person has a “net long position” within the meaning of Rule 14e-4 promulgated under the Exchange Act, in the securities or equivalent securities at least equal to the securities being tendered and will deliver or cause to be delivered such securities for the purpose of tendering to us within the period specified in the Offer. A tender of securities made pursuant to any method of delivery set forth herein will constitute the tendering shareholder’s acceptance of the terms and conditions of the Offer, as well as the tendering shareholder’s representation and warranty to us that (i) such shareholder has a “net long position” in securities or the equivalent securities at least equal to the securities being tendered within the meaning of Rule 14e-4 and (ii) such tender of securities complies with Rule 14e-4.
A tender of securities made pursuant to any method of delivery set forth herein will also constitute a representation and warranty to us that the tendering shareholder has full power and authority to tender, sell, assign and transfer the shares tendered, and that, when the same are accepted for purchase by us, we will acquire good, marketable and unencumbered title thereto, free and clear of all security interests, liens, restrictions, claims, encumbrances and other obligations relating to the sale or transfer of the securities, and the same will not be subject to any adverse claim or right. Any such tendering shareholder will, on request by the Depositary or us, execute and deliver any additional documents deemed by the Depositary or us to be necessary or desirable to complete the sale, assignment and transfer of the shares tendered, all in accordance with the terms of the Offer.
All authority conferred or agreed to be conferred by delivery of the Letter of Transmittal shall be binding on the successors, assigns, heirs, personal representatives, executors, administrators and other legal representatives of the tendering shareholder and shall not be affected by, and shall survive, the death or incapacity of such tendering shareholder. A tender of securities made pursuant to any method of delivery set forth herein will also constitute an acknowledgement by the tendering shareholder that: (i) the Offer is discretionary and may be extended, modified, or terminated by us as provided herein; (ii) such shareholder is voluntarily participating in the Offer; (iii) the future value of our Ordinary Shares is unknown and cannot be predicted with certainty; (iv) such shareholder has been advised to read this entire Offer to Purchase, including the Annex thereto; (v) such shareholder has been advised to consult his, her or its tax and financial advisors with regard to how the Offer will impact the tendering shareholder’s specific situation; (vi) any foreign exchange obligations triggered by such shareholder’s tender of Ordinary Shares or receipt of proceeds are solely his, her or its responsibility; and (vii) regardless of any action that we take with respect to any or all income/capital gains tax, social security or insurance tax, transfer tax or other tax-related items (“Tax Items”) related to the Offer and the disposition of securities, such shareholder acknowledges that the ultimate liability for all Tax Items is and remains his, her or its sole responsibility. In that regard, a tender of Ordinary Shares shall authorize us to withhold all applicable Tax Items potentially payable by a tendering shareholder. Our acceptance for payment of shares tendered pursuant to the Offer will constitute a binding agreement between the tendering shareholder and us upon the terms and subject to certain conditions of the Offer.
Determination of Validity; Rejection of Ordinary Shares; Waiver of Defects; No Obligation to Give Notice of Defects
All questions as to the number of shares to be accepted and the validity, form, eligibility (including time of receipt) and acceptance for payment of Ordinary Shares will be determined by us, in our sole discretion, and our determination will be final and binding on all parties, subject to a shareholder’s right to challenge our determination in a court of competent jurisdiction. We reserve the absolute right prior to the Expiration Date to reject any or all tenders we determine not to be in proper form or the acceptance for payment of or payment for which may, in the opinion of our counsel, be unlawful. We also reserve the absolute right, subject to applicable law, to waive any waivable conditions of the Offer with respect to all tendered shares or waive any defect or irregularity in any tender with respect to any particular securities or any particular shareholder whether or not we waive similar defects or irregularities relating thereto in the case of other shareholders. No tender of securities will be deemed to have been validly made until all defects or irregularities have been cured or waived. We will not be liable for failure to waive any condition of the Offer, or any defect or irregularity in any tender of shares. None of Blue Wolf, the Information Agent, the Depositary or any other person will be under any duty to give notification of defects or irregularities in tenders or incur any liability for failure to give any such notification. Our interpretation of the terms of and conditions to the Offer, including each Letter of Transmittal and the instructions thereto, will be final and binding on all parties, subject to a shareholder’s right to challenge our determination in a court of competent jurisdiction. By tendering Ordinary Shares, you agree to accept all decisions we make concerning these matters and waive any rights you might otherwise have to challenge those decisions.
Lost or Destroyed Certificates
If any certificate representing Ordinary Shares has been lost, destroyed or stolen, the shareholder should complete the Letter of Transmittal, indicate the certificate(s) representing Ordinary Shares is lost and return it to the Depositary. The shareholder will then be instructed as to the steps that must be taken in order to replace the certificate. The Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed certificates have been completed. Shareholders are requested to contact the Depositary immediately in order to permit timely processing of this documentation.
Withdrawal Rights
You may withdraw Ordinary Shares that you have previously tendered pursuant to the Offer at any time prior to the Expiration Date, namely 5:00 p.m. on Wednesday, June 19, 2013. Although pursuant to Rule 13e-4(f)(2)(ii) promulgated under the Exchange Act, you would also have the right to withdraw your previously tendered Ordinary Shares at any time after 5:00 p.m., New York City time, on Thursday, July 18, 2013 if not accepted prior to such time, we will cease operations, distribute the proceeds held in our Trust Account to the holders of our Ordinary Shares purchased in our IPO and begin to liquidate Blue Wolf if we do not consummate the Transaction by July 22, 2013. Except as this section otherwise provides, tenders of Ordinary Shares are irrevocable.
For a withdrawal to be effective, a valid written notice of withdrawal must (i) be received in a timely manner by the Depositary at the address set forth on the back cover of this Offer to Purchase and (ii) specify the name of the person having tendered the Ordinary Shares to be withdrawn, the number of Ordinary Shares to be withdrawn and the name of the registered holder of the Ordinary Shares to be withdrawn, if different from the name of the person who tendered the shares. To be effective, a notice of withdrawal must be in writing.
If a shareholder has used more than one Letter of Transmittal or has otherwise tendered Ordinary Shares in more than one group of Ordinary Shares, the shareholder may withdraw Ordinary Shares using either separate notices of withdrawal or a combined notice of withdrawal, so long as the information specified above is included.
If certificates for Ordinary Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of those certificates, the shareholder must submit the serial numbers shown on those certificates to the Depositary and, unless an eligible institution has tendered those shares, an eligible institution must guarantee the signatures on the notice of withdrawal. If Ordinary Shares have been delivered in accordance with the procedures for book-entry transfer described above in “— Procedures for Tendering Shares” above, any notice of withdrawal must also specify the name and number of the account at DTC to be credited with the withdrawn shares and must otherwise comply with DTC’s procedures.
Withdrawals of tenders of Ordinary Shares may not be rescinded, and any Ordinary Shares properly withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. Withdrawn securities may be retendered at any time prior to the Expiration Date by again following one of the procedures described in this section.
All questions as to the form and validity, including the time of receipt, of notices of withdrawal, will be determined by us, in our sole discretion, and our determination will be final and binding on all parties subject to a shareholder’s right to challenge our determination in a court of competent jurisdiction. We reserve the absolute right to waive any defect or irregularity in the withdrawal of securities by any shareholder, whether we waive similar defects or irregularities in the case of other shareholders. None of Blue Wolf, the Information Agent, the Depositary or any other person will be obligated to give notice of any defects or irregularities in any notice of withdrawal, nor will any of them incur liability for failure to give any notice.
If we extend the Offer, are delayed in our purchase of securities or are unable to purchase securities pursuant to the Offer for any reason, then, without prejudice to our rights pursuant to the Offer, the Depositary may, subject to applicable law, retain tendered Ordinary Shares on our behalf. Such Ordinary Shares may not be withdrawn except to the extent tendering shareholders are entitled to withdrawal rights as described in this section. Our reservation of the right to delay payment for Ordinary Shares which we have accepted for payment is limited by Rule 13e-4(f)(5) promulgated under the Exchange Act, which requires that we must pay the consideration offered or return the shares tendered promptly after termination or withdrawal of a tender offer.
Purchase of Shares and Payment of Purchase Price
Upon the terms and subject to certain conditions of the Offer promptly following the Expiration Date (but in no event later than three business days after the Expiration Date), we will accept for payment and pay for (and thereby purchase) up to 1,467,970 Ordinary Shares validity tendered and not properly withdrawn prior to the Expiration Date. There will be no proration in the event that more than 1,467,970 Ordinary Shares are validly tendered and not properly withdrawn in the Offer. If more than 1,467,970 Ordinary Shares have been validly tendered and not properly withdrawn prior to the Expiration Date or if the Merger Condition has not been satisfied, we will either extend the Offer or terminate the Offer and will promptly return all Ordinary Shares tendered at our expense.
For purposes of the Offer, we will be deemed to have accepted for payment (and therefore purchased), subject to the terms and conditions of the Offer, Ordinary Shares that are validly tendered and not properly withdrawn only when, as and if we give oral or written notice to the Depositary of our acceptance of the Ordinary Shares for payment pursuant to the Offer.
In all cases, payment for Ordinary Shares tendered and accepted for payment in the Offer will be made promptly, but only after timely receipt by the Depositary of certificates for Ordinary Shares, or a timely book-entry confirmation of Ordinary Shares into the Depositary’s account at the DTC, a properly completed and duly executed Letter of Transmittal, or an Agent’s Message in the case of a book-entry transfer, and any other required documents. In no event shall payment for Ordinary Shares tendered be made unless the Merger Condition has been satisfied. We will make prompt payment upon satisfaction of the offer conditions, but in no event later than three business days after the Expiration Date.
Blue Wolf will pay for Ordinary Shares purchased in the Offer by depositing the aggregate Purchase Price with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payment from us and transmitting payment to tendering shareholders.
Certificates for all Ordinary Shares tendered and not purchased will be returned or, in the case of Ordinary Shares tendered by book-entry transfer, will be credited to the account maintained with DTC by the broker/dealer participant who delivered the securities, to the tendering shareholder at our expense promptly after the Expiration Date or termination of the Offer, without expense to the tendering shareholders.
Under no circumstances will we pay interest on the Purchase Price, including, but not limited to, by reason of any delay in making payment. In addition, if certain events occur, we may not be obligated to purchase Ordinary Shares pursuant to the Offer. See “— Conditions of the Offer” below.
We will not pay any transfer taxes, if any, payable on the transfer to us of Ordinary Shares purchased pursuant to the Offer. If payment of the Purchase Price is to be made to, or (in the circumstances permitted by the Offer) unpurchased Ordinary Shares are to be registered in the name of, any person other than the registered holder, or if tendered certificates are registered in the name of any person other than the person signing the Letter of Transmittal, the amount of all transfer taxes, if any (whether imposed on the registered holder or the other person), payable on account of the transfer to the person, will be deducted from the Purchase Price, as applicable, unless satisfactory evidence of the payment of the transfer taxes, or exemption from payment of the transfer taxes, is submitted.
We urge shareholders who hold Ordinary Shares through a broker, dealer, commercial bank, trust company or other nominee to consult their nominee to determine whether transaction costs are applicable if they tender Ordinary Shares through their nominee and not directly to the Depositary.
Conditions of the Offer
All the conditions of the Offer within the control of Blue Wolf must be satisfied or waived prior to the Expiration Date (as the same may be extended).Notwithstanding any other provision of the Offer, and in addition to (and not in limitation of) our rights to extend and/or amend the Offer, we will not be required to accept Ordinary Shares tendered and we may terminate or amend the Offer, or postpone our acceptance of the Ordinary Shares that you elect to tender, subject to the rules under the Exchange Act, including Rule 13e-4(f)(5) and Rule 14e-1(c), at any time on or after the commencement of the Offer and before or on the Expiration Date if any of the following events has occurred, or has been determined by us to have occurred, and, in our reasonable judgment in any case, the occurrence of such event or events makes it inadvisable for us to proceed with the Offer:
| · | more than 1,467,970 Ordinary Shares having been validly tendered and not properly withdrawn, subject to our right to accept for payment an additional amount of shares pursuant to the 2% Increase, prior to the Expiration Date. We refer to this condition, which is not waivable, as the “Maximum Tender Condition.” |
| · | the Transaction, in our reasonable judgment, to be determined as of immediately prior to the Expiration Date, is not capable of being consummated contemporaneously with the Offer, but in no event later than three business days after the Expiration Date. For a description of the conditions to the Transaction, see “The Agreement and Plan of Merger— Conditions to the Closing of the Transaction.” We refer to this condition, which is not waivable, as the “Merger Condition.” |
We will not accept for payment, purchase or pay for any Ordinary Shares tendered, and may amend the Offer or may postpone, in accordance with Rule 13e-4(f)(5) under the Exchange Act, the acceptance for payment of, or the purchase of and the payment for Ordinary Shares tendered until the SEC has advised us that they have no further comment with respect to the Offer and its related documents unless we have earlier terminated the Offer. We intend to extend the term of the Offer until such time, and intend to provide interim amendments to the Offer electronically via filings with the SEC to our shareholders. Upon notification from the SEC that it has no further comment regarding the Offer, to the extent the Offer has been materially modified, we will redistribute the Offer to Purchase, as amended or supplemented, or a supplement to a previously distributed Offer to Purchase, and the Letter of Transmittal to our shareholders, setting forth a final Expiration Date.
Furthermore, notwithstanding any other provisions of the Offer, and in addition to (and not in limitation of) the rights and obligations of Blue Wolf to extend, terminate and/or modify the Offer (subject to the terms and conditions of the Agreementand Plan of Merger), we will not be required to accept for payment, purchase or, subject to the applicable rules and regulations of the SEC, pay for any Ordinary Shares tendered, and may terminate or amend the Offer or may postpone, in accordance with Rule 13e-4(f)(5) and Rule 14e-1(a) under the Exchange Act, the acceptance for payment of, or the purchase of and the payment for Ordinary Shares tendered, subject to the rules under the Exchange Act, if at any time on or after the commencement of the Offer and before the Expiration Date the Agreement and Plan of Merger shall have been terminated in accordance with its terms.
In addition: (i) no general suspension of trading in, or limitation on prices for, securities on any U.S. national securities exchange or in the over-the-counter markets in the United States or a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, whether or not mandatory, shall have occurred and (ii) there shall not have been instituted or pending, at any time after the commencement of the Offer and before the Expiration Date, any action, suit or proceeding by any government or governmental, regulatory or administrative agency, authority or tribunal or by any other person, domestic, foreign or supranational, before any court, authority, agency or other tribunal that directly or indirectly, challenges or seeks to make illegal, or to delay or otherwise directly or indirectly to restrain or prohibit the making of the Offer or the acquisition of some or all of the Ordinary Shares pursuant to the Offer.
The foregoing addresses only conditions under which we are not obligated to complete the Offer.The offer conditions referred to above are for our sole benefit and may be asserted by us regardless of the circumstances (other than any action or omission to act by us) giving rise to any condition, and may be waived by us, in whole or in part, at any time during the period beginning on or after the commencement of the Offer and ending before or on the Expiration Date, in our reasonable discretion. Our failure at any time to exercise the foregoing rights will not be deemed a waiver of any right, and each such right will be deemed an ongoing right that may be asserted at any time prior to the Expiration Date and from time to time. However, all of the conditions to the Offer, including theMaximum Tender Condition and theMerger Condition, must have been satisfied or waived prior to the Expiration Date. In certain circumstances, if we waive the conditions described above, we may be required to extend the Expiration Date. Any determination by us concerning the events described above will be final and binding on all parties, subject to a shareholder’s right to challenge our determination in a court of competent jurisdiction.
You should evaluate current market quotes for our Ordinary Shares, among other factors, before deciding whether or not to accept the Offer. See “Price Range of Securities and Dividends” and “Risk Factors.”
Source and Amount of Funds
We expect that up to $14,635,661will be required to purchase Ordinary Shares tendered pursuant to the Offer if the Offer is fully subscribed, and up to an additional $1.4 million will be required to pay fees and expenses specifically related to the Offer, including costs for legal, accounting, printing and EDGAR filings, services of the Information Agent and Depositary for distribution and handling of Offer materials and other services related to the Offer. The purchase of shares tendered in the Offer will be funded by Blue Wolf from the IPO proceeds held in our Trust Account, which will be released upon consummation of the Transaction. Of the approximately $22.5 million of cash in our Trust Account, approximately $14,635,661 million will be allocated to purchase of Ordinary Shares in the Offer, a minimum of $5 million (after payment of the Purchase Price for shares validly tendered in the Offer and payment of our expenses) must be reserved for working capital of the combined company, approximately $1.4 million for fees and expenses incurred by Blue Wolf in connection with the Offer and the Transaction, and between $1.0 million and up to approximately $1.4 million in deferred IPO underwriting fees. The receipt of funds necessary to purchase Ordinary Shares tendered in the Offer is dependent on the consummation of the Transaction.
After the consummation of the Transaction, we believe that our anticipated financial condition, cash flow from operations and access to capital will provide us with adequate financial resources to meet our working capital requirements.
Certain Information Concerning Blue Wolf, Li3 and the Transaction
Set forth elsewhere in this Offer to Purchase is information concerning Blue Wolf, Li3 and the Transaction. Shareholders are urged to review such information, including the information set forth in “Risk Factors,” prior to making a decision whether to tender their Ordinary Shares.
Interests of Directors and Executive Officers; Transactions and Arrangements Concerning the Ordinary Shares
See “The Transaction — Certain Benefits of Blue Wolf’s Directors and Officers and Others in the Transaction,” “The Agreement and Plan of Merger,” “Related Agreements,” “Description of Securities,” “Management Following the Transaction,” “Certain Relationships and Related Transactions,” and “Description of Securities” herein for information related to the proposed Transaction, our management following the consummation of the Transaction and certain transactions and arrangements concerning the securities.
Based on our records and on information provided to us by our directors, executive officers, affiliates and subsidiaries, neither we nor any of our directors, executive officers, affiliates or subsidiaries have effected any transactions involving our Ordinary Shares during the 60 days prior to the date of this Offer to Purchase, other than the 5,794,119 shares we redeemed for $9.97 per share (for a total of $57.8 million) on or about April 18, 2013 in connection with a tender offer we conducted in connection with the extension of our corporate existence.
Certain Legal Matters; Regulatory Approvals
Except as otherwise discussed herein, we are not aware of any license or regulatory permit that is material to our business that might be adversely affected by our acquisition of Ordinary Shares pursuant to the Offer or of any approval or other action by any government or governmental, administrative or regulatory authority or agency, domestic, foreign or supranational, that would be required for our acquisition or ownership of Ordinary Shares pursuant to the Offer. Should any approval or other action be required, we presently contemplate that we will seek that approval or other action. We are unable to predict whether we will be required to delay the acceptance for payment of or payment for Ordinary Shares tendered pursuant to the Offer pending the outcome of any such matter. There can be no assurance that any approval or other action, if needed, would be obtained or would be obtained without substantial cost or conditions or that the failure to obtain the approval or other action might not result in adverse consequences to our business and financial condition.
Material U.S. Federal Income Tax Considerations
The following summary describes the material U.S. federal income tax consequences of the Offer to U.S. holders (as defined below) whose Ordinary Shares are tendered and accepted for payment. In addition, this summary also describes the material U.S. federal income tax consequences of our expected future activities, which may be relevant to U.S. holders and non-U.S. holders (as defined below) that do not tender their Ordinary Shares in the Offer. This discussion assumes that holders hold Ordinary Shares as capital assets within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”). This discussion does not address all aspects of U.S. federal taxation that may be relevant to a particular holder in light of the holder’s individual investment or tax circumstances. In addition, this discussion does not address (i) state, local or non-U.S. tax consequences, or (ii) the special tax rules that may apply to certain holders, including, without limitation:
| · | tax-exempt organizations; |
| · | financial institutions or broker-dealers; |
| · | non-U.S. individuals, and non-U.S. corporations; |
| · | persons who mark-to-market our stock; |
| · | subchapter S corporations; |
| · | U.S. holders whose functional currency is not the U.S. dollar; |
| · | regulated investment companies and REITs; |
| · | trusts and estates (except to the extent discussed herein); |
| · | persons who received our stock through the exercise of employee stock options or otherwise as compensation; |
| · | persons holding our common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment; |
| · | persons subject to the alternative minimum tax provisions of the Code; |
| · | persons holding our common stock through a partnership or similar pass-through entity; and |
| · | persons holding a 10% or more (by vote or value) beneficial interest in our stock. |
This discussion is based on current provisions of the Code, final, temporary and proposed U.S. Treasury Regulations, judicial opinions, and published positions of the IRS, all as in effect on the date hereof and all of which are subject to differing interpretations or change, possibly with retroactive effect. We have not sought, and will not seek, any ruling from the IRS or any opinion of counsel with respect to the tax consequences discussed herein, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed herein or that any position taken by the IRS would not be sustained.
As used in this discussion, the term “U.S. holder” means a person that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the U.S., (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in the U.S. or under the laws of the U.S., any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust if (a) a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. holders have the authority to control all substantial decisions of the trust, or (b) it has in effect a valid election to be treated as a U.S. holder. As used in this discussion, the term “non-U.S. holder” means a beneficial owner of shares (other than a partnership or other entity treated as a partnership or as a disregarded entity for U.S. federal income tax purposes) that is not a U.S. person.
The tax treatment of a partnership and each partner thereof will generally depend upon the status and activities of the partnership and such partner. A holder that is treated as a partnership for U.S. federal income tax purposes should consult its own tax advisor regarding the U.S. federal income tax considerations applicable to it and its partners.
This discussion is only a summary of material U.S. federal income tax consequences of the Offer and our expected future activities for holders that do not participate in the Offer. Holders are urged to consult their own tax advisors with respect to the particular tax consequences to them of the Offer and our expected future activities for holders that do not participate in the Offer, including the effect of any federal tax laws other than income tax laws, any state, local, or non-U.S. tax laws and any applicable tax treaty.
Exchange of Ordinary Shares Pursuant to the Offer
The exchange of Ordinary Shares for cash pursuant to the Offer will be a taxable redemption of the Ordinary Shares for U.S. federal income tax purposes. The redemption will be treated either as a sale of Ordinary Shares or as a distribution with respect to Ordinary Shares, as more fully described below under “Criteria for Determining Sale or Distribution Treatment under Section 302.”
Criteria for Determining Sale or Distribution Treatment Under Section 302
Whether an exchange of Ordinary Shares for cash pursuant to the Offer qualifies for sale or distribution treatment will depend largely on the total number of Ordinary Shares treated as held by the holder before and after the exchange (including any Ordinary Shares constructively owned by the holder as a result of, among other things, owning Warrants). The exchange of Ordinary Shares for cash pursuant to the Offer generally will be treated as a sale of the Ordinary Shares (rather than as a corporate distribution) if the receipt of cash upon the redemption (i) is “substantially disproportionate” with respect to the holder, (ii) results in a “complete termination” of the holder’s share interest in us or (iii) is “not essentially equivalent to a dividend” with respect to the holder. These tests are explained more fully below. If the receipt of cash pursuant to the Offer is treated as a sale, then holders will have the tax effects described under “Passive Foreign Investment Company Rules” below.
In determining whether any of the foregoing tests are satisfied, a holder takes into account not only Ordinary Shares actually owned by the holder, but also Ordinary Shares that are constructively owned by it. A holder may constructively own, in addition to shares owned directly, shares owned by certain related individuals and entities in which the holder has an interest or that have an interest in such holder, as well as any shares the holder has a right to acquire by exercise of an option, which would generally include Ordinary Shares which could be acquired pursuant to the exercise of the Warrants. In order to meet the substantially disproportionate test, the percentage of our outstanding shares actually and constructively owned by the holder immediately following the redemption must, among other requirements, be less than 80% of the percentage of our outstanding shares actually and constructively owned by the holder immediately before the redemption. There will be a complete termination of a holder’s shares interest if either (i) all of the Ordinary Shares actually and constructively owned by the holder are redeemed or (ii) all of the Ordinary Shares actually owned by the holder are redeemed and the holder is eligible to waive, and effectively waives in accordance with specific rules, the attribution of shares owned by certain family members and the holder does not constructively own any other shares in us. The exchange of Ordinary Shares for cash pursuant to the Offer will be “not essentially equivalent to a dividend” if such exchange results in a “meaningful reduction” of the holder’s proportionate interest in us. Whether the redemption will result in a meaningful reduction in a holder’s proportionate interest will depend on the particular facts and circumstances. However, the IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority shareholder in a publicly held corporation who exercises no control over corporate affairs may constitute such a “meaningful reduction.” Contemporaneous dispositions or acquisitions of Ordinary Shares by a holder or related persons may be deemed to be part of a single integrated transaction for purposes of the foregoing tests. A holder should consult with its own tax advisors in order to determine the appropriate tax treatment to it of tendering Ordinary Shares pursuant to the Offer. A U.S. holder owning at least 1% of our outstanding shares who exchanges any Ordinary Shares for cash pursuant to the Offer may be required to comply with the reporting requirement of U.S. Treasury Regulation Section 1.302-2(b)(2).
If none of the foregoing tests is satisfied, then the exchange of Ordinary Shares for cash pursuant to the Offer will be treated as a corporate distribution and the tax effects will be as described below under “Passive Foreign Investment Company Rules.”
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will be a PFIC if at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income. Alternatively, a foreign corporation will be a PFIC if at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of passive assets.
Because we are a blank check company, with no past or current active business, we believe that we have been a PFIC since our inception.
If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. holder of our Ordinary Shares and the U.S. holder did not make either a timely qualified electing fund (“QEF”) election for our first taxable year as a PFIC in which the U.S. holder held (or was deemed to hold) Ordinary Shares, as described below, such holder generally will be subject to special rules with respect to:
| · | any gain recognized by the U.S. holder on the sale or other disposition of its Ordinary Shares; and |
| · | any “excess distribution” made to the U.S. holder (generally, any distributions to such U.S. holder during a taxable year of the U.S. holder that are greater than 125% of the average annual distributions received by such U.S. holder in respect of the Ordinary Shares during the three preceding taxable years of such U.S. holder or, if shorter, such U.S. holder’s holding period for the Ordinary Shares). |
Under these rules,
| · | the U.S. holder’s gain or excess distribution will be allocated ratably over the U.S. holder’s holding period for the Ordinary Shares; |
| · | the amount allocated to the U.S. holder’s taxable year in which the U.S. holder recognized the gain or received the excess distribution, or to the period in the U.S. holder’s holding period before the first day of our first taxable year in which we are a PFIC, will be taxed as ordinary income; |
| · | the amount allocated to other taxable years (or portions thereof) of the U.S. holder and included in its holding period will be taxed at the highest tax rate in effect for that year and applicable to the U.S. holder; and |
| · | the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. holder. |
In general, a U.S. holder will avoid the PFIC tax consequences described above in respect to our Ordinary Shares by making a timely QEF election to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income) (“QEF inclusions”), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. holder in which or with which our taxable year ends. A subsequent distribution of such earnings and profits that were previously included in income is not taxable as a dividend to such U.S. holders. The tax basis of a U.S. holder’s shares in a QEF will be increased by QEF inclusions that are included in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. A U.S. holder may make a separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
The QEF election is made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. Retroactive QEF elections generally may be made only by filing a protective statement with such return and if certain other conditions are met or with the consent of the IRS. U.S. holders should consult their own tax advisors regarding the availability and tax consequences of a retroactive QEF election under their particular circumstances.
If a U.S. holder did not make a timely QEF election and/or is not eligible for a retroactive QEF election as described above, then the PFIC tax consequences described above will apply unless the U.S. holder made a “purging election.” The purging election creates a deemed sale of such shares at their fair market value. The gain recognized by the purging election will be subject to the special PFIC tax and interest charge rules described above. As a result of the purging election, the U.S. holder will have a new basis and holding period in the Ordinary Shares with respect to which the purging election was made.
If the redemption pursuant to the Offer is treated as a sale, a U.S. holder that made a timely QEF election with respect to our Ordinary Shares generally will recognize capital gain on such sale based on its adjusted basis in its Ordinary Shares (as increased for QEF inclusions previously included in income and decreased by any distributions previously made that were not treated as dividends). On the other hand, a U.S. holder that did not make a QEF election may be subject to the special PFIC tax and interest charge rules described above on any gain realized from a redemption that is treated as a sale.
If the redemption pursuant to the Offer is treated as a corporate distribution, the deemed dividend generally should not be treated as a taxable to the extent attributable to amounts previously included in income by the U.S. holder pursuant to a QEF election. A U.S. holder that did not make a QEF election may be subject to the special PFIC tax and interest charge rules described above on any such deemed dividend.
U.S. holders should consult their own tax advisors regarding the PFIC rules in connection with the Offer.
Information Reporting and Backup Withholding
Under U.S. Treasury Regulations, we must report annually to the IRS and to each holder the amount of dividends paid to such holder on our Ordinary Shares and the tax withheld with respect to those dividends, regardless of whether withholding was required. In the case of a non-U.S. holder, copies of the information returns reporting those dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement.
The gross amount of dividends paid to a holder that fails to provide the appropriate certification in accordance with applicable U.S. Treasury Regulations generally will be reduced by backup withholding at the applicable rate (currently 28%).
In order for a non-U.S. holder to qualify as an exempt recipient, that holder must submit an applicable IRS Form W-8, signed under penalties of perjury, attesting to that holder’s exempt status. A non-U.S. holder that is an exempt recipient is not subject to information reporting and backup withholding on disposition proceeds where the transaction is effected by or through a U.S. office of a broker. U.S. information reporting and backup withholding generally will not apply to a payment of proceeds of a disposition of Ordinary Shares where the transaction is effected outside the U.S. through a foreign office of a foreign broker. However, information reporting requirements, but not backup withholding, generally will apply to such a payment if the broker is (i) a U.S. person, (ii) a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the U.S., (iii) a controlled foreign corporation as defined in the Code or (iv) a foreign partnership with certain U.S. connections, unless the broker has documentary evidence in its records that the holder is a non-U.S. holder and certain conditions are met or the holder otherwise establishes an exemption.
Backup withholding is not an additional tax. Amounts that we withhold under the backup withholding rules may be refunded or credited against the holder’s U.S. federal income tax liability, if any, provided that certain required information is furnished to the IRS in a timely manner. Holders should consult their own tax advisors regarding application of backup withholding in their particular circumstances and the availability of and procedure for obtaining an exemption from backup withholding under current U.S. Treasury Regulations.
Non-Participation in the Offer
Holders of Ordinary Shares who do not tender any of their Ordinary Shares in the Offer will not recognize any gain or loss for U.S. federal income tax purposes as a result of the consummation of the Offer.
Extension of the Offer; Termination; Amendment
We expressly reserve the right, at any time and from time to time prior to the scheduled Expiration Date, and regardless of whether any of the events set forth in “—Conditions of the Offer” shall have occurred or are deemed by us to have occurred, to extend the period of time during which the Offer is open and thereby delay acceptance for payment of, and payment for, any Ordinary Shares. We will effect any such extension by giving oral or written notice of such extension to the Depositary and making a public announcement of the extension. We also expressly reserve the right, in our sole discretion, to terminate the Offer and reject for payment and not pay for any Ordinary Shares not theretofore accepted for payment or paid for or, subject to applicable law, to postpone payment for Ordinary Shares upon the occurrence of any of the conditions specified in “Conditions of the Offer” by giving oral or written notice of the termination or postponement to the Depositary and making a public announcement of the termination or postponement. Our reservation of the right to delay payment for Ordinary Shares which we have accepted for payment is limited by Rule 13e-4(f)(5) and Rule 14e-1(c) under the Exchange Act, which requires that we must pay the consideration offered or return the Ordinary Shares tendered promptly after termination or withdrawal of a tender offer. Subject to compliance with applicable law (including Rule 13e-4 and Rule 14e-1(c) under the Exchange Act), we further reserve the right, in our sole discretion, and regardless of whether any of the events set forth in “Conditions of the Offer” have occurred or are deemed by us to have occurred, to amend the Offer prior to the Expiration Date to increase the Share Purchase Price, or otherwise if we determine such other amendments are required by applicable law or regulation. Amendments to the Offer may be made at any time and from time to time by public announcement. In the case of an extension of the Offer, such announcement must be issued no later than 9:00 a.m., New York City time, on the next business day after the last previously scheduled or announced Expiration Date. Any public announcement made pursuant to the Offer will be disseminated promptly to shareholders in a manner reasonably designed to inform shareholders of the change. Without limiting the manner in which we may choose to make a public announcement, except as required by applicable law or regulation (including Rule 13e-4 and Rule 14e-1(c) under the Exchange Act), we shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by making a release through PR Newswire or another comparable service.
If we materially change the terms of the Offer or the information concerning the Offer, including the material terms of the Agreement and Plan of Merger, we will extend the Offer to the extent required by Rules 13e-4(d)(2), 13e-4(e)(3), and 13e-4(f)(1) promulgated under the Exchange Act. These rules and certain related releases and interpretations of the SEC provide that the minimum period during which a tender offer must remain open following material changes in the terms of the Offer or information concerning the Offer (other than a change in price or a change in percentage of securities sought) will depend on the facts and circumstances, including the relative materiality of the terms or information; however, the Offer will remain open for at least five business days following the date that a notice concerning a material change in the terms of, or information concerning, the Offer is first published, sent or given to shareholders. If (i) we make any change to increase the Share Purchase Price for Ordinary Shares, and (ii) the Offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth business day from, and including, the date that notice of an increase is first published, sent or given to shareholders in the manner specified in this section, the Offer will be extended until the expiration of such period of 10 business days. For purposes of the Offer, a “business day” means any day other than a Saturday, Sunday or federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, New York City time.
Fees and Expenses
We have retained Morrow & Co., LLC to act as Information Agent and Continental Stock Transfer & Trust Company to act as Depositary in connection with the Offer. The Information Agent may contact holders of securities by mail, facsimile and personal interviews and may request brokers, dealers and other nominee shareholders to forward materials relating to the Offer to beneficial owners. The Information Agent and Depositary will receive reasonable and customary compensation for their respective services, will be reimbursed by Blue Wolf for reasonable out-of-pocket expenses and will be indemnified against certain liabilities in connection with the Offer, including certain liabilities under the federal securities laws.
We will not pay any fees or commissions to brokers, dealers or other persons (other than fees to the Information Agent as described above) for soliciting tenders of Ordinary Shares pursuant to the Offer. Shareholders holding securities through brokers, dealers and other nominee shareholders are urged to consult the brokers, dealers and other nominee shareholders to determine whether transaction costs may apply if any such shareholder tenders Ordinary Shares through the brokers, dealers and other nominee shareholders and not directly to the Depositary. We will, however, upon request, reimburse brokers, dealers and commercial banks for customary mailing and handling expenses incurred by them in forwarding the Offer and related materials to the beneficial owners of Ordinary Shares held by them as a nominee or in a fiduciary capacity. No broker, dealer, commercial bank or trust company has been authorized to act as our agent or the agent of the Information Agent or the Depositary for purposes of the Offer. We will not pay or cause to be paid any stock transfer taxes, if any, on our purchase of securities.
In addition, we will incur and pay reasonable and customary fees and expenses for financial printing services.
Miscellaneous
The Offer is not being made to, nor will we accept tenders from, or on behalf of, owners of Ordinary Shares in any state in which the making of the Offer or its acceptance would not comply with the securities or “blue sky” laws of that state. We are not aware of any state in which the making of the Offer or the acceptance of tenders of, purchase of, or payment for, Ordinary Shares in accordance with the Offer would not be in compliance with the laws of such state. We, however, reserve the right to exclude shareholders in any state in which it is asserted that the Offer cannot lawfully be made or tendered Ordinary Shares cannot lawfully be accepted, purchased or paid for. So long as we make a good-faith effort to comply with any state law deemed applicable to the Offer, we believe that the exclusion of holders residing in any such state is permitted under Rule 13e-4(f)(9) promulgated under the Exchange Act.
You should only rely on the information contained in this document or to which we have referred you. We have not authorized any person to provide you with information or make any representation in connection with the Offer other than those contained in this Offer to Purchase, the Letter of Transmittal or in the other documents that constitute a part of the Offer. If given or made, any recommendation or any such information or representation must not be relied upon as having been authorized by us, our board of directors, the Depositary or the Information Agent.
Description of Securities
Blue Wolf
The following is a summary of the rights and preferences of Blue Wolf’s securities and related provisions of its Charter and the Companies Act. While we believe that the following description covers the material terms of our securities, the description may not contain all the information that is important to you. We encourage you to read carefully this entire Offer to Purchase, our Charter and the other documents we refer to for a more complete understanding of our securities. See “Where You Can Find More Information.”
For a summary of the material differences in the securities of Blue Wolf following the Transaction, see “Material Differences in the Rights ofBlue Wolf Shareholders Following The Transaction.”
Blue Wolf is a BVI business company (company number 1637055) and our affairs are governed by our Charter, the Companies Act and the common law of the British Virgin Islands. We are authorized to issue an unlimited number of both Ordinary Shares of no par value and preferred shares of no par value. The following description summarizes certain terms of our shares as set out more particularly in our Charter. Because it is only a summary, it may not contain all the information that is important to you. See “Where You Can Find More Information.”
Units
We consummated the IPO of 8,050,000 Units on July 20, 2011. Each Unit consists of one Ordinary Share and one Warrant. Each Warrant entitles the holder to purchase one Ordinary Share.
Ordinary Shares
Upon closing of our IPO, 10,062,500 Ordinary Shares were issued and outstanding. Upon our purchase of Ordinary Shares validly tendered and not properly withdrawn in connection with our prior tender offer conducted concurrent with the shareholder meeting called, among other things, for the purpose of amending our Charter, we purchased an aggregate of 5,794,119 Ordinary Shares. Consequently as of the date of this Offer to Purchase, there are 4,268,381 Ordinary Shares issued and outstanding (including founder shares).
Under the Companies Act, the Ordinary Shares are deemed to be issued when the name of the shareholder is entered in our register of members. Our register of members is maintained by our transfer agent, Continental Stock & Trust Company, which entered the name of Cede & Co. in our register of members on the closing of the IPO as nominee for each of the respective shareholders. If (a) information that is required to be entered in the register of members is omitted from the register or is inaccurately entered in the register, or (b) there is unreasonable delay in entering information in the register, a shareholder of the company, or any person who is aggrieved by the omission, inaccuracy or delay, may apply to the BVI courts for an order that the register be rectified, and the court may either refuse the application or order the rectification of the register, and may direct the company to pay all costs of the application and any damages the applicant may have sustained.
At any general meeting on a show of hands every ordinary shareholder who is present in person (or, in the case of a shareholder being a corporation, by its duly authorized representative) or by proxy will have one vote and on a poll every shareholder present in person (or, in the case of a shareholder being a corporation, by its duly appointed representative) or by proxy will have one vote for each ordinary share in which such ordinary shareholder is the holder. Voting at any meeting of the ordinary shareholders is by show of hands unless a poll is demanded. A poll may be demanded by shareholders present in person or by proxy if the shareholder disputes the outcome of the vote on a proposed resolution and the chairman shall cause a poll to be taken. Up until the consummation of the earlier of (a) our initial business combination and (b) July 22, 2013, all resolutions of shareholders must be passed on a poll. Prior to the consummation of our initial business combination, the rights attaching to Ordinary Shares (including those provisions designed to provide certain rights and protections to our ordinary shareholders) may only be amended by a resolution of persons holding 65% of our issued and outstanding Ordinary Shares. Other provisions of our Charter may be amended prior to the consummation of our initial business combination if approved by a majority of the votes of shareholders who being so entitled attend and vote at the general meeting (to be decided by poll) or by resolution of the directors. Following the consummation of our initial business combination, the rights and obligations attaching to our Ordinary Shares and other provisions of our Charter may be amended if approved by holders of a majority of the Ordinary Shares who being so entitled attend and vote at the general meeting or by resolution of the directors. Our board of directors is divided into three classes, each of which will generally serve for a term of three years with only one class of directors being elected in each year. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Our shareholders are entitled to receive ratable dividends when, as and if declared by the board of directors out of funds legally available therefore.
We are not required under BVI law to hold an annual meeting of shareholders and we do not currently intend to hold an annual meeting of shareholders until after we consummate our initial business combination. Therefore, if our shareholders want us to hold a meeting prior to such consummation, they may requisition the directors to hold one upon the written request of members entitled to exercise at least 30 percent of the voting rights in respect of the matter for which the meeting is requested. Under British Virgin Islands law, we may not increase the required percentage to call a meeting above such 30 percent level.
Pursuant to our Charter, if we are unable to consummate our initial business combination prior to July 22, 2013, we will, as promptly as reasonably possible but no later than five business days thereafter, distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata to our public shareholders by way of redemption and cease all operations except for the purposes of winding up of our affairs. This redemption of public shareholders from the Trust Account will be done automatically by function of our Charter and prior to any voluntary winding up. Our Sponsor has agreed to waive its right to receive liquidating distributions with respect to its founder shares if we fail to consummate our initial business combination prior to July 22, 2013. However, if our Sponsor or any of our officers, directors or affiliates acquire Public Shares after our IPO, they will be entitled to receive liquidating distributions with respect to such Public Shares if we fail to consummate our initial business combination within the required time period.
Our shareholders are entitled to receive ratable dividends when, as and if declared by the board of directors out of legally available funds. In the event of a liquidation or winding up of the company after our initial business combination, our shareholders are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision is made for each class of shares, if any, having preference over the Ordinary Shares. Our shareholders have no preemptive or other subscription rights. There are no sinking fund provisions applicable to the Ordinary Shares, except that we will provide our shareholders with the redemption rights set forth above.
Founder Shares
The founder shares are identical to the Ordinary Shares included in the Units and holders of founder shares have the same shareholder rights as public shareholders, except that (i) the founder shares are subject to certain transfer restrictions, as described in more detail below, and (ii) our Sponsor has agreed (A) to waive its redemption rights with respect to its founder shares and Public Shares in connection with the consummation of our initial business combination and (B) to waive its redemption rights with respect to its founder shares if we fail to consummate our initial business combination prior to July 22, 2013, although they will be entitled to redemption rights with respect to any Public Shares they hold if we fail to consummate our initial business combination within such time period.
With certain limited exceptions, the founder shares will not be transferable, assignable or salable by our Sponsor until the earlier of (1) one year after the completion of our initial business combination and (2) the date on which we consummate a liquidation, merger, share exchange or other similar transaction after our initial business combination that results in all of our shareholders having the right to exchange their Ordinary Shares for cash, securities or other property. Notwithstanding the foregoing, we agreed with our Sponsor that in the event the sales price of our shares reaches or exceeds $11.50 for any 20 trading days within any 30-trading day period during such one year period, 50% of the founder shares shall be released from the lock-up and, if the sales price of our shares reaches or exceeds $15.00 for any 20 trading days within any 30-trading day period during such one year period, the remaining 50% of the founder shares shall be released from the lock-up. 591,912 of our founder shares were originally subject to forfeiture by our Sponsor as follows: (1) 304,924 founder shares were subject to forfeiture in the event the last sales price of our shares does not equal or exceed $15.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of our initial business combination and (2) 286,988 founder shares were subject to forfeiture in the event the last sales price of our shares does not equal or exceed $12.50 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of our initial business combination. Any forfeiture of shares would be effected by our redeeming such shares from the Sponsor for nominal consideration pursuant to the provisions of the insider letter entered into between us, the Sponsor and the representative of the underwriters. In addition, notwithstanding our Sponsor’s ability to transfer, assign or sell its founder shares to permitted transferees during the lock up periods described above, our Sponsor has agreed not to transfer, assign or sell the founder earn out shares (whether to a permitted transferee or otherwise) before the applicable forfeiture provisions with respect to such shares lapse.
In connection with the Transaction, the Sponsor entered into an agreement with Blue Wolf concurrent with the execution of the Agreement and Plan of Merger pursuant to which it has agreed to forfeit1,610,000 (or80%) of its founder shares (including all of the founder shares that were originally subject to forfeiture) and 3,333,333 (or80%) of its Sponsor Warrants. This forfeiture will take effect by way of redemption. The remaining founder shares held by the Sponsor subsequent to the closing of the Transaction will not be subject to any forfeiture provisions currently in effect. See “Related Agreements—Sponsor Agreement.”
Preferred Shares
Our Charter authorizes the creation and issuance without shareholder approval of an unlimited number of preferred shares divided into five classes, Class A through Class E each with such designation, rights and preferences as may be determined by a resolution of our board of directors to amend the Charter to create such designations, rights and preferences. We have five classes of preferred shares to give us flexibility as to the terms on which each Class is issued. Unlike Delaware law, all shares of a single class must be issued with the same rights and obligations. Accordingly, starting with five classes of preference shares will allow us to issue shares at different times on different terms. No preferred shares are currently issued or outstanding. Accordingly, our board of directors is empowered, without shareholder approval, to issue preferred shares with dividend, liquidation, redemption, voting or other rights which could adversely affect the voting power or other rights of the holders of Ordinary Shares. However, the underwriting agreement prohibits us, prior to our initial business combination, from issuing preferred shares which participate in any manner in the proceeds of the Trust Account, or which vote as a class with the Ordinary Shares on our initial business combination. In addition, the preferred shares could be utilized as a method of discouraging, delaying or preventing a change in control of us. Although we do not currently intend to issue any preferred shares, we may do so in the future.
The rights of preferred shareholders, once the preferred shares are in issue, may only be amended by a resolution to amend our Charter provided such amendment is also approved by a separate resolution of a majority of the votes of preferred shareholders who being so entitled attend and vote at the class meeting of the relevant preferred class. If our preferred shareholders want us to hold a meeting of preferred shareholders (or of a class of preferred shareholders), they may requisition the directors to hold one upon the written request of preferred shareholders entitled to exercise at least 30 percent of the voting rights in respect of the matter (or class) for which the meeting is requested. Under British Virgin Islands law, we may not increase the required percentage to call a meeting above 30 percent.
Warrants
Public Shareholders’ Warrants
Each Warrant entitles the registered holder to purchase one ordinary share at a price of $12.00 per share, subject to adjustment as discussed below, at any time commencing 30 days after the completion of our initial business combination. The Warrants will expire five years after the completion of our initial business combination, at 5:00 p.m., New York time, or earlier upon redemption or liquidation.
We will not be obligated to issue any Ordinary Shares pursuant to the exercise of a Warrant and will have no obligation to settle such Warrant exercise unless a registration statement under the Securities Act with respect to the Ordinary Shares underlying the Warrants is then effective and a prospectus relating thereto is current, subject to our satisfying our obligations described below with respect to registration. No Warrant will be exercisable and we will not be obligated to issue Ordinary Shares upon exercise of a Warrant unless Ordinary Shares issuable upon such Warrant exercise have been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the Warrants. In the event that the conditions in the two immediately preceding sentences are not satisfied with respect to a Warrant, the holder of such Warrant will not be entitled to exercise such Warrant and such Warrant may have no value and expire worthless. In no event will we be required to net cash settle any Warrant. In the event that a registration statement is not effective for the exercised Warrants, the purchaser of a Unit containing such Warrant will have paid the full purchase price for the Unit solely for the ordinary share underlying such Unit.
We have agreed that as soon as practicable, but in no event later than 15 business days, after the closing of our initial business combination, we will use our best efforts to file with the SEC a post-effective amendment to the registration statement relating to our IPO, or a new registration statement, for the registration, under the Securities Act, of the Ordinary Shares issuable upon exercise of the Warrants, and we will use our best efforts to take such action as is necessary to register or qualify for sale, in those states in which the Warrants were initially offered by us, the Ordinary Shares issuable upon exercise of the Warrants, to the extent an exemption is not available. We will use our best efforts to cause the same to become effective and to maintain the effectiveness of such registration statement, and a current prospectus relating thereto, until the expiration of the Warrants in accordance with the provisions of the warrant agreement. In addition, we agree to use our best efforts to register the Ordinary Shares issuable upon exercise of a Warrant under the blue sky laws of the states of residence of the exercising Warrant holder to the extent an exemption is not available.
If any such post-effective amendment or registration statement has not been declared effective by the 60th business day following the closing of our initial business combination, holders of the Warrants will have the right, during the period beginning on the 61st business day after the closing of our initial business combination and ending upon such post-effective amendment or registration statement being declared effective by the SEC, and during any other period when we will fail to have maintained an effective registration statement covering the Ordinary Shares issuable upon exercise of the Warrants, to exercise such Warrants on a “cashless basis,” by exchanging the Warrants (in accordance with Section 3(a)(9) of the Securities Act or another exemption) for that number of Ordinary Shares equal to the quotient obtained by dividing (x) the product of the number of Ordinary Shares underlying the Warrants, multiplied by the difference between the Warrant exercise price and the fair market value” by (y) the fair market value. For these purposes, fair market value will mean the volume weighted average price of Ordinary Shares as reported during the ten (10) trading day period ending on the trading day prior to the date that notice of exercise is received by the warrant agent from the holder of such Warrants or our securities broker or intermediary.
Once the Warrants become exercisable, we may call the Warrants for redemption:
| • | in whole and not in part; |
| • | at a price of $0.01 per Warrant; |
| • | upon not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each Warrant holder; and |
| • | if, and only if, the reported last sale price of the Ordinary Shares equals or exceeds $18.00 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption to the Warrant holders. |
We will not redeem the Warrants unless an effective registration statement covering the Ordinary Shares issuable upon exercise of the Warrants is current and available throughout the 30-day redemption period.
We have established the last of the redemption criterion discussed above to prevent a redemption call unless there is at the time of the call a significant premium to the Warrant exercise price. If the foregoing conditions are satisfied and we issue a notice of redemption of the Warrants, each Warrant holder will be entitled to exercise his, her or its Warrant prior to the scheduled redemption date. However, the price of the Ordinary Shares may fall below the $18.00 redemption trigger price as well as the $12.00 Warrant exercise price after the redemption notice is issued.
If we call the Warrants for redemption as described above, our management will have the option to require any holder that wishes to exercise his, her or its Warrant to do so on a “cashless basis.” If our management takes advantage of this option, all holders of Warrants would pay the exercise price by surrendering their Warrants for that number of Ordinary Shares equal to the quotient obtained by dividing (x) the product of the number of Ordinary Shares underlying the Warrants, multiplied by the difference between the exercise price of the Warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the Ordinary Shares for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of Warrants. If our management takes advantage of this option, the notice of redemption will contain the information necessary to calculate the number of Ordinary Shares to be received upon exercise of the Warrants, including the “fair market value” in such case. Requiring a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the dilutive effect of a Warrant redemption. We believe this feature is an attractive option to us if we do not need the cash from the exercise of the Warrants after our initial business combination. If we call our Warrants for redemption and our management does not take advantage of this option, members of our Sponsor and their permitted transferees would still be entitled to exercise their Sponsor Warrants for cash or on a cashless basis using the same formula described above that other Warrant holders would have been required to use had all Warrant holders been required to exercise their Warrants on a cashless basis, as described in more detail below.
A holder of a Warrant may notify us in writing in the event it elects to be subject to a requirement that such holder will not have the right to exercise such Warrant, to the extent that after giving effect to such exercise, such person (together with such person’s affiliates), to the warrant agent’s actual knowledge, would beneficially own in excess of 9.8% of the Ordinary Shares outstanding immediately after giving effect to such exercise.
If the number of outstanding Ordinary Shares is increased by a share dividend payable in Ordinary Shares, or by a split-up of Ordinary Shares or other similar event, then, on the effective date of such share dividend, split-up or similar event, the number of Ordinary Shares issuable on exercise of each Warrant will be increased in proportion to such increase in the outstanding Ordinary Shares. A rights offering to holders of Ordinary Shares entitling holders to purchase Ordinary Shares at a price less than the fair market value will be deemed a share dividend of a number of Ordinary Shares equal to the product of (i) the number of Ordinary Shares actually sold in such rights offering (or issuable under any other equity securities sold in such rights offering that are convertible into or exercisable for Ordinary Shares) multiplied by (ii) one (1) minus the quotient of (x) the price per ordinary share paid in such rights offering divided by (y) the fair market value. For these purposes (i) if the rights offering is for securities convertible into or exercisable for Ordinary Shares, in determining the price payable for Ordinary Shares, there will be taken into account any consideration received for such rights, as well as any additional amount payable upon exercise or conversion and (ii) fair market value means the volume weighted average price of Ordinary Shares as reported during the ten (10) trading day period ending on the trading day prior to the first date on which the Ordinary Shares trade on the applicable exchange or in the applicable market, regular way, without the right to receive such rights.
In addition, if we, at any time while the Warrants are outstanding and unexpired, pay a dividend or make a distribution in cash, securities or other assets to the holders of Ordinary Shares on account of such Ordinary Shares (or other of our shares into which the Warrants are convertible), other than (a) as described above, (b) certain ordinary cash dividends, (c) to satisfy the redemption rights of the holders of Ordinary Shares in connection with a proposed initial business combination, or (d) in connection with the redemption of our Public Shares upon our failure to consummate our initial business combination, then the Warrant exercise price will be decreased, effective immediately after the effective date of such event, by the amount of cash and/or the fair market value of any securities or other assets paid on each Ordinary Share in respect of such event.
If the number of outstanding Ordinary Shares is decreased by a consolidation, combination, reverse share split or reclassification of Ordinary Shares or other similar event, then, on the effective date of such consolidation, combination, reverse share split, reclassification or similar event, the number of Ordinary Shares issuable on exercise of each Warrant will be decreased in proportion to such decrease in outstanding Ordinary Shares.
Whenever the number of Ordinary Shares purchasable upon the exercise of the Warrants is adjusted, as described above, the Warrant exercise price will be adjusted by multiplying the Warrant exercise price immediately prior to such adjustment by a fraction (x) the numerator of which will be the number of Ordinary Shares purchasable upon the exercise of the Warrants immediately prior to such adjustment, and (y) the denominator of which will be the number of Ordinary Shares so purchasable immediately thereafter.
In case of any reclassification or reorganization of the outstanding Ordinary Shares (other than those described above or that solely affects the par value of such Ordinary Shares), or in the case of any merger or consolidation of us with or into another corporation (other than a consolidation or merger in which we are the continuing corporation and that does not result in any reclassification or reorganization of our outstanding Ordinary Shares), or in the case of any sale or conveyance to another corporation or entity of the assets or other property of us as an entirety or substantially as an entirety in connection with which we are dissolved, the holders of the Warrants will thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in the Warrants and in lieu of the Ordinary Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented thereby, the kind and amount of shares or other securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or transfer, that the holder of the Warrants would have received if such holder had exercised their Warrants immediately prior to such event. The warrant agreement provides for certain modifications to what holders of Warrants will have the right to purchase and receive upon the occurrence of certain events, and that if less than 70% of the consideration receivable by the holders of Ordinary Shares in the applicable event is payable in the form of Ordinary Shares in the successor entity that is listed for trading on a national securities exchange or on the OTC Bulletin Board, or is to be so listed for trading immediately following such event, then the Warrant exercise price will be reduced in accordance with a formula specified in the warrant agreement.
The Warrants were issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us. You should review a copy of the warrant agreement, which was filed as an exhibit to the registration statement relating to our IPO, for a complete description of the terms and conditions applicable to the Warrants.
The Warrants may be exercised upon surrender of the Warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to us, for the number of Warrants being exercised. The Warrant holders do not have the rights or privileges of holders of Ordinary Shares and any voting rights until they exercise their Warrants and receive Ordinary Shares. After the issuance of Ordinary Shares upon exercise of the Warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.
No fractional shares will be issued upon exercise of the Warrants. If, upon exercise of the Warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up to the nearest whole number the number of Ordinary Shares to be issued to the Warrant holder.
Sponsor Warrants
The Sponsor Warrants (including the Ordinary Shares issuable upon exercise of the Sponsor Warrants) will not be transferable, assignable or salable until 30 days after the completion of our initial business combination (except, among other limited exceptions as described under “Beneficial Ownership of Securities—Transfers of Founder Shares and Sponsor Warrants,” to our officers and directors and other persons or entities affiliated with the Sponsor) and they will not be redeemable by us so long as they are held by members of the Sponsor or their permitted transferees. Otherwise, the Sponsor Warrants have terms and provisions that are identical to those of the Warrants being sold as part of the Units in our IPO, except that such Warrants may be exercised by the holders on a cashless basis. If the Sponsor Warrants are held by holders other than members of the Sponsor or their permitted transferees, the Sponsor Warrants will be redeemable by us and exercisable by the holders on the same basis as the Warrants included in the Units being sold in our IPO.
If holders of the Sponsor Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering their Warrants for that number of Ordinary Shares equal to the quotient obtained by dividing (x) the product of the number of Ordinary Shares underlying the Warrants, multiplied by the difference between the exercise price of the Warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of the Ordinary Shares for the 10 trading days ending on the third trading day prior to the date on which the notice of Warrant exercise is sent to the warrant agent. The reason that we have agreed that these Warrants will be exercisable on a cashless basis so long as they are held by our Sponsor or their affiliates and permitted transferees is because it is not known at this time whether they will be affiliated with us following our initial business combination. If they remain affiliated with us, their ability to sell our securities in the open market will be significantly limited. We expect to have policies in place that prohibit insiders from selling our securities except during specific periods of time. Even during such periods of time when insiders will be permitted to sell our securities, an insider cannot trade in our securities if he or she is in possession of material non-public information. Accordingly, unlike public shareholders who could exercise their Warrants and sell the Ordinary Shares received upon such exercise freely in the open market in order to recoup the cost of such exercise, the insiders could be significantly restricted from selling such securities. As a result, we believe that allowing the holders to exercise such Warrants on a cashless basis is appropriate.
Members of our Sponsor have agreed (except with respect to permitted transferees) not to transfer, assign or sell any of the Sponsor Warrants (including the Ordinary Shares issuable upon exercise of any of these Warrants) until the date that is 30 days after the date we complete our initial business combination, except that, among other limited exceptions as described under “Beneficial Ownership of Securities—Transfers of Founder Shares and Sponsor Warrants,” transfers can be made to our officers and directors and other persons or entities affiliated with the Sponsor. In addition, notwithstanding the members of our Sponsor’s ability to transfer, assign or sell its founder shares to permitted transferees during the lock up periods described herein, our Sponsor has agreed not to transfer, assign or sell the founder earn out shares (whether to a permitted transferee or otherwise) before the applicable forfeiture provisions with respect to such shares lapse.
In connection with the Transaction, the Sponsor entered into an agreement with Blue Wolf concurrent with the execution of the Agreement and Plan of Merger pursuant to which it has agreed to forfeit 80% of its Sponsor Warrants. See “Related Agreements—Sponsor Agreement.”
In order to finance transaction costs in connection with an intended initial business combination, our Sponsor or an affiliate of our Sponsor or certain of our officers and directors may, but are not obligated to, loan us funds as may be required. Up to $500,000 of such loans may be convertible into Warrants of the post business combination entity at a price of $0.75 per Warrant at the option of the lender. The Warrants would be identical to the Sponsor Warrants. See “Certain Relationships and Related Transactions.”
Our Transfer Agent and Warrant Agent
The transfer agent for our Ordinary Shares and warrant agent for our Warrants is Continental Stock Transfer & Trust Company. We have agreed to indemnify Continental Stock Transfer & Trust Company in its roles as transfer agent and warrant agent, its agents and each of its shareholders, directors, officers and employees against all claims and losses that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due to any gross negligence or intentional misconduct of the indemnified person or entity.
Changes in Authorized Shares
We are authorized to issue an unlimited number of shares which will have rights, privileges, restrictions and conditions attaching to them as the shares in issue. We may by resolution of directors or shareholders:
| • | consolidate and divide all or any of our unissued authorized shares into shares of larger or smaller amount than our existing shares; |
| • | reduce the maximum number of Ordinary Shares the Company is authorized to issue; or |
| • | create new classes of shares with preferences to be determined by resolution of the board of directors to amend the Charter to create new classes of shares with such preferences at the time of authorization, although any such new classes of shares, with the exception of the preferred shares, may only be created with prior shareholder approval. |
Pre-emption Rights
There are no pre-emption rights applicable to the issuance of new shares under our Charter.
Variation of Rights of Shares
As permitted by the Companies Act and our Charter, we may vary the rights attached to any class of shares only with the consent of not less than 65% of the votes of all issued and outstanding shares, in the case of the Ordinary Shares prior to our initial business combination and a majority of the votes of shareholders who being so entitled attend and vote at the general meeting following our initial business combination, or more than 50% in the case of the preferred shares of the votes of shareholders who being so entitled attend and vote at a meeting of such class, except where a greater majority is required under our Charter or the Companies Act, provided that that for these purposes the creation, designation or issue of preferred shares with rights and privileges ranking in priority to an existing class of shares is deemed not to be a variation of the rights of such existing class and may in accordance with our Charter be effected by resolution of directors without shareholder approval.
OurInformation Agent
The Information Agent for the Offer is Morrow & Co., LLC, 470 West Avenue, 3rd Floor, Stamford, CT 06902.
Li3
Set forth below is a summary of selected provisions of Li3’s articles of incorporation, bylaws and the Nevada Revised Statutes relating to its capital stock. This summary is not complete. This discussion is subject to the relevant provisions of Nevada law and is qualified in its entirety by reference to the articles of incorporation and bylaws.
Authorized Capital Stock
Li3’s articles of incorporation, as amended, provide for the issuance of 1,000,000,000 shares of capital stock, of which 990,000,000 are shares of common stock, par value $0.001 per share, and 10,000,000 are blank-check preferred stock, par value $0.001 per share.
Equity Securities Issued and Outstanding
As of April 30, 2013, there were issued and outstanding:
| · | 395,497,453 shares of common stock; |
| · | No shares of preferred stock; |
| · | Options to purchase 1,450,000 shares of common stock of which 1,200,000 options are currently exercisable; |
| · | 399,999 shares of common stock issuable pursuant to vested Restricted Stock Units; |
| · | Warrants to purchase 162,776,432 shares of our common stock, all of which warrants are currently exercisable. |
In addition, Li3 has granted the following rights to purchase its securities:
| · | A convertible note in the principal amount of $45,000, which provides that the principal and interest balance due thereon are convertible at the holder’s option pursuant to terms to be mutually agreed upon by Li3 and the holder; to date, no conversion price has been agreed to by the parties; and |
| · | An aggregate of $1,880,000 face amount of zero-coupon convertible notes which are convertible into shares of common stock at the lender’s option at a conversion price of $0.095. |
Common Stock
Holders of Li3’s common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Apart from preferences that may be applicable to any holders of preferred stock outstanding at the time, holders of common stock are entitled to receive dividends, if any, ratably as may be declared from time to time by the Board out of funds legally available thereof. Upon Li3’s liquidation, dissolution or winding up, the holders of common stock are entitled to receive ratably Li3’s net assets available after the payment of all liabilities and liquidation preferences on any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of holders of the common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which Li3 may designate and issue in the future. Each outstanding share of common stock is duly authorized, fully paid and non-assessable.
Preferred Stock
Under the terms of the articles of incorporation, Li3’s board of directors has authority, without any vote or action of stockholders, to issue up to 10,000,000 shares of “blank check” preferred stock in one or more series and to fix the relative rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption terms (including sinking fund provisions) and liquidation preferences and the number of shares constituting a series or the designation of such series.
While Li3 does not currently have any plans for the issuance of preferred stock, the issuance of such preferred stock could adversely affect the rights of the holders of common stock and, therefore, reduce the value of the common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of the common stock until the board of directors determines the specific rights of the holders of the preferred stock; however, these effects may include:
| · | Restricting dividends on the common stock; |
| · | Diluting the voting power of the common stock; |
| · | Impairing the liquidation rights of the common stock; or |
| · | Delaying or preventing a change in control of Li3 without further action by the stockholders. |
Dividends
Since inception, Li3 has not paid any dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future on the common stock. Although Li3 intends to retain its earnings, if any, to finance the exploration and growth of its business, Li3’s board of directors will have the discretion to declare and pay dividends in the future. Payment of dividends in the future will depend upon Li3’s earnings, capital requirements, and other factors, which Li3’s board of directors may deem relevant.
2009 Plan
Li3’s board of directors adopted, and its stockholders approved, the 2009 Plan on October 19, 2009. The 2009 Plan reserves a total of 5,000,000 shares of its common stock for issuance under the 2009 Plan. If an incentive award granted under the 2009 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2009 Plan.
Options
As of April 30, 2013, Li3 has outstanding 1,450,000 nonqualified stock options under the 2009 Plan, with a weighted average exercise price of approximately $0.22 per share, of which options for 1,200,000 are currently vested. For all option grants, Li3’s board of directors has set (or will set) the exercise price of the options at a price equal to or greater than the fair market value of its common stock on the date of grant of the options. Of the outstanding options under the 2009 Plan, 1,200,000 have vested. 200,000 of such options vested immediately and have a five year term, 1,000,000 options were fully vested as of December 31, 2012 and have five year terms, and the remaining 250,000 options vest on September 1, 2013 and have a five year term.
Restricted Stock
On August 11, 2010, Li3 granted to MIZ an award under the 2009 Plan pursuant to which it issued 2,500,000 restricted shares of common stock (the “Restricted Stock”) as part of the compensation for the services of its former Chief Operating Officer, Tom Currin. Following the resignation of Mr. Currin on December 5, 2012, all the restricted shares have vested.
On June 27, 2011, Li3 granted to Luis F. Saenz, its Chief Executive Officer, an award under the 2009 Plan of 700,000 shares of Restricted Stock, vesting in three equal installments on each of January 15, 2012, January 15, 2013 and January 15, 2014, pursuant to the terms of an award agreement between Li3 and Mr. Saenz.
During December 2011, Li3 entered into a one-year employment agreement with its new Vice President of Finance (now called the Chief Financial Officer, the “CFO”) which originally was to begin on January 1, 2012 (amended to March 1, 2012). Pursuant to the agreement, the CFO was granted 250,000 restricted stock units under its 2009 Plan vesting in three equal installments in each of March 1, 2013, March 1, 2014 and March 1, 2015.
Furthermore, Li3 has committed to grant Restricted Stock Units with respect to an aggregate of 900,000 shares; however, it does not currently have enough shares authorized for issuance under the 2009 Plan to satisfy all of these obligations.
Warrants
Li3 has the following outstanding warrants to purchase common stock:
| · | 7,198,584 “A” warrants; $0.26 per share exercise price; expiring November-December 2014; |
| · | 7,269,374 “B” Warrants; $0.38 per share exercise price; expiring November-December 2014; |
| · | 11,729,615 “C Warrants; $0.26 per share exercise price; expiring September 2015; |
| · | 646,645 “Agent C” Warrants; $0.17 per share exercise price; expiring September 2015; |
| · | 1,400,000 “D” Warrants; $0.05 per share exercise price; expiring November 2015 ; |
| · | 4,890,418 “E” Warrants; $0.15 per share exercise price; expiring February 2016; |
| · | 5,416,953 “F” Warrants; $0.35 per share exercise price; expiring February 2016; |
| · | 11,960,049 “G” Warrants; $0.29 per share exercise price; expiring April 2014; |
| · | 1,913,606 “Agent G” Warrants; $0.22 per share exercise price; expiring April 2014; |
| · | 1,500,000 “Lender” Warrants; $0.34 per share exercise price; expiring May 2016; |
| · | 75,000 “Arranger” Warrants; $0.29 per share exercise price; expiring May 2016; |
| · | 800,000 “Consultant” Warrants; $0.29 per share exercise price; expiring April 2014; |
| · | 38,095,300 “POSCAN A” Warrants; $0.20 per share exercise price; expiring September 2014; |
| · | 62,499,938 “POSCAN B” Warrants; $0.20 per share exercise price; expiring August 2015; |
| · | 5,000,000 “POSCAN Bonus” Warrants; $0.15 per share exercise price; expiring August 2014; and |
| · | 2,380,950 “Luscar” Warrants; $0.21 exercise price; expiring August 2017. |
Certain of the warrants, at the option of the holders, may be exercised by cash payment of the exercise price, or by “cashless exercise.” A “cashless exercise” means that in lieu of paying the aggregate purchase price for the shares being purchased upon exercise of the warrants in cash, the holder will forfeit a number of shares underlying the warrants with a “fair market value” equal to such aggregate exercise price. Li3 will not receive proceeds upon exercise of warrants to the extent that such warrants are exercised by cashless exercise. The warrants contain provisions that protect their holders against dilution by adjustment of the exercise price and (in some cases) number of shares issuable upon exercise upon the occurrence of specific events.
At Li3’s option , upon written notice to the holders, it may call the A Warrants or B Warrants for redemption if the closing bid price of Li3’s common stock equals or exceeds $0.75 per share or $1.50 per share, respectively, on any trading day within 20 days prior to such written notice; provided that a registration statement under the Securities Act covering the resale of the shares of common stock issuable upon exercise of the relevant class of Warrants has been effective for at least 45 days and such registration statement remains effective until redemption.
No holder of Warrants will possess any rights as a stockholder with respect to the Warrants, except to the extent such Warrants are exercised.
Convertible Securities
Li3 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 Enhanced Fund Ltd. (“Milestone”). The Convertible Note provides that principal and interest balance due on the Convertible Note are convertible at Milestone’s option pursuant to terms to be mutually agreed upon by Li3 and Milestone in writing at a later date. Li3 and Milestone have not yet negotiated such conversion terms. The Convertible Note is in default as of December 31, 2012 and remains payable to Milestone. To date, no demand or communication has been received from Milestone.
On May 2, 2011, Li3 entered into and simultaneously closed a Credit Agreement for a $1.5 million bridge loan with three private institutional investors. Under the Credit Agreement, Li3 issued to each lender a zero-coupon original issue discount note due February 2, 2012. The notes were originally convertible into shares of the Company’s common stock at the lender’s option at an exercise price of $0.40 per share. The aggregate face amount of the notes at maturity is $1,677,438. Li3 may prepay the notes at it option (together with accrued original issue discount), and must prepay them (together with accrued original issue discount) first out of the net proceeds of any future capital raising transactions by us.
Pursuant to an Amendment and Waiver Agreement between Li3 and the holders of its zero-coupon bridge notes, dated as of August 25, 2011 (the “Waiver Agreement”), effective upon the September 14, 2011, closing of POSCAN’s initial $8 million investment, the zero-coupon bridge notes are now due on June 30, 2012, and Li3 is not required to make any prepayment out of the proceeds of the POSCAN investment. 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 reduced the conversion price of the zero-coupon bridge notes to $0.12 per share.
On September 28, 2012, Li3 entered into a Second Amendment and Waiver Agreement with the holders of the zero-coupon convertible notes (the “Second Waiver Agreement”). Pursuant to the Second Waiver Agreement, the zero-coupon convertible notes’ maturity date was extended to September 28, 2013, and the aggregate principal amount thereof was increased to $1,880,000, which includes an Original Issue Discount of 12.1%. The Waiver Agreement also reduced the conversion price of the zero-coupon bridge notes from $0.12 to $0.095 per share. In connection with the Waiver Agreement, Li3 agreed to pay an arranger a cash fee (“arranger fee”) of $37,600.
Stock Splits
On July 29, 2008, Li3 effected a forward stock split pursuant to which each share of its common stock then outstanding was converted into 3.031578 shares of common stock. Then, on November 16, 2009, Li3 effected another forward stock split pursuant to which each share of its common stock then outstanding was converted into 15.625 shares of common stock. All share and per share amounts in this prospectus have been adjusted to give retroactive effect to such stock splits, unless otherwise stated.
Registration Rights
We granted “piggy-back” registration rights to the investors purchasing units in the 2009 Private Placement and 2010 Private Placements. If Li3 determines to register for sale for cash any of its common stock for its own account or for the account of others, then the holders of the common stock and warrants issued in the 2009 Private Placement and 2010 Private Placements have the right to have such shares, and the shares of common stock issuable upon exercise of the warrants, included in such registration statement, subject to customary exceptions and scale backs.
Li3 granted “demand” registration rights under the POSCAN Agreements that give POSCAN the right to demand registration after 12 months following the date of issuance of any registrable securities under the POSCAN Agreements. Additionally, POSCAN was granted “piggy-back” registration rights. If Li3 registers for sale for cash any of its common stock for its own account or for the account of others, then POSCAN will have the rights to have any registrable securities under the POSCAN Agreements included in such registration statement, subject to customary exceptions and scale backs. All registration rights set forth in the POSCAN Agreements shall terminate five years following the date of the issuance of securities under the POSCAN Agreements.
Rights of First Refusal and Preemptive Rights
Under the POSCAN Agreements, Li3 also granted a “preemptive” right to POSCAN. Li3 agreed not to issue any new securities to any person unless Li3 also offers to POSCAN the right to purchase the number of shares of Common Stock necessary such that POSCAN’s pro rata percentage upon the new issuance remains equal to that prior to the new issuance.
Adjustments to Exercise and Conversion Prices of Outstanding Securities
All of Li3’s outstanding warrants contain weighted-average anti-dilution provisions that will be triggered if and to the extent securities are issued (or deemed issued) for a price per share that is less than the then-effective respective exercise prices of such warrants.
On April 30, 2009, Li3 issued an unsecured Convertible Promissory Note (the “Convertible Note”) to Milestone, bearing an interest rate of 8.25% per annum, in the amount of $45,000, due November 8, 2010. 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 Li3 and Milestone in writing at a later date. Li3 and Milestone have not yet negotiated such conversion terms. The total interest accrued on the Convertible Note at March 31, 2013 and June 30, 2012 was $14,454 and $11,678, respectively.The Convertible Note is in default as of December 31, 2012 and remains payable to Milestone. To date, no demand or communication has been received from Milestone.
Anti-Takeover Effects of Provisions of Nevada State Law
Li3 may be or in the future become subject to Nevada’s control share laws. A corporation is subject to Nevada’s control share law if it has more than 200 stockholders, at least 100 of whom are stockholders of record with addresses in Nevada on the corporation’s stock ledger, and if the corporation does business in Nevada, including through an affiliated corporation. This control share law may have the effect of discouraging corporate takeovers. As of May 16, 2013, we have 188 stockholders of record and none of them have addresses of record in Nevada.
The control share law focuses on the acquisition of a “controlling interest,” which means the ownership of outstanding voting shares that would be sufficient, but for the operation of the control share law, to enable the acquiring person to exercise the following proportions of the voting power of the corporation in the election of directors: (1) one-fifth or more but less than one-third; (2) one-third or more but less than a majority; or (3) a majority or more. The ability to exercise this voting power may be direct or indirect, as well as individual or in association with others.
The effect of the control share law is that an acquiring person, and those acting in association with that person, will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders of the corporation, approved at a special or annual meeting of stockholders. The control share law contemplates that voting rights will be considered only once by the other stockholders. Thus, there is no authority to take away voting rights from the control shares of an acquiring person once those rights have been approved. If the stockholders do not grant voting rights to the control shares acquired by an acquiring person, those shares do not become permanent non-voting shares. The acquiring person is free to sell the shares to others. If the buyer or buyers of those shares themselves do not acquire a controlling interest, the shares are not governed by the control share law.
If control shares are accorded full voting rights and the acquiring person has acquired control shares with a majority or more of the voting power, any stockholder of record, other than the acquiring person, who did not vote in favor of approval of voting rights, is entitled to demand fair value for such stockholder’s shares.
In addition to the control share law, Nevada has a business combination law, which prohibits certain business combinations between Nevada corporations and “interested stockholders” for three years after the interested stockholder first becomes an interested stockholder, unless the corporation’s Board of Directors approves the combination in advance. For purposes of Nevada law, an interested stockholder is any person who is: (a) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the corporation; or (b) an affiliate or associate of the corporation and at any time within the previous three years was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then-outstanding shares of the corporation. The definition of “business combination” contained in the statute is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.
The effect of Nevada’s business combination law is to potentially discourage parties interested in taking control of Li3 from doing so if it cannot obtain the approval of Li3’S board of directors.
Transfer Agent
The transfer agent for Li3’s common stock is Continental Stock Transfer & Trust Company. The transfer agent’s address is 17 Battery Place, New York, New York 10004, and its telephone number is (212) 845-3212.
MATERIAL DIFFERENCES IN THE RIGHTS OF BLUE WOLF SHAREHOLDERS
FOLLOWING THE TRANSACTION
Provisions Relating to Business Combination
Following the consummation of the Transaction, provisions of Articles 30 through 44 of Blue Wolf’s Charter, which afford certain protections to holders of our Ordinary Shares issued as part of the Units in our IPO, will no longer be applicable following the consummation of theTransaction. Such Articles provide for:
| • | Automatic redemption of the Public Shares in the event that Blue Wolf does not consummate a business combination by July 22, 2013. |
| • | Unless a resolution of shareholders in connection with a business combination is required by law or the directors determine to propose such a resolution, Blue Wolf may enter into a business combination without approval by a resolution of shareholders. |
| • | In the event a resolution of shareholders is proposed to approve a business combination, Blue Wolf shall be authorized to consummate the business combination if such resolution of shareholder is passed. |
| • | The redemption of Ordinary Shares held by public shareholders, effective upon consummation of a business combination, for cash equal to the redemption price (as noted below) either through a tender offer or in conjunction with a shareholder vote and the solicitation of proxies. If the redemption is conducted through a tender offer, Blue Wolf shall file tender offer documents with the SEC containing substantially the same financial and other information about the business combination and the redemption rights as is required under the Exchange Act proxy rules. |
Price Range of Securities and Dividends
Blue Wolf
Price Range of Blue Wolf Securities
The Units, Ordinary Shares and Warrants of Blue Wolf are listed on Nasdaq under the symbols “MNGU,” “MNGL” and “MNGLW,” respectively. The Units commenced public trading on July 15, 2011, and the Ordinary Shares and Warrants commenced separate trading on August 3, 2011.
The following table sets forth the high and low sales prices on Nasdaq for our Units, Ordinary Shares and Warrants for the periods indicated.
| | Units | | | Ordinary Shares | | | Warrants | |
Quarter Ended | | Low | | | High | | | Low | | | High | | | Low | | | High | |
March 31, 2013 | | $ | 10.10 | | | $ | 10.38 | | | $ | 9.87 | | | $ | 9.99 | | | $ | 0.29 | | | $ | 0.40 | |
December 31, 2012 | | $ | 10.01 | | | $ | 10.41 | | | $ | 9.80 | | | $ | 10.34 | | | $ | 0.00 | | | $ | 0.40 | |
September 30, 2012 | | $ | 10.10 | | | $ | 10.30 | | | $ | 9.50 | | | $ | 9.90 | | | $ | 0.00 | | | $ | 0.60 | |
June 30, 2012 | | $ | 10.11 | | | $ | 10.94 | | | $ | 9.60 | | | $ | 10.10 | | | $ | 0.60 | | | $ | 0.72 | |
March 31, 2012 | | $ | 10.05 | | | $ | 10.37 | | | $ | 9.50 | | | $ | 10.08 | | | $ | 0.00 | | | $ | 0.72 | |
December 31, 2011 | | $ | 10.05 | | | $ | 10.33 | | | $ | 9.49 | | | $ | 9.62 | | | $ | 0.00 | | | $ | 0.80 | |
September 30, 2011 | | $ | 10.03 | | | $ | 10.49 | | | $ | 9.58 | | | $ | 10.10 | | | $ | 0.65 | | | $ | 0.87 | |
On May 17, 2013, the last reported closing prices of our Units, Ordinary Shares and Warrants were $10.10, $10.75 and $0.10, respectively.
Holders
As of the date of this Offer to Purchase, there were two holders of record of our Ordinary Shares, two holders of record of our Warrants andoneholders of record of our Units.
Dividends
We have not paid any cash dividends on our Ordinary Shares to date and do not intend to pay cash dividends prior to the completion of a business combination. The payment of any cash dividends subsequent to our initial business combination will be within the discretion of our board of directors at such time and subject to the Companies Act. The Companies Act provides that, subject to our Charter the directors may, by resolution, authorize a distribution to shareholders at such time and of such an amount as they think fit, if they are satisfied on reasonable grounds that we will immediately after the distribution, satisfy the ‘solvency test’. A company will satisfy the solvency test if (i) the value of the company’s assets exceeds its liabilities; and (ii) the company is able to pay its debts as they fall due. Where a distribution is made to a shareholder at a time when the company did not, immediately after the distribution, satisfy the solvency test, it may be recovered by the company from the shareholder unless (i) the shareholder received the distribution in good faith and without knowledge of the company’s failure to satisfy the solvency test; (ii) the shareholder has altered his position in reliance on the validity of the distribution; and (iii) it would be unfair to require repayment in full or at all.
In addition, our board of directors is not currently contemplating and does not anticipate declaring any share dividends in the foreseeable future. Further, if we incur any indebtedness in connection with our initial business combination, our ability to declare dividends may be limited by restrictive covenants we may agree to in connection therewith.
Li3
Price Range of Li3 Common Stock
Li3’s common stock trades on the OTCBB under the symbol “LIEG”. The OTCBB is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. An OTCBB equity security generally is any equity that is not listed or traded on a national securities exchange. The following table shows, for the periods indicated, the high and low bid prices per share of the Li3 common stock as reported by the OTCBB quotation service. These bid prices represent prices quoted by broker-dealers on the OTCBB quotation service. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not represent actual transactions.
| | Fiscal Year Ending June 30, 2013 | | | Fiscal Year Ending June 30, 2012 | | | Fiscal Year Ending June 30, 2011 | |
| | High | | | Low | | | High | | | Low | | | High | | | Low | |
| | | | | | | | | | | | | | | | | | |
First Quarter (July 1 - September 30) | | $ | 0.10 | | | $ | 0.06 | | | $ | 0.23 | | | $ | 0.10 | | | $ | 0.42 | | | $ | 0.18 | |
Second Quarter (October 1 – December 31) | | $ | 0.08 | | | $ | 0.05 | | | $ | 0.13 | | | $ | 0.06 | | | $ | 0.32 | | | $ | 0.10 | |
Third Quarter (January 1 – March 31) | | $ | 0.06 | | | $ | 0.03 | | | $ | 0.14 | | | $ | 0.07 | | | $ | 0.51 | | | $ | 0.21 | |
Fourth Quarter (April 1 – June 30) (through May 17, 2013) | | $ | 0.06 | | | $ | 0.03 | | | $ | 0.10 | | | $ | 0.06 | | | $ | 0.45 | | | $ | 0.19 | |
On May 17, 2013, the last reported closing price of Li3’s common stock on the OTCBB was $0.04.
Holders of Common Stock
As of May 8, 2013, there were approximately 188 Li3 stockholders of record. Because shares of Li3’s common stock are held by depositaries, brokers and other nominees, the number of beneficial holders of such shares is substantially larger than the number of stockholders of record. On May 17, 2013, the last reported sale price per share for the Li3 common stock as reported by the OTCBB quotation service was $0.04 per share.
Dividends
Li3 has never declared any cash dividends with respect to its common stock. Future payment of dividends is within the discretion of its board of directors and will depend on our earnings, capital requirements, financial condition and other relevant factors. Li3 presently intends to retain future earnings, if any, for use in its business and it has no present intention to pay cash dividends on its common stock.
Securities Authorized for Issuance under Equity Compensation Plans
The Li3 board of directors adopted, and its stockholders approved, the 2009 Equity Incentive Plan (the “2009 Plan”) on October 19, 2009. The 2009 Plan reserves a total of 5,000,000 shares of common stock for issuance pursuant to awards granted thereunder. If an incentive award granted under the 2009 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2009 Plan.
As of March 31, 2013, Li3 has outstanding 1,450,000 nonqualified stock options under the 2009 Plan, with a weighted average exercise price of approximately $0.22 per share, of which options for 1,200,000 are currently vested. In addition, Li3 has granted (a) an award of 2,500,000 shares of restricted stock under the 2009 Plan, of which 2,500,000 shares are currently issued and vested, and (b) awards of restricted stock units with respect to 950,000 shares of common stock, 550,001 of which are currently issued and vested. For all option grants, the board of directors has set (or will set) the exercise price of the options at a price equal to or greater than the fair market value of the common stock on the date of grant of the options. Of the outstanding options under the 2009 Plan, 1,200,000 have vested. 200,000 of such options vested immediately and have a five year term, 1,000,000 options were fully vested as of December 31, 2012 and have a five year term, and the remaining 250,000 options vest on September 1, 2013 and have a five year term. Furthermore, Li3 has committed to grant Restricted Stock Units with respect to an aggregate of 900,000 shares; however, it does not currently have enough shares authorized for issuance under the 2009 Plan to satisfy all of these obligations.
The following table provides information as of March 31, 2013,with respect to the shares of common stock that may be issued under existing Li3 equity compensation plans:
| | | | | Weighted- | | | | |
| | | | | average | | | Number of securities | |
| | Number of securities | | | Exercise price of | | | remaining available for | |
| | to be issued upon | | | Outstanding | | | future issuance under equity | |
| | exercise of | | | options, | | | compensation plans | |
| | outstanding options, | | | Warrants and | | | (excluding securities reflected | |
| | warrants and rights | | | rights | | | in column (a)) | |
Plan Category | | (a) | | | (b) | | | (c) | |
Equity compensation plans approved by security holders (1) | | | 1,450,000 | | | $ | 0.22 | | | 1,050,000 | (2) |
Equity compensation plans not approved by security holders | | | - | | | | - | | | - | |
Total | | | 1,450,000 | | | $ | 0.22 | | | 1,050,000 | (2) |
(1) Represents the 2009 Equity Incentive Plan.
(2) 950,000 of such shares are reserved for issuance pursuant to Restricted Stock Units granted under the 2009 Plan, of which 550,001 shares have vested.
See “Executive Compensation of Li3” for information regarding individual equity compensation arrangements received by Li3’s executive officers pursuant to their employment agreements with Li3. See “The Agreement and Plan of Merger — Transaction Consideration to be Delivered” for a description of the treatment of Li3’s outstanding options and warrants in the Transaction.
Dividend Policy Following the Transaction
Future payment of dividends is within the discretion of our Board of Directors and will depend on our earnings, capital requirements, financial condition and other relevant factors. We presently intend to retain future earnings, if any, for use in our business and have no present intention to pay cash dividends on our common stock.
BUSINESS OF BLUE WOLF
Introduction
We are a blank check company incorporated as a British Virgin Islands, or BVI, business company limited by shares and formed for the purpose of acquiring, engaging in a share exchange, share reconstruction and amalgamation, purchasing all or substantially all of the assets of, or engaging in any other similar business combination with one or more businesses or assets. While we intended to focus on operating businesses that had their primary operations in Mongolia, we also considered other geographic regions or industries if we believed those regions or industries were better able to provide attractive financial returns to our investors.
To date our efforts have been limited to organizational activities, activities relating to our IPO and activities relating to identifying and evaluating prospective acquisition candidates. The registration statement for the IPO was declared effective July 14, 2011. We consummated the IPO of 8,050,000 Units on July 20, 2011 (including the underwriters’ exercise of their over-allotment option in full). Simultaneously with the consummation of the IPO, we consummated the private sale to our Sponsor of 4,166,667 Sponsor Warrants at $0.75 per Warrant (for an aggregate purchase price of $3,125,000). Upon the closing of the IPO and the private placement, $80,237,500 ($9.97 per share) was placed in the Trust Account, including $2,415,000 in deferred underwriting commissions, payable only upon the consummation of our business combination. In April 2013 Blue Wolf and the underwriters agreed to a modification of such deferred commissions, such that, in lieu of payment of $2.4 million upon consummation of the business combination, the underwriters will receive an amount equal to the sum of (i) $1.0 million and (ii) (a) $1.4 million multiplied by (b) the quotient of (x) the amount of cash remaining in the Trust Account at the closing of the Business Combination after payment of the aggregate Purchase Price to holders of Public Shares that have tendered such shares to Blue Wolf, divided by $80,237,500.
We have not generated any revenues, other than interest income earned on the proceeds held in the Trust Account from our IPO. As of April 30, 2013 approximately $22,470,123 was held in the Trust Account and we had cash outside of the Trust Account of $76,125 (which amounts reflect the balance of loan proceeds received from the Sponsor).Through April 30, 2013, we have withdrawn $11,040 of interest earned on the funds held in the Trust Account.Other than the deferred underwriting commissions, no amounts are payable to the underwriters of our IPO in the event of a business combination.
In January 2013, we issued a non-interest bearing unsecured promissory note (the “January Note”) in the amount of $200,000 to our Sponsor in consideration for the payment by the Sponsor of various expenses. In March 2013, we issued a non-interest bearing unsecured promissory note (the “March Note”) in the amount of $100,000 to our Sponsor in consideration for the payment by the Sponsor of various expenses. In April 2013, we issued a non-interest bearing unsecured promissory note (the “April Note”) in the amount of $100,000 to our Sponsor in consideration for the payment by the Sponsor of various expenses. The January Note, March Note and April Note are due upon consummation of the business combination. They do not have a claim against the Trust Account and will not reduce the per-share redemption price to below $9.97.
Redemption of Public Shares and Liquidation If No Initial Business Combination
Our Sponsor, officers and directors have agreed that we must complete our initial business combination by July 22, 2013. We may not be able to find a suitable target business and consummate our initial business combination within such time period. If we are unable to consummate our initial business combination by July 22, 2013, we will, as promptly as reasonably possible but no later than five business days thereafter, distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata to our public shareholders by way of redemption and cease all operations except for the purposes of winding up of our affairs. This redemption of Public Shares from the Trust Account shall be done automatically by function of our Charter and prior to any voluntary winding up, although at all times subject to the Companies Act.
The redemption will trigger automatic distribution procedures and any subsequent necessary action by us in the discretion of our directors, resulting in our voluntary liquidation and subsequent dissolution. In connection with such a voluntary liquidation, the liquidator would give notice to creditors inviting them to submit their claims for payment, by notifying known creditors (if any) who have not submitted claims and by placing a public advertisement locally in the British Virgin Islands and in Blue Wolf’s principal place of business or in the place the liquidator believes such advertising is most likely to come to the attention of Blue Wolf’s creditors, and taking any other steps he considers appropriate to identify our creditors, after which our assets would be distributed. As soon as our affairs are fully wound-up, the liquidator must complete his statement of account and make a notificational filing with the Registrar. We would be dissolved once the Registrar issues a Certificate of Dissolution.
We will instruct the trustee to distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata, to our public shareholders. Our Sponsor has agreed to waive its redemption rights with respect to its founder shares if we fail to consummate our initial business combination by July 22, 2013. However, to the extent our Sponsor, or any of our officers, directors or affiliates acquire Public Shares in the open market, they will be entitled to redemption rights with respect to such Public Shares if we fail to consummate our initial business combination by July 22, 2013. There will be no redemption rights or liquidating distributions with respect to our Warrants, which will expire worthless in the event we do not consummate our initial business combination by July 22, 2013. We will pay the costs of our liquidation of the Trust Account from our remaining assets outside of the Trust Account. However, if those funds are not sufficient to cover these costs and expenses, we may request the trustee to release to us an amount of up to $50,000 of such accrued interest to pay those costs and expenses. However, the liquidator may determine that he or she requires additional time to evaluate creditors’ claims (particularly if there is uncertainty over the validity or extent of the claims of any creditors). Also, a creditor or shareholder may file a petition with the BVI court which, if successful, may result in our liquidation being subject to the supervision of that court. Such events might delay distribution of some or all of our assets to our public shareholders.
Additionally, in any liquidation proceedings under British Virgin Islands law, the funds held in our Trust Account may be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any such claims deplete the Trust Account we may not be able to return to our public shareholders the liquidation amounts payable to them.
If we were to expend all of the net proceeds of our IPO, other than the proceeds deposited in the Trust Account, and without taking into account interest, if any, earned on the Trust Account, the per-share redemption amount received by shareholders upon our dissolution would be approximately $9.97. The proceeds deposited in the Trust Account could, however, become subject to the claims of our creditors which would have higher priority than the claims of our public shareholders. The actual per-share redemption amount received by shareholders may be less than $9.97 (net of any taxes payable).
Although we seek to have all vendors, service providers, prospective target businesses or other entities with which we do business execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies held in the Trust Account for the benefit of our public shareholders, there is no guarantee that they will execute such agreements or even if they execute such agreements that they would be prevented from bringing claims against the Trust Account including but not limited to fraudulent inducement, breach of fiduciary responsibility or other similar claims, as well as claims challenging the enforceability of the waiver, in each case in order to gain an advantage with respect to a claim against our assets, including the funds held in the Trust Account. If any third party refuses to execute an agreement waiving such claims to the monies held in the Trust Account, our management will perform an analysis of the alternatives available to it and will only enter into an agreement with a third party that has not executed a waiver if management believes that such third party’s engagement would be significantly more beneficial to us than any alternative. Examples of possible instances where we may engage a third party that refuses to execute a waiver include the engagement of a third party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a service provider willing to execute a waiver. In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the Trust Account for any reason. In order to protect the amounts held in the Trust Account, Messr. Kraus and Edwards have agreed that they will be jointly and severally liable to us, if and to the extent any claims by a vendor for services rendered or products sold to us, or a prospective target business with which we have discussed entering into a transaction agreement, reduce the amounts in the Trust Account to below approximately $9.97 per share, except as to any claims by a third party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under our indemnity of the underwriters of our IPO against certain liabilities, including liabilities under the Securities Act. In the event that an executed waiver is deemed to be unenforceable against a third party, Messr. Kraus and Edwards will not be responsible to the extent of any liability for such third party claims. However, Messr. Kraus and Edwards may not be able to satisfy those obligations. None of our officers will indemnify us for claims by third parties including, without limitation, claims by vendors and prospective target businesses. We have not independently verified whether such persons have sufficient funds to satisfy their indemnity obligations and, therefore, our existing shareholders may not able to satisfy those obligations. We believe the likelihood of our existing shareholders having to indemnify the Trust Account is limited because we endeavor to have all vendors and prospective target businesses as well as other entities execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account.
In the event that the proceeds in the Trust Account are reduced below approximately $9.97 per share and Messrs. Kraus or Edwards assert that he is unable to satisfy any applicable obligations or that it has no indemnification obligations related to a particular claim, our independent directors would determine whether to take legal action against such person to enforce its indemnification obligations. While we currently expect that our independent directors would take legal action on our behalf against such person to enforce his indemnification obligations to us, it is possible that our independent directors in exercising their business judgment may choose not to do so in any particular instance. Accordingly, due to claims of creditors, the actual value of the per-share redemption price may be less than $9.97 per share.
We will seek to reduce the possibility that Messr. Kraus and Edwards will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers, prospective target businesses or other entities with which we do business execute agreements with us waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account. Messr. Kraus and Edwards will also not be liable as to any claims under our indemnity of the underwriters of our IPO against certain liabilities, including liabilities under the Securities Act. If we are deemed insolvent for the purposes of the BVI Insolvency Act, 2003 (the “Insolvency Act”) (i.e. (i) it fails to comply with the requirements of a statutory demand that has not been set aside under section 157 of the Insolvency Act; (ii) execution or other process issued on a judgment, decree or order of a British Virgin Islands court in favor of a creditor of ours is returned wholly or partly unsatisfied; or (iii) either the value of our liabilities exceeds its assets, or we are unable to pay its debts as they fall due), then there are very limited circumstances where prior payments made to shareholders or other parties may be deemed to be a “voidable transaction” for the purposes of the Insolvency Act. A voidable transaction would include, for these purposes, payments made as “unfair preferences” or “transactions at an undervalue.” A liquidator appointed over an insolvent company who considers that a particular transaction or payment is a voidable transaction under the Insolvency Act could apply to the British Virgin Islands courts for an order setting aside that payment or transaction in whole or in part.
Additionally, if we enter insolvent liquidation under the Insolvency Act, the funds held in our Trust Account will likely be included in our estate and subject to the claims of third parties with priority over the claims of our shareholders. To the extent any insolvency claims deplete the Trust Account you may not be able to return to our public shareholders the liquidation amounts due them.
Our public shareholders will be entitled to receive funds from the Trust Account only in the event of a redemption to public shareholders prior to any winding up in the event we do not consummate our initial business combination or our liquidation or if they redeem their shares in connection with an initial business combination that we consummate. In no other circumstances shall a shareholder have any right or interest of any kind to or in the Trust Account. In the event we seek shareholder approval in connection with our initial business combination, a shareholder’s voting in connection with the business combination alone will not result in a shareholder’s redeeming its shares to us for an applicable pro rata share of the Trust Account. Such shareholder must have also exercised its redemption rights described above.
Employees
We currently have two executive officers. These individuals are not obligated to devote any specific number of hours to our matters but they intend to devote as much of their time as they deem necessary to our affairs until we have completed our initial business combination. The amount of time they will devote in any time period will vary based on whether a target business has been selected for our initial business combination and the stage of the business combination process we are in. We do not intend to have any full time employees prior to the consummation of our initial business combination.
Properties
We currently maintain our executive offices in Ulaanbaatar, Mongolia. The cost for this space is included in the $10,000 per month fee that we pay our sponsor for office space, utilities and secretarial and administrative services. We consider our current office space adequate for our current operations until consummation of the Transaction.
Legal Proceedings
There are no legal proceedings pending against Blue Wolf.
Management’s Discussion and Analysis
of Financial Condition and Results of Operations of Blue WOLF
The following discussion should be read in conjunction with our financial statements, together with the notes to those statements, included elsewhere herein. Our actual results may differ materially from those discussed in these forward-looking statements because of the risks and uncertainties inherent in future events.
Overview
Blue Wolf is a blank check company formed on March 11, 2011 for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. While our efforts in identifying prospective target businesses were initially focused on businesses within Mongolia, we also considered opportunities in other business sectors or geographic regions. We intend to effectuate our initial business combination using cash from the proceeds of our IPO and the private placement of the Sponsor Warrants, our shares, debt or a combination of cash, shares and debt. In addition, we will not effect a business combination with another blank check company or a similar company with nominal operations.
Results of Operations
Our efforts have been limited to organizational activities, activities relating to our IPO, activities relating to identifying and evaluating prospective acquisition candidates and activities relating to general corporate matters. We have not generated any revenues, other than interest income earned on the proceeds held in the Trust Account. As of March 31, 2013, $80,248,791 was held in the Trust Account (including $2.415 million of deferred underwriting commissions, $3.125 million from the sale of the Sponsor Warrants and $11,543 in accrued interest) and we had cash outside of the Trust Account of $49,340 (which amounts reflect the balance of loan proceeds received from the Sponsor). Interest income on the balance of the Trust Account (net of taxes payable) may be available to us to fund our working capital requirements but given the current interest rates, it is doubtful that we will earn a significant amount of interest. The current low interest rate environment has made it more difficult for such investments to generate sufficient funds, together with the amounts available outside the Trust Account, to locate, conduct due diligence, structure, negotiate and close our initial business combination. Through March 31, 2013, Blue Wolf had not withdrawn any funds from interest earned on the trust proceeds. Other than the deferred underwriting commissions, no amounts are payable to the underwriters of our Public Offering in the event of a business combination.
For the nine months ended March 31, 2013, we had net income of $1,840,369 ($607,559 of expenses, $2,443,333 of gainfrom the change in the fair value of the warrant liability and earned $4,595 of interest income). For the period from March 11, 2011 (date of inception) to March 31, 2013, we had a net income of $3,111,174 ($1,176,202 of expenses, $4,275,833 of gain from the change in fair value of the warrant liability and earned $11,543 in interest income, of which none had been withdrawn as of March 31, 2013.We incurred offering costs of approximately $4,980,000 (including $2,012,500 of underwriting fees paid at closing and $2,415,000 of deferred underwriting commissions), which were charged to shareholders’ equity upon the completion of the IPO.All of our funds in the Trust Account are invested in U.S. government treasury bills with a maturity of 180 days or less.
Liquidity and Capital Resources
On July 20, 2011, we consummated our IPO of 8,050,000 units at a price of $10.00 per unit. Simultaneously with the consummation of our IPO, we consummated the private sale of 4,166,667 Sponsor Warrants to our Sponsor for $3,125,000. We received net proceeds from our IPO and the sale of the Sponsor Warrants of $80,237,500 (including the deferred portion of the underwriting commission of $2.415 million) net of the non-deferred portion of the underwriting commissions of approximately $2.013 million and other offering costs of approximately $665,000 and cash deposited outside of our Trust Account. As of March 31, 2013, we had cash of $49,340, including loans in the amount of $300,000.
Public shareholders of Blue Wolf were afforded the opportunity concurrent with the proxy solicitation with respect to the extension of time to consummate our initial business combination to redeem their Public Shares through a tender offer. On April 16, 2013, the expiration date for the tender offer, an aggregate of 5,794,119 Ordinary Shares had been validly tendered and were accepted for purchase pursuant to the tender offer for an aggregate purchase price of approximately $57.8 million. Consequently, approximately $22.5 million remains in the Trust Account. As a result, the amount of deferred underwriting commissions payable to our IPO underwriters has been modified to provide for a minimum fee of $1.0 million and a maximum fee of up to approximately $1.4 million payable upon consummation of our initial business combination.
We will depend on sufficient interest being earned on the proceeds held in the Trust Account to provide us with additional working capital to identify one or more target businesses, conduct due diligence and complete our initial business combination, as well as to pay any taxes that we may owe. The amounts in the Trust Account may be invested only in U.S. government treasury bills with a maturity of 180 days or less or in money market funds investing solely in U.S. Treasuries and meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act. The current low interest rate environment has made it more difficult for such investments to generate sufficient funds, together with the amounts available outside the Trust Account, to locate, conduct due diligence, structure, negotiate and close our initial business combination. As a result, we may need to seek additional capital to continue our operations. In such event, we intend to borrow sufficient funds from our Sponsor or management team to operate until we close our initial business combination. Neither our Sponsor nor our management team is under any obligation to advance funds to us. If our Sponsor or its affiliate or our management team loans us any funds, they may, at their option, convert up to $500,000 of those loans into warrants at $0.75 per warrant. These warrants would have the same terms as the Sponsor Warrants. Any such loans would be repaid only from funds held outside the Trust Account or from funds released to us upon completion of our initial business combination. If we are unable to complete our initial business combination because we do not have sufficient funds available to us, we will cease operations and liquidate the Trust Account. As of March 31, 2013, loans in the aggregate amount of $300,000 were outstanding, none of which are convertible to warrants.
For the period from July 20, 2011 (consummation of our IPO) through March 31, 2013, we disbursed an aggregate of approximately $980,000 out of the proceeds of our IPO held outside the trust, for legal expenses, accounting expenses and filing fees relating to our SEC reporting obligations, general corporate matters, and miscellaneous expenses.
Off-balance Sheet Financing Arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial assets.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities other than a monthly fee of $10,000 payable to our Sponsor, for office space, utilities, secretarial and administrative services.
We began incurring these fees on July 15, 2011 (the date Blue Wolf’s securities were first listed on Nasdaq) and will terminate upon the earlier of (i) the consummation of an initial business combination or (ii) the liquidation of Blue Wolf. We had a balance outstanding of $60,000 for unpaid fees as of March 31, 2013.
Critical Accounting Policies
The preparation of interim financial statements and related disclosures in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the interim financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:
Cash Equivalents
Blue Wolf considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Development Stage Company
Blue Wolf is considered to be in the development stage as defined by FASB ASC 915, “Development Stage Entities,” and is subject to the risks associated with activities of development stage companies. Blue Wolf’s efforts to date have been limited to organizational activities, activities relating to its IPO, activities relating to identifying and evaluating prospective acquisition candidates and activities relating to general corporate matters. Blue Wolf has not generated any revenues, other than interest income earned on the proceeds held in the Trust Account. Blue Wolf will not generate any operating revenues until after completion of an initial business combination, at the earliest. Blue Wolf will continue to generate non-operating income in the form of interest income on the designated Trust Account until the earlier of our initial business combination or our liquidation.
Redeemable Ordinary Shares
All of the Ordinary Shares sold as part of the Units in the IPO contain a redemption feature which allows for the redemption of Ordinary Shares under Blue Wolf's liquidation or tender offer/stockholder approval provisions. In accordance with ASC 480, redemption provisions not solely within the control of Blue Wolf require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity's equity instruments, are excluded from the provisions of ASC 480. Although Blue Wolf does not specify a maximum redemption threshold, our Charter provides that in no event will Blue Wolf redeem its Public Shares in an amount that would cause its net tangible assets (shareholders' equity) to be less than $5,000,001.
Blue Wolf recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable Ordinary Shares shall be affected by charges against paid-in capital.
Accordingly, at March 31, 2013, 6,782,032 of the 10,062,500 Public Shares are classified outside of permanent equity at their redemption value. The redemption value is equal to the pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable (approximately $9.97 as of March 31, 2013).
Ne Income/(Loss) Per Ordinary Share
Net income/(loss) per share is computed by dividing net income/(loss) applicable to ordinary shareholders by the weighted average number of Ordinary Shares outstanding for the period. The 12,216,667 shares issuable upon exercise of the Warrants related to our IPO and the private placement of the Sponsor Warrants are contingently issuable shares and are excluded from the calculation of diluted earnings per share because they are anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements:
Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on Blue Wolf’s interim financial statements.
Off-Balance Sheet Arrangements
None.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the sensitivity of income to changes in interest rates, foreign exchanges, commodity prices, equity prices and othermarket driven rates or prices. We are not presently engaged in and, if we do not consummate a suitable business combination prior to the prescribed liquidation date of the Trust Account, we may not engage in, any substantive commercial business. Accordingly, we are not and, until such time as we consummate a business combination, we will not be, exposed to significant risks associated with foreign exchange rates, commodity prices, equity prices or other market driven rates or prices. The net proceeds of our IPO held in the Trust Account may be invested by the trustee only in U.S. Treasuries with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act. Given our limited risk in our exposure to government securities and money market funds, we do not view the interest rate risk to be significant.
MANAGEMENT OF BLUE WOLF
Directors and Executive Officers
Our current directors and executive officers are as follows:
Name | | Age | | Position |
| | | | |
Lee Kraus | | 57 | | Chief Executive Officer and Chairman of the Board |
| | | | |
Paul (Nicholas) Edwards | | 51 | | President and Chief Financial Officer |
| | | | |
John A. Shapiro | | 61 | | Director |
| | | | |
George Ireland | | 56 | | Director |
| | | | |
Koji Fusa | | 53 | | Director |
| | | | |
Stephen Quin | | 53 | | Director |
| | | | |
Giacomo E. Di Mase | | 34 | | Director |
| | | | |
Buyankhishig Ishdorj | | 33 | | Vice President, Business Development |
| | | | |
Elena Bagayeva | | 32 | | Vice President, Finance |
Lee Kraus has been our Chief Executive Officer and Chairman of the Board since inception. Mr. Kraus is co-founder of Composite Capital, LLC, an investment management and financial advisory firm with a particular focus on the natural resources sector. In February 2007, he founded the predecessor firm to Composite Capital Advisors, LLC (an affiliate of Composite Capital, LLC), a natural resources financial advisory firm focused principally on activities in Central Asia, including Kazakhstan and Uzbekistan. In February 2011, Mr. Kraus co-founded Blue Wolf Fund L.P., a Cayman Islands exempted limited partnership which makes private and public equity investments in Asia, including Mongolia. All investment decisions of Blue Wolf Fund L.P. are made by Composite Capital, LLC. In March 2011, he co-founded Blue Wolf MHC Ltd., our Sponsor, and has served as a director since inception. In Mr. Kraus has in-depth experience in the natural resources area, and has been actively involved in mergers and acquisitions, restructurings, and debt and equity capital raising for this class of assets on a global basis for three decades. From June 2007 to December 2012, Mr. Kraus served as a director of Max Petroleum, Plc, or Max, an exploration and production company with assets in Kazakhstan and listed on the London Stock Exchange and the Frankfurt Stock Exchange. From September 2007 to January 2008, Mr. Kraus also served as interim Chief Operating Officer of Max. Mr. Kraus is also a member of the board of directors of Duraseal Holding S.r.l., a nanotechnology-based coatings company focused on the oil and gas, aerospace and automotive sectors. From January 2005 until January 2007, Mr. Kraus served as Managing Director and Head of Natural Resources at Dresdner Kleinwort. From 2000 through 2004, he was involved as a venture investor in software startups. From 1991 to 2000, Mr. Kraus worked at Lazard Frères & Co. in mergers and acquisitions. From 1998 to 2000, Mr. Kraus was a Managing Director and served on the Board of Directors of Lazard Moscow. From 1984 to 1991, Mr. Kraus was in Morgan Stanley’s Natural Resources Group. He also served as a field engineer with Schlumberger in Venezuela and as a systems design consulting engineer on refining and petrochemicals projects before studying for his MBA. He received his Bachelors degree in Electrical Engineering from Stanford University and his Masters of Business Administration from the University of Chicago.
We believe Mr. Kraus is well qualified to serve as our Chief Executive Officer and Chairman of the Board due to his public company experience as well as his experience in operations, financing and natural resources. We believe Mr. Kraus’s access to a network of contacts and sources, ranging from private and public company contacts, private equity groups and investment bankers will allow us to generate acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Kraus’s strategic experience and background in negotiating, structuring and consummating numerous business combinations over career spanning four decades will further our purposes of consummating a business combination.
Nicholas Edwards has been our President and Chief Financial Officer since inception. From inception to December 30, 2012, he also served as a director of Blue Wolf. Mr. Edwards is co-founder of Composite Capital LLC, an investment management and financial advisory firm with a particular focus on the natural resources sector. In February 2011, he co-founded Blue Wolf Fund L.P., a Cayman Islands exempted limited partnership which makes private and public equity investments in Asia, including Mongolia. All investment decisions of Blue Wolf Fund L.P. are made by Composite Capital, LLC. In March 2011, Mr. Edwards co-founded Blue Wolf MHC Ltd., our Sponsor, and has served as a director since inception. Since 2003, Mr. Edwards has been the Managing Partner of Nicholas Edwards Investments LLC, a Japan-focused investment management company. From 1995 until 2001, Mr. Edwards was the partner in charge of the Japanese equity business at Warburg Pincus and opened Warburg Pincus’ Tokyo office in 1996. Subsequently, he founded Nicholas Edwards Investments, Japan, a Japan-focused investment management company. At Warburg Pincus, Mr. Edwards’s other areas of responsibility included the firm’s technology investments elsewhere in Asia, specifically in Taiwan, Korea, and Thailand, and mining investments in Latin America, specifically in Mexico, Chile and Peru. From July 1991 until July 1995, Mr. Edwards worked as a portfolio manager in Jardine Fleming in Tokyo. From January 1989 to June 1991, he worked at Robert Fleming in New York, where he ran the Japan equity research sales desk, including the specialist smaller company mandates and the Japan Technology Fund. From July 1984 to January 1989, Mr. Edwards worked as an analyst covering a variety of sectors, including technology and basic raw materials, at Jardine Fleming in Tokyo. He received a First Class Honors degree in Oriental Studies from Oxford University and his Masters degree equivalent from Hiroshima University. Mr. Edwards is fluent in English, Japanese, French and Spanish.
John A. Shapiro has served as a Director since July 2211. Mr. Shapiro has served as a director of Blueknight Energy Partners, L.P., a service provider for companies engaged in the production, distribution and marketing of crude oil and asphalt product, since November 2009. He retired as an officer at Morgan Stanley & Co. in 2008 where he had served for more than 24 years in various capacities, most recently as Global Head of Commodities. While an officer at Morgan Stanley, Mr. Shapiro participated in the successful acquisitions of TransMontaigne Inc. and Heidmar Inc. and served as a member of the board of directors of both companies. Prior to joining Morgan Stanley & Co., Mr. Shapiro worked for Conoco, Inc. and New England Merchants National Bank. Mr. Shapiro has been a lecturer at Princeton University, Harvard University School of Government, HEC Business School (Paris, France) and Oxford University Energy Program (Oxford, UK). In addition, he serves on the board of directors of Citymeals-on-Wheels and holds an MBA from Harvard University and a Bachelors degree in Economics from Princeton University.
We believe Mr. Shapiro is well-qualified to serve as our Director due to his commodity and finance experience. We believe Mr. Shapiro’s access to a network of contacts and sources, ranging from private and public company contacts, private equity groups, and investment bankers will allow us to generate attractive acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Shapiro’s background in commodities, finance and investing will further our purpose of consummating our initial business combination.
George Ireland has served as a Director since May 2011. Mr. Ireland is the Chief Executive Officer and Managing Member of Geologic Resource Partners, LLC and Portfolio Manager of the associated Geologic Resource Funds. Mr. Ireland has over 30 years of experience in most aspects of the mining sector, ranging from field geology to banking and venture capital. Mr. Ireland founded Geologic Resource Partners LLC in 2004. From 2000 to 2004, he was the general partner of Ring Partners, LP, an investment partnership that later merged with the Geologic Resource Fund. From 1991 to 2000, he was an analyst for Knott Partners LP. Mr. Ireland graduated from Phillips Academy and the University of Michigan with a Bachelors degree from the School of Natural Resources. Mr. Ireland also serves on the board of directors of Kiska Metals Corporation (TSX.V: KSK), a mineral exploration company primarily engaged in the exploration and development of mineral properties primarily in the United States and Canada, and Merrill & Ring Inc., a private timber company in the United States. Mr. Ireland served as a director of Uranium Resources, Inc. from 1995 to 2008.
We believe Mr. Ireland is well qualified to serve as our Director due to his public company experience as well as his experience in operations, finance and natural resources. We believe Mr. Ireland’s access to a network of contacts and sources, ranging from private and public company contacts, private equity groups and investment bankers will allow us to generate acquisition opportunities and identify suitable acquisition candidates.
Koji Fusa has served as a Director since July 9, 2012. He served as the Chief Executive Officer and a Director of Sandringham Capital Partners Limited, an investment manager and advisory company in the United Kingdom, since September 2004. Since February 2012, he has also served as chief executive officer and director of Collabrium Japan Acquisition Corporation (Nasdaq: JACQ) a blank check company formed for the purpose of consummating a business combination with one or more businesses or entities. From July 2003 to August 2004, Mr. Fusa served as a Managing Director at Credit Suisse First Boston Ltd. based in London. From July 2200 to June 2003, he served as Head of Investment Banking at Credit Suisse First Boston Ltd. in its Japanese office.
We believe Mr. Fusa is well-qualified to serve as our Director due to his commodity and finance experience. We believe Mr. Fusa’s access to a network of contacts and sources, ranging from private and public company contacts, private equity groups, and investment bankers will allow us to generate attractive acquisition opportunities and identify suitable acquisition candidates. We believe Mr. Fusa’s background in commodity and finance will further our purpose of consummating our initial business combination.
Stephen Quin has served as a Director since August 27, 2012. He is a professional geologist registered with the Association of Professional Engineers and Geoscientists of BC, and a Fellow of the Geologic Association of Canada and Society of Economic Geologists. Mr. Quin has more than 30 years of international experience in exploration, mine development and operations and corporate development. Since January 2011, he has served as President and Chief Executive Officer of Midas Gold Corp. (TSE:MAX), a Canadian company involved in exploration and evaluation of the Golden Meadows Project in Idaho. From November 2008 to December 2010, Mr. Quin served as President and Chief Operating Officer of Capstone Mining Corp. (TSE: CS), a Canadian mining company. From September 2005 until November 2008, Mr. Quin served as President and Chief Executive Officer of Sherwood Copper Corp., where he led the acquisition and subsequent feasibility, financing and development of the Minto Mine in Yukon and, subsequently, its merger with Capstone Mining Corp. Prior to his employment at Sherwood Copper Corp., Mr. Quin served as Executive Vice President (January 1994 to August 2005) and director (May 1987 to June 2002) of Miramar Mining Corporation, where he participated in the acquisition of the Con Mine in the Northwest Territories of Canada and in the acquisition and exploration of the Hope Bay project in Nunavut, Canada. In parallel, Mr. Quin led the acquisition and subsequent exploration of copper and gold properties for Miramar’s affiliate, Northern Orion Exploration, including the giant Agua Rica copper-gold-molybdenum deposit in Argentina. Mr. Quin currently serves as a director of the following Canadian companies: Mercator Minerals Ltd. (TSE: ML), Troon Ventures Ltd. (CVE:TVN) and Chalice Gold Mines Ltd. (TSE:CXN). From May 2005 to July 2011, Mr. Quin served as a director of Rare Element Resources Ltd. (NYSE MKT:REE).
We believe Mr. Quin is well qualified to serve as our Director due to his public company experience as well as his experience in operations, finance and natural resources. We believe Mr. Quin’s access to a network of contacts and sources, ranging from private and public company contacts, private equity groups and investment bankers will allow us to generate acquisition opportunities and identify suitable acquisition candidates.
Giacomo E. Di Mase has served as a Director since December 30, 2012. Mr. Di Mase has served as chief executive officer and a director of Orange Park Records srl, an independent record label and music publishing company in Rome, Italy, since March 2007. From May 2000 to March 2012, Mr. Di Mase served in various capacities including business analyst, business development, and strategic management at Piaggio Aero Industries, an aircraft manufacturing company in Genoa, Italy, which is family owned in partnership with Mubadala and Tata Group. He also serves as a director of Xurex Inc., a company that develops anti-corrosion and anti-abrasion chemicals, Duraseal Coatings Company, a company that produces coatings for drilling and extraction pipes, and Universal Nanotech Ltd., a marketing and public relations company for nanotechnology coating products. Mr. Di Mase received his B.A. in Business Administration from John Cabot University in Rome, Italy.
We believe Mr. Di Mase is well qualified to serve as our Director due to his experience in operations and finance. We believe Mr. Di Mase’s access to a network of contacts and sources, ranging from private and public company contacts, private equity groups and investment bankers will allow us to generate acquisition opportunities and identify suitable acquisition candidates.
Buyankhishig Ishdorj has been our Vice President, Business Development since December 30, 2012. Mr. Ishdorj has served as a Vice President of Composite Capital, LLC, an investment management and financial advisory firm with a particular focus on the natural resources sector, since December 2011 and as an Associate from March 2011 to December 2011. From September 2009 to March 2011, he served as General Manager of Monet Capital Investment, an investment bank in Mongolia. Mr. Ishdorj served as the Head of Marketing and the Chief Operating Officer of Altai Cashmere LLC, a garment manufacturing company, from November 2007 to September 2009. From September 2007 to November 2007, he served as the Chief Executive Officer of UBOS LLC, a trading company owned by Just Group LLC. Mr. Ishdorj served as Manager of Business Development for Just Group LLC, a diversified holding company, from May 2006 to September 2007, and as the Chief Executive Officer of MTML LLC, a trading company, from January 2004 to May 2006. He has served as a board member of the Mongolia-Turkey Association of Mongolia since 2008 and as a member of the Association of New Market since 2011. Mr. Ishdorj received his B.A. in International Relations and Economics at the University of Uludag in Turkey and a M.B.A. in International Relations and Economics at the University of Ankara in Turkey.
Elena Bagayeva has been our Vice President, Finance since December 30, 2012. Ms. Bagayeva has served as project manager at Composite Capital, LLC, an investment management and financial advisory firm with a particular focus on the natural resources sector, since September 2012. From November 2011 to June 2012, she served as manager of corporate development and investor relations of Xanadu Mines Ltd. (ASX:XAM). From October 2009 to November 2011, Ms. Bagayeva served as business development manager and projects coordinator of Wardell Armstrong International Ltd., a United Kingdom consulting company serving the international mineral industry. From February 2006 to September 2009, she served in various capacities at Sary Kazna LLC, an operating subsidiary of Central Asia Metals PLC (AIM:CAML). Ms. Bagayeva received a B.A. in Linguistics from Kazakh State University and is studying for her MBA at the London School of Business and Finance.
Number and Terms of Office of Officers and Directors
Our board of directors is divided into three classes with only one class of directors being elected in each year and each class (except for those directors appointed prior to our first annual meeting of shareholders) serving a three-year term. The term of office of the first class of directors, consisting of Messr. Shapiro and Quin, will expire at our first annual meeting of shareholders. The term of office of the second class of directors, consisting of Messr. Ireland and Fusa, will expire at the second annual meeting of shareholders. The term of office of the third class of directors, consisting of Messr. Kraus and Di Mase, will expire at the third annual meeting of shareholders. Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our Charter as it deems appropriate. Our Charter provide that our officers may consist of a chairman of the board, chief executive officer, president, chief financial officer, vice presidents, secretary, treasurer and such other offices as may be determined by the board of directors.
See “Management Following the Transaction” for a description of the officers and directors of Blue Wolf following the Transaction.
Committees of the Board of Directors
The Board of Directors has established an audit committee and a corporate governance and nominating committee, each of which is comprised of directors who are independent under the Nasdaq listing standards.
Audit Committee
The audit committee of the board of directors consists of Mr. Shapiro (chairman), Mr. Fusa and Mr. Quin. The audit committee’s duties, which are specified in our Audit Committee Charter, include, but are not limited to:
| · | reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in our Form 10-K; |
| · | discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements; |
| · | discussing with management major risk assessment and risk management policies; |
| · | monitoring the independence of the independent auditor; |
| · | verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; |
| · | reviewing and approving all related-party transactions; |
| · | inquiring and discussing with management our compliance with applicable laws and regulations; |
| · | pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed; |
| · | appointing or replacing the independent auditor; |
| · | determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; |
| · | establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and |
| · | approving reimbursement of expenses incurred by our management team in identifying potential target businesses. |
Financial Expert on Audit Committee
The audit committee will at all times be composed exclusively of directors who are “financially literate” as defined under the Nasdaq listing standards. The Nasdaq listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.
In addition, we must certify to Nasdaq that the committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. The board of directors has determined that Mr. Shapiro satisfies Nasdaq’s definition of financial sophistication and also qualifies as an “audit committee financial expert,” as defined under rules and regulations of the SEC.
Corporate Governance and Nominating Committee
The corporate governance and nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The corporate governance and nominating committee considers persons identified by its members, management, shareholders, investment bankers and others. Each of Messr. Ireland and Shapiro serve on the committee, with Mr. Ireland serving as its chair.
Guidelines for Selecting Director Nominees
The guidelines for selecting nominees, which are specified in the Corporate Governance and Nominating Committee Charter, generally provide that persons to be nominated:
| · | should have demonstrated notable or significant achievements in business, education or public service; |
| · | should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and |
| · | should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the shareholders. |
The corporate governance and nominating committee will consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a person’s candidacy for membership on the board of directors. The corporate governance and nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time and will also consider the overall experience and makeup of its members to obtain a broad and diverse mix of board members. The corporate governance and nominating committee does not distinguish among nominees recommended by shareholders and other persons.
Code of Conduct and Ethics
We have adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal securities laws.
Compensation Discussion and Analysis
None of our executive officers or directors has or will receive any cash compensation for services rendered prior to the consummation of our initial business combination. Commencing on July 15, 2011, the date that our securities were first listed on Nasdaq, through the earlier of consummation of our initial business combination and our liquidation, we will pay our Sponsor, an entity controlled by our officers and directors, a total of $10,000 per month for office space, utilities and secretarial and administrative services. Other than this $10,000 per month fee, no compensation of any kind, including finder’s and consulting fees, will be paid to our Sponsor, executive officers and directors, or any of their respective affiliates, for services rendered prior to or in connection with the consummation of our initial business combination. However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. Our independent directors will review on an ongoing basis all material payments to our Sponsor, officers, directors or our or their affiliates.
After the completion of our initial business combination, our directors and/or members of our management team who remain with us may be paid consulting, management or other fees from the combined company with any and all amounts being fully disclosed to shareholders, to the extent then known, in the tender offer materials or proxy solicitation materials furnished to our shareholders in connection with a proposed business combination. However, it is unlikely the amount of such compensation will be known at such time, as executive and director compensation will be determined by the directors of the post-combination company. Any compensation to be paid to our officers will be determined, or recommended to the board of directors for determination, either by a compensation committee constituted solely by independent directors or by a majority of the independent directors on our board of directors.
We do not intend to take any action to ensure that members of our management team maintain their positions with us after the consummation of our initial business combination, although it is possible that some or all of our executive officers and directors may negotiate employment or consulting arrangements to remain with us after the initial business combination. The existence or terms of any such employment or consulting arrangements to retain their positions with us may influence our management’s motivation in identifying or selecting a target business but we do not believe that the ability of our management to remain with us after the consummation of our initial business combination will be a determining factor in our decision to proceed with any potential business combination. We are not party to any agreements with our executive officers and directors that provide for benefits upon termination of employment.
Compensation Committee Interlocks and Insider Participation and Compensation Committee Report
We do not presently have a compensation committee of our board of directors. Our board of directors intends to establish a compensation committee upon the consummation of an initial business combination and, at that time, adopt a charter for such committee. We do not believe a compensation committee is necessary prior to the consummation of an initial business combination because there will be no salary, fees or other compensation paid to our officers or directors prior to such time other than as disclosed herein. All members of our board of directors reviewed the “Compensation Discussion and Analysis” and agreed that it should be included in our public reports.
Business of Li3
General
Li3 Energy, Inc. is a South America based and U.S. listed exploration company in the lithium and mining sector. Li3 aims to acquire, develop and commercialize a significant portfolio of lithium brine deposits in the Americas. Li3 is currently focused on further exploring, developing and commercializing its 60% controlling interest in its flagship Maricunga Project, located in the northeast section of the Salar de Maricunga in Region III of Atacama, in northern Chile. The recently completed technical report produced in accordance with National Instrument 43 101 of the Canadian Securities Administrator proves Maricunga’s attractive lithium and potassium grades and recommends the project to advance to the Feasibility Study stage. Li3 is seeking to be a low cost producer of lithium, potassium nitrate and other mineral products.
In Chile, Li3’s assets consist of 1,888 hectares located within the Salar de Maricunga as well as 4,900 hectares of other prospective land holdings that are strategically located within close proximity to the Salar de Maricunga that could serve as potential processing sites for the project. Together, its total Chilean land holdings consist of 6,788 hectares, and to the best of Li3’s knowledge, it is one of the only companies with an advanced stage lithium and potassium project within the Salar de Maricunga. Li3 plans to continue exploring other synergistic opportunities to further augment and strengthen this property and its land portfolio throughout the region.
Through its strategic partners, Li3 has been evaluating the use of advanced process technologies that may further improve upon the economics and shorten the commercial production timeline of its Maricunga Project. Li3 plans to further evaluate these technologies in pilot/demonstration and test facilities that will measure both effectiveness and economic feasibility when measured against the conventional lithium commercialization process.
Upon Li3 obtaining the necessary permits to exploit lithium, its goals are to:
| · | advance the Maricunga project to the Feasibility Study stage; |
| · | support the global implementation of clean and green energy initiatives; |
| · | meet growing lithium market demand; and |
| · | become a mid-tier, low cost secondary supplier of lithium, potassium nitrate, and other strategic minerals, serving global clients in the energy, fertilizer and specialty chemical industries. |
A summary of Li3’s key recent activities is found below:
| · | May 2011 - Completed acquisition of 60% Controlling Interest in Maricunga Project. |
| · | June 2011 - Maricunga identified as “Top 11 Lithium Projects in the World” - signumBOX. |
| · | August 2011 - Strategic Partnership with POSCO Canada Ltd., a wholly owned subsidiary of POSCO (NYSE: PKX), which established an $18 million Exploration and Development program for Maricunga, among other things. |
| · | September 2011 - Completed $8 million funding tranche with POSCAN and launched $8 million Phase One Plan. |
| · | March 2012 - MOU with POSCO to construct Test Facility (advanced process technology). |
| · | April 2012 - As required by POSCAN, Li3 issued a technical report, which was prepared in accordance with National Instrument 43-101 of the Canadian Securities Administrators validating its earlier exploration campaign at Maricunga recommending the project to advance to the Feasibility Study stage. |
| · | August 2012 - Completed a $10 million funding tranche from POSCAN. |
| · | Sept 2012 - Organized a consortium to bid on auction for lithium exploitation permit. |
| · | Participated in government auction for lithium exploitation permit in September 2012, and initially have been unsuccessful. |
| · | December 2012 – Evaluating the production of potassium and other bi-products from the Maricunga properties. |
| · | March 2013 – Executed MOU with Blue Wolf Mongolia Holdings Corp. to explore a possible business combination. |
| · | April 2013 – Acquired 100% of SLM Cocina Diecinueve de la Hoyada de Maricunga, a Chilean based company. |
| | |
| · | May 2013 – signumBox, a leading, independentresource sector market analysis firm, ranked Li3's Maricunga project in its current state as the 4th top undeveloped lithium project in the world out of 47 other brine salars. |
Li3 believes that if it is successful in (i) advancing the Maricunga Project through the Feasibility Study stage, (ii) obtaining the government of Chile to either reconsider its decision to cancel the 2012 CEOL public offer and instead awards it to the Consortium or adjudicates a new CEOL public offer issued by the government to the Consortium (or any other Li3 entity); (iii) obtaining all other necessary Chilean government approvals/licenses, (iv) closing and acquiring additional land acreage to support further development of the Maricunga project, (v) achieving a Definitive Feasibility Study, and (vi) raising the necessary capital, it could begin commercial production and begin generating revenues by the end of calendar year 2015. However, there can be no assurance that Li3 will achieve its stated objectives. Li3 is led by a management team of seasoned industry veterans with extensive exploration, mining, minerals, finance and commercialization expertise and a board of directors which includes global industry leaders who have advised, led and operated numerous mining entities and an experienced technical team, many of whom have worked on other junior lithium projects.
Li3 is an exploration stage company and as such, it has never generated revenues from operations and currently does not expect to generate any such revenues in the near term.
Strategic Plan
Part of Li3’s strategic plan is to explore and develop its existing projects as well as to identify other synergistic opportunities with new projects with production potential that that could also be advanced in an accelerated manner, with the goal of becoming a company with valuable lithium and other industrial minerals properties. Li3’s primary objective is to become a low cost lithium producer as well as a significant producer of potassium nitrate. Management believes the key to achieving this objective is 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. The third leg of Li3’s strategic plan is to develop improved technologies for the extraction of lithium from brines.
Acquisition of Additional Accretive Land Acreage for Potential Processing Facility
On May 11, 2012, Li3 signed an agreement to receive 100% ownership from a group of 18 concessions, named Verde 1, 2, 3, 4, 5, 6, 7, and Amarillo 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12. These concessions are located in Region III of Atacama in northern Chile, 55km northeast of the city of Copiapo and 70 km west of the Maricunga Project. Collectively, these concessions cover a total area of 4,900 hectares. Li3 paid approximately $10,000 to acquire the property concessions. Li3 is evaluating Llano de Varas as a potential site for processing facilities.
Value added Nitrate Project
Li3 believes that Maricunga, when combined with a potential nitrate acquisition, would create the following rooted synergies:
| · | Based on preliminary chemical analysis, the Maricunga Project has the potential to produce lithium as well as a significant amount of potassium chloride. Li3 believes that production of potassium would significantly improve the economics of any potential Nitrate Acquisition, as sodium nitrate from the caliche deposit can be reacted with potassium chloride (potash) to produce a value added potassium nitrate (KNO3). Potassium nitrate is a valuable product used in fertilizers, which could create additional revenue. |
| · | A stand-alone potential Nitrate project would produce iodine and a sodium sulfate byproduct, which is needed to remove magnesium from brines in order to purify the lithium product. The sodium sulfate can then be used as a low cost raw material which can be employed in Maricunga, subsequently improving its economics. This would generate a credit for the lithium carbonate (Li2CO3) produced at Maricunga. |
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Evaluation of Advanced Process Technologies
As such, the third aspect of Li3’s strategic plan involves exploring the use of technologies that, when measured against the conventional approach to lithium commercialization could possibly improve the project economics and shorten time to market. Li3 believes that the lithium industry (specifically the juniors) has not embarked upon much R&D efforts addressing several critical areas that it hopes to gain a competitive edge if it can improve upon:
1) The approximately 60% lithium yield loss from brine to end-product;
2) The land and capital intensive (CAPEX) foot-print necessary for solar evaporation ponds; and
3) The typical 4 year speed to market of a typical lithium project from start to commercial production.
In the current lithium market, in which three large global companies supply 80% of the world’s lithium with few mid-tier producers, Li3’s management believes that in order to compete it must address these critical areas. Accordingly, Li3 has sought strategic partners who it believes are capable of deploying both the intellectual and financial capital necessary to assist it in these initiatives.
Project Overviews
Chile - Maricunga Project
Location
The Salar de Maricunga is located in Region III of northern Chile at an elevation of approximately 3,750 m. It is classified as a mixed type of salar of the Na-Cl-Ca/SO4 system. The Salar de Maricunga was originally sampled by CORFO (the Chilean governmental organization that promotes economic growth in Chile) in the early 1980s. Based on the due diligence conducted in connection with the acquisition of Li3’s Maricunga interest and on its recently issued technical report, which was prepared in accordance with National Instrument 43-101 of the Canadian Securities Administrator (“NI 43-101 report”), Li3’s management believes the local brine contains high grades of lithium and potassium with reasonable magnesium levels and low sulphate content and the salar had a highly productive aquifer system within the extensive colluvial/alluvial sediments surrounding the salar.
Location of the Salar de Maricunga
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Maricunga Project within the Salar
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The Maricunga property is undeveloped and covers an area of approximately 1,888 hectares comprising six exploitation mining concessions granted by the Chilean government, each held by one of the Maricunga Companies, and is located in the northeast section of the Salar de Maricunga in Region III of Atacama in northern Chile. Each mining concession grants the owner the right to explore and develop commercially, mineral deposits at the Maricunga property, except for lithium, and hydrocarbons (liquid or gas). These mining properties are not subject to royalties or other agreements. However, Li3 must pay annual licenses in March of each year, aggregating approximately $15,000 per year for exploration and exploitation concessions.
On May 20, 2011, Li3 and the Maricunga Sellers signed the Framework Contract of Mining Project Development and Buying and Selling of Shares of Sociedades Legales Mineras Litio 1 a 6 de la Sierra Hoyada de Maricunga, (the “Acquisition Agreement”) whereby Li3, through its Chilean subsidiary, Minera Li Energy SPA (“Minera Li”), acquired from the Maricunga Sellers a 60% interest in each of the Maricunga Companies. The purchase price was $6,370,000 in cash, including amounts paid to agents, and Li3’s 127,500,000 restricted shares of common stock (the “Maricunga Purchase Price Shares”), 50% of which was restricted from sale for nine months and the remainder of which is restricted from sale for 18 months as provided in the Acquisition Agreement (the “Lock-Up”). Li3 has registered all of the Maricunga Purchase Price Shares.
As part of the acquisition, Li3 agreed with the Maricunga Sellers: (a) to increase the number of directors constituting Li3’s board of directors to seven; (b) that the Maricunga Sellers will have the right to nominate three of Li3’s 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 Li3’s 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 of directors by the increase in the number of directors and by resignations, to serve until the next annual meeting of shareholders; (c) that the Nominees shall continue to be nominated as directors by Li3’s management at the next and subsequent annual meetings of its shareholders, and at any special meeting of the shareholders 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 shareholders as provided in Li3’s by-laws); and (d) that if any Nominee is not elected by the shareholders 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 Lock-Up period. Pursuant to these provisions, Li3’s board of directors was expanded and Messrs. De Aguirre, Campos and Fraser were appointed to the board as Nominees of the Maricunga Sellers. While the Lock-Up period has ended, the Nominees will remain as directors until the next shareholder meeting, at which point the Company will not be required to re-nominate them.
Li3 currently maintains 60% ownership of the Maricunga project, with minority shareholders owning the remaining 40%. The Chilean Mining Code (sometimes referred to as “CMC”) requires shareholders of legal mining companies (such as the Maricunga Companies) to contribute their pro rata portion of exploration and exploitation expenses that are established at a shareholders meeting (“Required Contributions”).
At shareholders meetings held on October 6, 2011, the Maricunga Companies established Required Contributions that were to be funded by the shareholders on or prior to January 4, 2012. The minority shareholders of each Maricunga Company defaulted on their obligations to fund such Required Contributions.
The Chilean Mining Code permits any legal mining company to initiate an executive trial, the final resolution of which would state that shares held by shareholders who fail to make any Required Contribution must be sold at a public auction. The Chilean Mining Code establishes that the minimum bid in such auction shall be the amount of the Required Contribution that the defaulting shareholders failed to contribute (the “Default Amount”). The proceeds of such auction shall go first to the relevant legal mining company in the amount of the Default Amount, and any proceeds in excess thereof shall be paid to the defaulting shareholders. If the minimum bid is not achieved in the auction, then the defaulting shareholders’ shares in the legal mining company will be cancelled and each non-defaulting shareholder’s funding obligations will increase proportionally. The defaulting shareholders may cancel this procedure by paying the Default Amount plus expenses at any time before the sale in the public auction.
As the majority shareholder, each of the Maricunga Companies has filed lawsuits distributed to four civil courts of Copiapo, third Region of Atacama, Chile, against each of the minority shareholders seeking either payment of their pro rata portion of costs or an auction of their share of the properties. The minority shareholders have not paid their contributions to the costs of conservation and exploration, which were agreed upon at the shareholders’ meeting on October 6, 2011. Mainly because they are subject to the jurisdiction of four different courts, not all said law suits are in the same procedural stage. Except for one of those law suits, in which no defense was filed, in all the other of those law suits the minority shareholders filed substantially the same defenses. The resolution of those defenses is still pending in 29 of those law suits, while in six of them the court already rejected them. As of today, no court has accepted any defense. The sale in public auction of the shares of each minority shareholder in each Maricunga Company shall take place once and if the defenses filed in the corresponding law suit are finally rejected.
As indicated above, the shares of the minority shareholders of the Maricunga Companies will be cancelled in the scenario where the minimum bid is not achieved in the public auctions of all the law suits. If this scenario occurred, Minera Li would become the exclusive shareholder of each of the Maricunga Companies thereby absorbing them as a matter of law. Note however that (i) the shares of the minority shareholders are subject to pledges, injunction orders and judicial liens created in favor of third parties before the initiation of the above referred law suits; and (ii) there is no legal norm regulating how (i) would impact the absorption outcome.
Finally, in order to prevent the Maricunga Companies from collecting the pro rata share of the minority shareholders in the Required Contributions, groups of minority shareholders filed law suits (12) to obtain the annulment of the six shareholders meetings whereby the Required Contributions were decided. These actions are subject to the Chilean regular civil procedure and all of them are still in the first stage of such procedure (discussion stage).
Under Article 189 of the CMC, the transfer of the mining concession(s) which caused the legal mining company to exist requires the vote of 2/3 of the legal mining company’s shares. The legal mining company requires the same majority for entering into a promise (or equivalent) to totally or partially sell such concession(s). Accordingly and as of today, Minera Li’s rights in the Maricunga Companies are not sufficient to have the Maricunga Companies transfer the Litio 1-6 Concessions or promise to sell them.
The mining industry in Chile is regulated by the Political Constitution of Chile (“Constitution”), the Constitutional Organic Mining Law (“COM”) and the Chilean Mining Code along with other general and special regulations. Specifically, the Constitution provides that the national government is the owner of all mines, although it also states that any individual or company may apply for an Exploration Concession or Exploitation Concession to explore or mine mineral deposits, respectively; the COM regulates all concessions and claims; and the MC elaborates on the provisions of the Constitution and the COM. The civil courts receive applications for concessions, grant concessions, terminate and resolve issues arising with respect to concessions. The National Geology and Mining Service (“NGMS”) within the Chilean Ministry of Mining is responsible for approving the technical requirements related to the form, boundary and location of concessions. The NGMS also maintains a public record of concessions and supervises technical compliance with mining regulations. There is no binding legal code for reporting on mineral resources and reserves The right to explore or exploit a designated area, and apply for concessions is on a first come first served basis, subject to an Exploration concession holder's exclusive right to file for an exploitation concession in respect of their concession area. Concessions can be freely assigned or transferred, mortgaged, and in general subject to any legal contracts. The ownership rights of a concession can be enforced against the government of Chile or any other party.
The ownership rights of a concession holder differ from the ownership rights of a surface title holder in that a concession holder has the right to:
| a) | upon providing the agreed indemnity payment to the surface land holder, occupy as much of the surface land as is necessary for the exploration or exploitation works; |
| b) | impose an easement on an unwilling surface land holder through a simple and summary procedure before the relevant civil court. Certain restrictions will apply where surface land is covered by dwellings and/ or is land where vineyards and fruit trees are planted. The respective surface land holder is entitled to compensation equivalent to the damage effectively suffered as a consequence of the easement, fixed by mutual agreement or judicial resolution, as requested. |
The significant differences between an Exploration Concession and an Exploitation Concession are summarized below:
An exploration concession:
| · | is granted by the competent Chilean Civil Court for an initial period of two years with a right to apply for a further two year period prior upon expiry of the initial concession. Where an extension is granted, the concession holder must relinquish half of the original designated area; |
| · | requires annual payment; |
| · | entitles the owner to explore for minerals in that concession area and to exclude anybody else from doing so; |
| · | provides a right to file for an exploitation concession in respect of all or part of a concession area; |
| · | must be greater than 100 hectares and less than or equal to 15,000 hectares in area; |
| · | does not require an environmental authorization for exploration works unless the exploration involves mining prospecting; |
| · | does not require work to be undertaken on the concession area in order to maintain interest in that concession; and |
| · | does not authorize its owner to exploit the minerals in that concession. |
An exploitation concession:
| · | is of unlimited duration; |
| · | requires annual payment; |
| · | involves a more onerous process for filing and higher costs for filing and compliance; |
| · | does not require work to be undertaken on the concession in order to maintain interest in that concession; |
| · | must be greater than 1 hectare and less than or equal to 5,000 hectares in area; |
| · | does not require an environmental authorization for exploration works unless the exploration involves mining prospecting; |
| · | grants mining rights which prevail over third party claims; and |
| · | entitles the owner to exploit the minerals in that concession area and to exclude anybody else from doing so. |
Li3’s Lithium exploitation mining concessions have the following grant numbers:
| a) | Litio 1- 1/29 is registered in folio 478 overleaf N° 158 year 2004 of the Property Registry kept by the Mine Registrar of Copiapo. |
| b) | Litio 2- 1/29 is registered in folio 485 overleaf N° 159 year 2004 of the Property Registry kept by the Mine Registrar of Copiapo. |
| c) | Litio 3- 1/58 is registered in folio 491 overleaf N° 160 year 2004 of the Property Registry kept by the Mine Registrar of Copiapo. |
| d) | Litio 4- 1/60 is registered in folio 498 N° 161 year 2004 of the Property Registry kept by the Mine Registrar of Copiapo. |
| e) | Litio 5- 1/60 is registered in folio 504 N° 162 year 2004 of the Property Registry kept by the Mine Registrar of Copiapo. |
| f) | Litio 6- 1/60 is registered in folio 511 N° 163 year 2004 of the Property Registry kept by the Mine Registrar of Copiapo. |
The area of each of such concessions is:
| a) | Litio 1- 1/29 - 130 hectares. |
| b) | Litio 2- 1/29 - 143 hectares. |
| c) | Litio 3- 1/58 - 286 hectares. |
| d) | Litio 4- 1/60 - 297 hectares. |
| e) | Litio 5- 1/60 - 300 hectares. |
| f) | Litio 6- 1/60 - 282 hectares. |
Acquisition of “Grandfathered” Lithium Properties
Upon expiry of an option granted by the Sellers in favor of a third party, on April 16, 2013, Minera Li (a 100% wholly-owned subsidiary of Li3) entered into a purchase agreement (the “Purchase Agreement”) with Jose Resk Nara and Carlos Alfonso Iribarren (the “Sellers”) whereby it purchased all of the outstanding shares of SLM Cocina Diecinueve de la Hoyada de Maricunga, a Chilean legal mining company (the “Cocina Company”). Cocina Company is the sole owner of a group of mining concessions named “Cocina 19 through 27” (the “Cocina Mining Concessions”).
Pursuant to the Purchase Agreement, Minera Li agreed to pay the Sellers $7.3 million, of which $2.0 million was paid on the Closing Date, $2.0 million is to be paid 90 days following the Closing Date, $1.8 million is to be paid 180 days after the Closing Date and $100,000 is to be paid annually on the anniversary of the Closing Date for fifteen years beginning in 2014. After the initial $2.0 million payment, Minera Li´s cash balance was approximately $100,000.
The transfer of the shares sold therein is currently in process and once it is completed, Minera Li will absorb, as a matter of law, the Cocina Company. As a consequence thereof, Minera Li will become the sole owner of the Cocina Mining Concessions.
The Cocina Mining Concessions were mortgaged in favor of a third party as a security of the Sellers’ obligations under the option agreement with the third party. The lifting of such mortgages is currently in process.
The Cocina Mining Concessions are located within the northern section of Salar de Maricunga in Region III of Atacama in northern Chile. They are comprised of 450 hectares, increasing Li3’s land holdings within Maricunga to 1,888 hectares. The Cocina Mining Concessions adjoin the company´s existing Litio 1-6 Mining Concessions and were constituted prior to the 1979 Lithium Exploitation Restrictions, meaning that, from a mining law point of view, their holder is authorized (having a constitutionally protected ownership right) to exploit lithium in the area covered by those concessions. It is, however, subject to obtain the NEC authorization as explained above. Also, the exploitation of the Cocina Mining Concessions is not subject to obtaining a CEOL for the exploitation of lithium in the area covered by those concessions; however,and as any mineral exploitation in Chile, it requires, as a condition precedent, all other permits which according to Chilean law are necessary to exploit minerals.
2011 Maricunga Project Exploration and Drilling Campaign
Li3 plans to utilize co-by-product credits in the commercialization of its Maricunga Project. The Maricunga project is being explored as a source of lithium carbonate and potassium chloride, with co-product boric acid. Lithium carbonate would be sold in the open market as battery grade material. Potassium chloride production is planned to be used in the production of potassium nitrate from a potential sodium nitrate/iodine project. If Li3 is successful in acquiring it, or another sodium nitrate/iodine project, a portion of the by-product sodium sulphate production from any iodine operation that Li3 may have, could be returned to Maricunga to adjust the sulphate balance for calcium removal in the lithium brine.
In December 2011, Li3 completed on schedule, the $8 million Phase One of the $18 million Exploration and Development Program established in August 2011. Li3 reported the initial results from brine samples taken during the sonic and reverse circulation well drilling program initiated in October 2011. The drilling contractors used by Li3 in Maricunga are leading Sonic Drilling Contractors and leading Reverse Circulation Well Drilling Contractors. Li3 carried out sonic drilling for the collection of undisturbed samples from continuous core for porosity determinations and brine samples for laboratory chemical analyses. Six sonic boreholes for a total of 900 meters were drilled and completed to a depth of 150 meters each. Li3 carried out reverse circulation well drilling with isolated brine sampling. A total of 884 meters of 6-inch monitoring wells were drilled and a total of 300 meters of 17 inch production wells were drilled.
From the Phase One Program, a total of 431 samples were taken during the drilling and were submitted to the University of Antofagasta in Antofagasta, Chile for analysis. The preliminary laboratory analysis of the 431 Maricunga brine samples, demonstrated the following values and characteristics:
MARICUNGA | | | | | | | | | | | | | | | | | Ratio | | | Ratio | | | Ratio | |
(mg/l) | | K | | | Li | | | Mg | | | Ca | | | SO4 | | | K/Li | | | Mg/Li | | | SO4/Li | |
Average | | | 8,988 | | | | 1,240 | | | | 8,284 | | | | 12,417 | | | | 718 | | | | 7.2 | | | | 6.7 | | | | 0.6 | |
Maximum | | | 14,669 | | | | 2,050 | | | | 15,100 | | | | 31,600 | | | | 2,960 | | | | 7.2 | | | | 7.4 | | | | 1.4 | |
Other Properties
Li3 acquired other interest in certain Peruvian and Argentina properties during 2010. Li3 has determined that these properties were not economically feasible, and as a result, Li3 has impaired any investment in these properties and will not be pursuing them any further. Li3 has recorded an impairment of $300,000 in fiscal 2012 and $50,000 in fiscal 2011 relating to these properties.
Strategic Partners
POSCO / POSCAN
On August 24, 2011, Li3 entered into a Securities Purchase Agreement (the “SPA”) and an Investor Rights Agreement (the “IRA” and, together with the SPA, the “POSCAN Agreements”) with POSCO Canada Ltd. (“POSCAN”), a wholly owned subsidiary of POSCO. Pursuant to the POSCAN Agreements, on September 14, 2011, POSCAN purchased 38,095,300 Units of Li3’s securities for approximately $8 million, with each “Unit” consisting of one share of common stock and a three-year warrant to purchase one share of common stock at an exercise price of $0.40 per share.
The SPA further provided that POSCAN would 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 a resource report prepared in accordance with National Instrument 43-101 of the Canadian Securities Administrators, that concludes that the 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 Li3 and POSCAN; and (iii) having the necessary permits and approvals in place for building and operating a brine test facility on the Maricunga property. In addition to being the relevant milestone under the agreement with POSCAN, Li3 believe that the Canadian standards for Resource Reports are generally perceived as the industry standard, having marketability worldwide. The SPA provides that Li3 is to use the proceeds from such investments exclusively for activities related to the development of the Maricunga project, pursuant to budgets mutually agreeable to Li3 and POSCAN. However, Li3 and POSCAN ultimately modified the terms of POSCAN’s second tranche investment as described below.
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 Li3 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, Li3 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 locked up and may not be sold (subject to customary exceptions) until the earlier of nine months from their issuance and November 20, 2012. Pursuant to the IRA, Li3 has 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. As of the date of this Offer to Purchase, POSCAN has not required a registration of such shares. The 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, Li3 must file a registration statement covering the relevant shares within 75 calendar days of such demand, and use best efforts to have it declared effective within 120 calendar days of filing. If Li3 do not meet these deadlines, Li3 must pay liquidated damages of 2% of the purchase price of the relevant 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 Li3 will appoint a director nominated by POSCAN to Li3’s 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 common stock. So long as POSCAN holds any shares of common stock (subject to customary exceptions), Li3 shall not issue any new securities to any person unless Li3 has 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 Li3 outstanding capital. The IRA also provides that, until the earlier of (i) POSCAN owning less than 10% of the issued and outstanding common stock and (ii) Li3’s aggregate market capitalization exceeding $250 million, Li3 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 Li3’s assets; incurring indebtedness in excess of $1,000,000 (subject to certain exceptions); create or take any action that results in Li3 holding the capital stock of any subsidiary that is not wholly owned (with certain exceptions); transfer or license Li3’s proprietary technology to a third party; substantially change the scope of its business; or amend or waive any non-competition or non-solicitation provision applicable to Li3’s Chief Executive Officer or Chief Operating Officer.
Concurrent with the execution of the Agreement and Plan of Merger, Blue Wolf and Li3 entered into an investor rights agreement with POSCO, pursuant to which POSCO will be entitled to certain rights as a shareholder of combined company, including without limitation, preemptive rights, consent rights, information rights and the right to nominate one director to the board of directors.
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 Li3’s production, or otherwise.
On February 23, 2012, POSCO announced that it has developed technology that may improve lithium recovery from brine and shorten processing times compared to the conventional processes currently being use in the lithium market. On March 7, 2012, Li3 and POSCO executed a Non-Binding Memorandum of Understanding to construct a test facility for the recovery of lithium and other products at POSCO’s expense, with technical support from Li3 as necessary. The parties expect that products from the test facility will not be commercialized and will be for testing purposes only. Upon successful completion of the test facility, evaluating the merits and validation of the technology, the parties may discuss commercialization of the products in detail, including off-take agreements between the parties.
On August 17, 2012, Li3 entered into an Additional Agreement to Stock Purchase Agreement (the “Additional Agreement”) with POSCAN which, among other things, modified certain provisions of the SPA. Also on August 17, 2012, Li3 closed on POSCAN’s second tranche of investment under the SPA, selling 62,499,938 Units to POSCAN for $9,999,990, with each “Unit” consisting of one share of common stock and a three-year warrant to purchase one share of common stock for $0.21 per share.
The Additional Agreement reduced POSCAN’s purchase price per Unit for the second tranche of investment from $0.21 per share to $0.16 per share, and reduced the exercise price of all of the warrants sold under the SPA (the “POSCAN Unit Warrants”) from $0.40 per share to $0.21 per share. Pursuant to the Additional Agreement, Li3 also agreed to issue to POSCAN a two-year warrant (the “POSCAN Bonus Warrant”) to purchase 5,000,000 shares of common stock at an exercise price of $0.15 per share. Furthermore, the Additional Agreement provides that, subject to certain exceptions, Li3 must issue additional shares of common stock to POSCAN in the event that Li3 issues or sells any such shares to third parties for a price of less than $0.16 per share at any time during the 18 months immediately following August 17, 2012.
The Additional Agreement provides restrictions on Li3’s use of the proceeds from the Second Closing, and includes Li3’s agreement to use its best efforts to obtain a Chilean lithium production concession and to take certain steps towards commercialization of the flagship Maricunga property. Other than having the right to participate in future fundings, POSCAN has no current commitments to provide Li3 with any additional funding in the future.
Lithium Exploitation Permitting in Chile
The mining industry is heavily regulated and changes in international laws and regulations can be significant. 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.
In Chile, lithium is not exploitable via regular mining concessions. The Chilean Mining Code 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 Li3 nor its subsidiaries have sufficient authority (or permits) to exploit lithium in Chile.
The government of Chile introduced a process to increase the exploitation of lithium in Chile. In February 2012, the Chilean Government outlined plans to improve its worldwide competiveness. The Boost Competitive Agenda (a package of reforms intended to remove regulatory red tape, to encourage entrepreneurship, innovation, competition and boost productivity of the economy), is coordinated by the Office of Competiveness of the Ministry of Economy and was initiated in August 2011. In February 2012, the Office of Competitiveness introduced ten new measures to extend the government’s commitment to ensure that development continues to reach Chile, including “Re-launching the Chilean Lithium Industry”, which Chile’s Minister of Economy stated seeks to lift restrictions and implement mechanisms to improve competitiveness within the industry, promote further investment and protect the country’s market share and standing in the world lithium market. In light of the events described in the following paragraphs, it remains to be seen whether the Chilean government is still interested in re-launching the Chilean lithium industry in the manner indicated above.
The Chilean Government’s Ministry of Mining established its first ever auction for the award of lithium, production quotas and licenses (Special Lithium Operations Contracts, or “CEOL”) which would permit the exploitation of an aggregate of 100,000 tons of lithium metal (approximately 530,000 tons of lithium carbonate equivalent) over a 20 year period, subject to a seven percent royalty. In September 2012, Li3 formed a consortium consisting of Li3, POSCO, Daewoo International Corp, and Mitsui & Co. (the “Consortium”) for the purpose of participating in such CEOL auction. As required under the rules established by the Ministry of Mining, on September 14 2012, the Consortium submitted its bid for the CEOLs.
On September 24, 2012, the Ministry of Mining opened the bids and informed Li3 that the Consortium’s bid was not the winning bid. The Consortium made the second highest offer.
On September 25, 2012, the Ministry of Mining issued a resolution awarding the CEOL public offer to the highest bidder.
On October 1, 2012, the Ministry of Mining resolved (i) to invalidate the September 25, 2012 resolution since the winner had not complied with the rules of the CEOL public offer; and (ii) not to award the CEOL public offer to any of the other bidders.
On October 5, 2012, Li3 submitted a “Request for Reconsideration” to the Chilean Government, requesting it to reconsider the invalidation of the CEOL public offer and award the CEOL to the Consortium as the second highest bidder during the September 2012 bidding process.
On October 17, 2012, the Chilean Government ratified its decision to invalidate the CEOL process and not to accept any of the bids.
On October 22, 2012, Li3 submitted another “Request for Reconsideration” to the Chilean Government. The Chilean Government had 30 days to answer Li3´s request.
On November 19, 2012, the Ministry of Mining ratified its decision to invalidate the September 25, 2012 resolution and rejected Minera Li’s request that the CEOL public offer should be awarded to the Consortium.
On January 16, 2013, Li3 submitted a letter to the Chilean Comptroller requesting to review the CEOL process. This is deemed to be the last administrative recourse before pursuing judicial remedies. Li3 is awaiting a response from the Chilean Controller to its letter. A negative response would imply that Li3 is not authorized to exploit lithium from the area covered by the Litio 1-6 Mining Concessions. Accordingly, there can be no assurance that Li3 will be able to obtain the permits necessary to exploit any minerals that its exploration activities discover in a timely manner or at all. Any such delay or failure would have a material adverse effect on the development horizon for Maricunga and its prospects.
On April 16, 2013, Minera Li (a 100% wholly-owned subsidiary of Li3) acquired a group of mining concessions named “Cocina 19 through 27” (the “Cocina Mining Concessions”). Cocina Mining Concessions are not subject to obtaining a CEOL for the exploitation of lithium in the area covered by those concessions; however, and as any mineral exploitation in Chile, it requires, as a condition precedent, all other permits which according to Chilean law are necessary to exploit minerals.
Other Permits
Li3’s operations are subject to numerous Chilean and international laws and regulations governing the operation and maintenance of its facilities and the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may:
| · | Require that Li3 acquire permits before commencing extraction operations; |
| · | Restrict the substances that can be released into the environment in connection with mining and extraction activities; |
| · | Limit or prohibit mining activities on protected areas such as wetland or wilderness areas; and |
| · | Require remedial measures to mitigate pollution from former operations, such as dismantling abandoned production facilities. |
Companies must meet, maintain and abide by strict environmental regulations in accordance with Chilean and international laws and regulations. Li3 will also have to abide and comply with national labor laws that protect and govern its employees. Additionally, Li3 believes that between its management team, the consultants and experts Li3 has hired, it will be able to satisfy any and all regulatory and compliance requirements.
Brine Exploration Phases
The life cycle of a brine mining operation can be divided into five phases:
| · | Mining activity begins with the “exploration phase,” in which one seeks to define the type, extent, location and value of deposits and to estimate the grade and size of the deposits; |
| · | The “feasibility phase” then ensues to address the financial viability of the project (including any permitting requirements) and to determine whether or not to proceed to development - the end of the feasibility stage is marked by the conclusion of a feasibility study; |
| · | If the decision is made to move forward after the feasibility stage, then the “development phase” follows, in which the infrastructure needed to begin operations is constructed; |
| · | Upon completion of such infrastructure, a project enters the “production phase,” during which the applicable minerals are extracted, produced and sold; and |
| · | Once all economically extractable minerals have been produced, a mine is closed and it enters the “reclamation phase,” in which the area is made suitable for future uses. |
Li3 is currently in the exploration phase, seeking to define the type, extent, location and value of deposits.
Competition
Li3 is currently categorized as a junior mineral resource exploration company that competes with other mineral resource exploration companies for financing, personnel and equipment and for the acquisition of mineral properties. Although Li3 commissioned report which was prepared in accordance with National Instrument 43-101 of the Canadian Securities Administrators completed by Hains Technology and Associates deemed Maricunga suitable to advance to the Feasibility Study stage and a Chilean based independent research firm signumBOX listed Maricunga as one of the top lithium salars in the world, many of the mineral resource exploration companies with whom Li3 competes have greater financial and technical resources than those available to Li3. Accordingly, these competitors may be able to spend greater amounts on acquisitions of mineral properties of merit, on exploration of their mineral properties and on development of their mineral properties and on exploration and development. This competition could result in competitors having mineral properties of greater quality and interest to prospective investors who may finance additional exploration and/or development. This competition could adversely impact on Li3’s ability to finance further exploration and to achieve the financing necessary for it to develop its mineral properties.
Compliance with Government Regulation
Li3 is committed to complying with and is, to its knowledge, in compliance with, all governmental and environmental regulations applicable to Li3 and its properties. Permits from a variety of regulatory authorities are required for many aspects of mine operation and reclamation. Li3 cannot predict the extent to which these requirements will affect it or its properties if Li3 identifies the existence of minerals in commercially exploitable quantities. In addition, future legislation and regulation could cause additional expense, capital expenditure, restrictions and delays in the exploration of its properties.
Employees
Li3 has eight full-time employees and/or contract employees, including its Chief Executive Officer, Chief Financial Officer, and Executive Vice President. In addition, Li3 engages several advisors and consultants.
Li3 engages contractors from time to time to consult with it on specific corporate affairs or to perform specific tasks in connection with its exploration programs.
Subsidiaries
Li3 currently has six wholly owned subsidiaries:
| 1. | Li3 Energy Peru SRL, a private limited company organized under the laws of Peru; |
| 2. | Minera Li Energy SPA, a wholly owned subsidiary in Chile; |
| 3. | Alfredo Holdings, Ltd., an exempted limited company incorporated under the laws of the Cayman Islands; |
| 4. | Pacific Road Mining Chile, S.A. a Chilean corporation, which is a subsidiary of Alfredo; |
| 5. | Noto Energy S.A., an Argentinean corporation; and |
| 6. | Li3 Energy Caymans, Inc., an exempted limited company incorporated under the laws of the Cayman Islands. |
Li3 also owns 60% of each of Sociedades Legales Mineras Litio 1 a 6 de la Sierra Hoyada de Maricunga, a group of six Chilean mining companies, which are wholly owned by Minera Li Energy SPA.
Intellectual Property
Li3 does not own, either legally or beneficially, any patent or trademark nor any material intellectual license, and is not dependent on any such rights. Li3 has trademarked Li3 Energy, its logo and registered the domain name www.li3energy.com. Li3 considers many of its lithium mining site evaluation, exploration and development techniques to be proprietary, and periodically evaluates whether to seek protection for any such techniques.
Lithium and Lithium Mining
Lithium is the lightest metal in the periodic table of elements. It is a soft, silver white metal and belongs to the alkali group of elements, which includes sodium, potassium, rubidium, cesium and francium. The chemical symbol for lithium is “Li,” and its atomic number is 3.
Like the other alkali metals, lithium has a single valence electron that is easily given up to form a cation (positively charged ion). Because of this, it is a good conductor of both heat and electricity and highly reactive, though it is the least reactive of the alkali metals. Lithium possesses a low coefficient of thermal expansion (which describes how the size of an object changes with a change in temperature) and the highest specific heat capacity (a measure of the heat, or thermal energy, required to increase the temperature of a given quantity of a substance by one unit of temperature) of any solid element.
No other metal is as lightweight, better at holding a charge or as good at dissipating heat as lithium. These properties make lithium an excellent material for manufacturing batteries (lithium-ion batteries). According to the U.S. Geological Survey’s (“USGS”) “Mineral Commodity Summaries 2011,” batteries accounted for 23% of lithium end-usage globally, and Li3 expects demand for lithium from the battery segment to grow along with demand for such batteries. Although lithium markets vary by location, global end-usage was estimated by the USGS as follows: ceramics and glass, 31%; batteries, 23%; lubricating greases, 10%; air treatment, 5%; continuous casting, 4%; primary aluminum production, 3%; and other uses, 24%. Lithium use in batteries expanded significantly in recent years, because rechargeable lithium batteries are being used increasingly in portable electronic devices and electrical tools.
As mentioned earlier, lithium belongs to the alkali group of metals. This group of metals is typically extracted from solutions called brines, which are associated with evaporite deposits. Lithium is also contained in the mineral spodumene, which occurs in a rock called pegmatite. To a lesser extent lithium occurs as a component of certain clay minerals.
Historically, and especially during the period leading up to and during World War II, lithium was designated a strategic metal, heavily used in the aircraft industry because it is light and strong. During this period the mineral spodumene (a lithium aluminum silicate) was mined by open pit hard rock mining methods and processed to recover the lithium. During the post-war period, lithium production from the higher cost hard rock mines was replaced by the lower cost extraction of lithium from the mineral rich brines associated with evaporite deposits. Evaporite deposits occur in environments characterized by arid conditions with extremely high evaporation rates. This environment typically occurs at high altitudes, greater than 12,000 feet above sea level, so evaporite deposits occur in only a very few locations in the world, including China (the province of Qinghai and the Autonomous Region of Tibet); the Puna Plateau, a high altitude plateau covering part of Argentina, Chile, Bolivia and the southern portion of Peru; and in a small region in Nevada, which is the core of what is called the Great Basin of the western United States. Over 70% of the world’s lithium is produced from the brines associated with the evaporite deposits on the Puna Plateau of South America.
Brine extraction (mining) and the recovery of lithium and other economic compounds is analogous to pumping water from an aquifer, but instead of fresh water, the water contains a variety of mineral salts in solution, including lithium, potassium (K), magnesium (Mg) and sodium (Na). This form of “mining” is much more efficient, cost effective and environmentally friendly than open pit mining. Lithium production from spodumene can typically cost in the range of $4,300 to $4,800 per metric ton of lithium carbonate and is a process that is highly sensitive to energy costs. On the other hand, lithium production from brines can be accomplished at costs in the range of $2,200 to $2,600 per metric ton of lithium carbonate. However, the processing cost can vary by a wide range, depending largely on:
| · | lithium concentration in the particular brine; |
| · | evaporation rates at the site, which determine how quickly the brine can be concentrated; and |
| · | the balance of other minerals in the brine, which affects the degree of processing needed to remove impurities. |
Lithium use in Batteries
Lithium demand is being driven by its increasing use in the batteries of portable consumer electronics, including mobile phones and laptop computers, and in a range of industrial applications including ceramics and lubricants. The most dramatic increase in demand is being spurred by auto makers racing to bring lithium-ion battery powered and hybrid electric cars to market, as major automobile manufacturers are forming partnerships with established battery manufacturers to build battery plants for their mass production. In addition, lithium-ion batteries used in transportation is expected to increase to approximately $8 billion by 2015 from $876 million in 2010, largely fueled by government subsidies and incentives.
A lithium-ion battery (Li-ion battery) is a type of rechargeable battery in which lithium ions move from the anode (negative terminal) to the cathode (positive terminal) during discharge, and from the cathode to the anode when charging. Lithium-ion batteries are one of the most popular types of battery, because they have one of the best energy-to-weight ratios, no memory effect (the effect in which certain other rechargeable batteries lose their maximum energy capacity if they are repeatedly recharged after being only partially discharged) and a slow loss of charge when not in use.
Rechargeable battery materials used in electric vehicles include lead-acid (traditional “wet” and gel or “valve regulated”), nickel-cadmium, nickel-metal-hydride, lithium-ion, lithium-ion polymer, and, less commonly, zinc-air and molten salt. Ideally, a battery for an electric car needs to be light, small, energy dense, quick to recharge, relatively inexpensive, long lasting, and safe. Today’s electric and hybrid vehicles are primarily powered by nickel-metal-hydride (NiMH) batteries. NiMH batteries are safe, abuse-tolerant and offer much longer life cycles than older lead-acid batteries, while providing reasonable energy density. However, NiMH batteries are more expensive than lead-acid batteries, as a result of the high nickel content.
Li-ion batteries have a higher energy density than most other types of rechargeable batteries. A Li-ion battery can achieve power density of 100-170 watt hours (Wh) per kilogram (kg) of weight, versus NiMH’s 30-80 Wh/kg. This means that for their size or weight they can store more energy than other rechargeable batteries. Li-ion batteries also operate at higher voltages than other rechargeable batteries, typically about 3.7 volts for Li-ion vs. 1.2 volts for NiMH or NiCd. This means a single cell can often be used rather than multiple NiMH or NiCd cells.
Finally, Li-ion batteries have a lower self-discharge rate than other types of rechargeable batteries. This means that once they are charged they will retain their charge for a longer time than other types of rechargeable batteries. NiMH and NiCd batteries can lose anywhere from 1-5% of their charge per day (depending on the storage temperature) even if they are not installed in a device. Li-ion batteries, on the other hand, can retain most of their charge even after months of storage.
Ideal Brine Conditions
The most important metrics when evaluating lithium brine resources are:
| 3) | magnesium to lithium ratio; |
| 5) | sulphate to lithium ratio. |
The boron content is also important, as it allows for the production of another saleable product, boric acid.
The lithium concentration in the brines is typically measured in parts per million (ppm) or weight percentages. The higher the lithium concentration, the better. However, high local evaporation rates can compensate for lower lithium concentrations.
Providing that lithium contents are high enough, the magnesium to lithium (Mg:Li) ratio is another important chemical feature in assessing favorable brine chemistry and the ultimate economic viability of a site at an early stage. The lower the ratio the better, as a high ratio means that, during the evaporation process, an increasing amount of lithium will be trapped (“entrained”) in the magnesium salts when they crystallize early. This will ultimately lead to a lower lithium recovery rate and thus less profitability. High Mg:Li ratios also generally mean that more soda ash (Na 2 CO 3) reagent is required during the processing of the brine (as described below) and, therefore, may add significantly to costs.
The potassium (K) concentration in the brines is typically measured as a weight percentage.
The lower the sulphate (SO4) to lithium ratio in the final lithium brine pond, the more the brine will be amenable to lithium extraction via the conventional solar evaporation process. This is because lithium sulphate (Li 2 SO 4) is highly soluble and so, to the extent that it is able to form, the lithium recovery will suffer.
Key Stages of Lithium Recovery
Currently the most economical way to recover lithium from a salar (a dry lake or salt flat) is by solar evaporation. However, the process is subject to natural conditions, and the evaporation rate, relative humidity, wind velocity, temperature and brine composition have a tremendous influence on the solar pond requirements and in turn on pumping and settling rates to meet production quotas.
Each lithium recovery process has a unique design based on the concentrations of Li, Na, K, Mg, calcium (Ca) and SO4 in the brine, and, although there may be some similarities, each salar has its own customized methodology for optimum recovery due to the varying ionic concentrations. Wells are drilled, and the mineral rich brine is pumped to the surface into a series of large shallow ponds of increasing concentration. As water evaporates, the concentration of minerals in solution increases. Typically the brine evaporates over an 18-24 month period until it has a sufficient concentration of lithium salts. At that point, the concentrate is shipped by truck or pipelined to processing plants where it is converted to usable salt products. In the plant, sodium carbonate (soda ash) is added to precipitate lithium carbonate, which is dried and shipped to end users to be further processed into pure lithium metal. The by-products such as potassium chloride (potash), sodium borate (borax) and other salts may also be recovered and sold to end users.
The primary reagents used to produce lithium from brine are lime and soda ash. Both substances are natural materials, commonly used in many processes and have no detrimental environmental effect when used properly. Other than solar energy, only minor amounts of fuels are consumed in the production process (pumping the brines into the ponds, etc.).
Potentially economic salts produced from the salar brine are NaCl, carnallite, sylvinite and bischoffite, as well as the final end-point brine. The chemical pond to pond process from the brine feed from the salar to the end-point brine ready for the processing plant is as follows:
| · | Calcium Chloride (CaCl2) is added at the beginning in the first pond in order to precipitate out most of the sulphate (SO 4) in the form of gypsum (CaSO 4). Removal of the sulphate is important, as it is detrimental in downstream processing. Furthermore, the gypsum itself has multiple uses from agriculture to construction. |
| · | In the next two ponds and after solar evaporation, sylvinite will begin to precipitate, which is a combination of table salt and potash (KCl). The sylvinite can be harvested and sent to a froth flotation circuit to produce potash. |
| · | Finally, the sequential ponding process moves to the lithium ponds until the end-point brine is sufficiently rich in lithium. The lithium is still largely in the final ponds, because it is extremely soluble (likes to stay dissolved in solution), although there will be some lithium entrained in Mg and K salts in previous ponds. |
Global Market
Based on the most recent available information from the United States Geological Survey (“USGS”), market conditions improved for lithium-based products in 2012. Worldwide lithium production increased in 2012. Production volumes of two major lithium producers in Australia and Chile increased moderately through the third quarter of 2012. Argentina’s major lithium producer experienced weather-related complications during the year, which reduced production and delayed efforts to increase production capacity. Industry analysts and the major lithium producers expected worldwide consumption of lithium in 2012 to be between 25,900 and 28,200 tons, increasing by 7.5% to 10% from that of 2011. All of the major brine and mineral-based lithium producers increased their lithium prices in 2012. Many emerging companies continued exploring for lithium on claims worldwide. Numerous claims in Nevada, as well as in Argentina, Australia,, Bolivia, and Canada, have been leased or staked.
Subsurface brines have become the leading raw material for lithium carbonate production worldwide because of lower production costs compared with the mining and processing costs for hard-rock ores. Owing to growing spodumene demand from China in the last several years, however, mineral-sourced lithium has gained market share on brine-sourced lithium. Two brine operations in Chile dominate the world market, and a facility at a brine deposit in Argentina produced lithium carbonate and lithium chloride. One new brine operation in Argentina began limited commercial production in 2012, and several additional brine operations were under development. Brine operations in China produced lithium carbonate, lithium chloride, and lithium hydroxide. Lithium minerals were used directly as ore concentrates in ceramics and glass applications worldwide and, increasingly, as feedstock for lithium carbonate and other lithium compounds in China.
Owing to China’s growing demand for high-quality spodumene by its chemical companies, Australia’s leading lithium ore miner doubled its production capacity, raising its total lithium carbonate equivalent production capacity to 110,000 tons per year. A major lithium brine producer agreed to acquire the Australian lithium ore miner in 2012 to diversify its supply of lithium. An emerging Australian lithium ore producer continued lithium concentrate production in Western Australia and opened a lithium carbonate plant in China, where the lithium concentrate was to be converted to battery-grade lithium carbonate and supplied to the Aisian market. Utilizing a unique reverse-osmosis process, a California company began producing high-purity lithium carbonate from geothermal brines. The reverse osmosis process eliminates the need for solar evaporation, a crucial and lengthy procedure in common brine operations. Initial lithium carbonate production was 500 tons per year.
Batteries, especially rechargeable batteries, are the uses for lithium compounds with the largest growth potential. Demand for rechargeable lithium batteries exceeds that of rechargeable non lithium batteries for use in cellular telephones, cordless tools, MP3 players, and portable computers and tablets. Major automobile companies were developing lithium batteries for electric motor. Non rechargeable lithium batteries were used in calculators, cameras, computers, electronic games, watches and other devices.
Lithium supply security has become a top priority for Asian technology companies. Strategic alliances and joint ventures have been, and are continuing to be, established with lithium exploration companies worldwide to ensure a reliable, diversified supply of lithium for Asia’s battery suppliers and vehicle manufactures.
The increase in 2011 production was due primarily to the increase of the lithium-ion battery market, as global sales were $13.9 billion during 2011. These sales are projected to rise to $16.1 billion in 2012, $18.6 billion in 2013, $23.6 billion in 2015, and $34.3 billion in 2020. Other lithium end uses have increased, but not at the same rates as lithium-ion batteries. According to Roskill Information Services Ltd., lithium-ion batteries were the largest single end use for lithium in 2011 (22% of total end use) , but glass & ceramics were still important (21% of total use in 2011).
According to the USGS, Chile is the leading lithium producer in the world. Argentina, Australia, China, and the United States are also major producers. The 2012 edition of the USGS Mineral Commodity Summaries gives the following estimated world lithium mine production (in metric tons of lithium content):
| | Mine production | |
| | 2012 (est.) | | | 2011 | |
Chile | | | 13,000 | | | | 12,900 | |
Australia | | | 13,000 | | | | 12,500 | |
China | | | 6,000 | | | | 4,144 | |
Argentina | | | 2,700 | | | | 2,950 | |
Portugal | | | 820 | | | | 820 | |
Zimbabwe | | | 500 | | | | 470 | |
Brazil | | | 490 | | | | 320 | |
United States | | | Withheld | | | | Withheld | |
World total (rounded) | | | 37,000 | 1 | | | 34,100 | 1 |
| 1. | Excludes U.S. production. |
Substitution for lithium compounds is possible in batteries, ceramics, greases, and manufactured glass. Examples are calcium and aluminum soaps as substitutes for stearates in greases; calcium, magnesium, mercury, and zinc as anode material in primary batteries; and sodic and potassic fluxes in ceramics and glass manufacture. Lithium carbonate is not considered to be an essential ingredient in aluminum potlines. Substitutes for aluminum-lithium alloys in structural materials are composite materials consisting of boron, glass, or polymer fibers in engineering resins.
Nitrate Market and Production
Potassium nitrate is a chemical compound with the formula KNO3. It occurs as a mineral niter and is a natural solid source of nitrogen. Its common names include saltpeter and nitrate of potash. Major uses of potassium nitrate are in fertilizers, rocket propellants and fireworks. When used as a food additive in the European Union, the compound is referred to as E252.
Potassium nitrate can be produced through various chemical reactions, including:
NH4NO3 (ammonium nitrate) + KCl (potash) NH4Cl (ammonium chloride) + KNO3
NH4NO3 + KOH (potassium hydroxide) NH3 (ammonia) + KNO3 + H2O
NaNO3 (sodium nitrate) + KCl NaCl (table salt) + KNO3
Potassium nitrate is mainly used in fertilizers, as a source of nitrogen and potassium, two of the macro nutrients for plants. Potassium nitrate is also one of the three components of black powder (gunpowder), along with powdered charcoal (substantially carbon) and sulfur, where it acts as an oxidizer.
In the process of food preservation, potassium nitrate, more commonly known as saltpeter, has been a common ingredient of salted meat since the middle ages, but its use has been mostly discontinued due to inconsistent results compared to more modern nitrate and nitrite compounds. Even so, saltpeter is still used in some food applications, such as charcuterie and the brine used to make corned beef.
Potassium nitrate is an efficient oxidizer, which produces a lilac flame upon burning due to the presence of potassium. It is therefore used in amateur rocket propellants and in fireworks. It is also added to pre-rolled cigarettes to maintain an even burn of the tobacco.
Potassium nitrate is the main component (usually about 98%) of tree stump remover, as it accelerates the natural decomposition of the stump. It is also commonly used in the heat treatment of metals as a solvent in the post-wash. The oxidizing, water solubility and low cost make it an ideal short-term rust inhibitor.
Potassium nitrate can also be found in some toothpastes for sensitive teeth. Recently, the use of potassium nitrate in toothpastes for treating sensitive teeth (dentine hypersensitivity) has increased dramatically, even though studies to this effect have been inconclusive.
World population growth and its effects on the scarcity of water and increased competition on land use for living, industry, nature and agriculture, increase the need for agriculture efficiency. The amount of land in agriculture per capita will further decrease in the future as world population is expected to grow faster than the growth of arable land. Therefore, crop productivity has to increase in order to provide the same amount of food in relation to the growing world population. The growing importance of specialty plant nutrition products, such as potassium nitrate, has been driven by these factors as one of its main uses is for premium crops.
Properties
The information set forth above under “Business—Project Overviews” relating to Li3’s exploration properties (primarily Maricunga) is incorporated herein by reference.
Li3 previously leased approximately 800 square feet of office space in Lima, Peru, on which its lease payments were $48,262 for fiscal year 2012. Li3 no longer maintains a property in Peru. Li3 also leases approximately 1,500 square feet of office space in Santiago, Chile, with monthly rent of approximately $3,800. This lease commenced on July 1, 2011, and Li3 paid rent during fiscal year 2012 amounting to $36,762. This lease expires June 30, 2014. Li3 believes its leased facilities are adequate for its needs at present.
Legal Proceedings
From time to time, Li3 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.
Except as described below, Li3 is currently not aware of any pending legal proceedings to which Li3 are a party or of which any of its property is the subject, nor is Li3 aware of any such proceedings that are contemplated by any governmental authority.
As the majority shareholder, Li3 has filed lawsuits distributed to four civil courts of Copiapo, third Region of Atacama, Chile, against the minority shareholders seeking either payment of their pro rata portion of costs or an auction of their share of the properties. The minority shareholders have not paid their contributions to the costs of conservation and exploration, which were agreed upon at the shareholders’ meeting on October 6, 2011. In November 2012, Li3 received a favorable decision from one of the civil courts to auction approximately 8% of the shares once the judgment is executed. Chilean law gives Li3 a preference in that auction. The other civil courts have not reached a final decision yet.
Certain minority shareholders have filed counterclaims against Li3 to declare, among other things, the invalidation of such shareholders’ meeting at which required contributions were established that such minority shareholders failed to make. Li3 filed dilatory defenses because Li3 was not served according to law and also filed a complaint against the officer serving the process. This process is on hold because the minority shareholders have not filed a new claim, as requested by the court. Li3’s future plans are not dependent on the outcome of this matter with respect to the development of the Maricunga project.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations of Li3
You should read the following discussion in conjunction with the sections of this Offer to Purchase entitled “Risk Factors — Risks Related to the Business of Li3,” “Forward-Looking Statements,” “Business of Li3” and Li3’s financial statements and the related notes thereto included elsewhere in this Offer to Purchase. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this Offer to Purchase.
Li3 Energy, Inc (“Li3” or the “Company”) is a South America based and United States listed exploration company in the lithium and mining sector. We aim to acquire, develop and commercialize a significant portfolio of lithium brine deposits in the Americas.
The Company owns (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; and (b) a mining concession on 2,995 acres (1,212 hectares) situated on brine salars in Argentina, known as Cauchari. We are currently evaluating additional exploration and production opportunities. In April 2013, the Company acquired a mining concession on 450 hectares which corresponds to a strategic lithium asset and is located adjacent to the existing Maricunga project.
Going Concern
As of March 31, 2013, the Company had no source of current revenue, a cash balance on hand of $2,349,834, negative working capital of $1,240,015 and cumulative negative cash flows from operations of $21,477,783 during the period from June 24, 2005 (inception) through March 31, 2013. The Company had negative cash flows from operations of $5,906,682 during the nine months ended March 31, 2013. On August 17, 2012, the Company received $9,499,990 in net funding from POSCO Canada Ltd. (“POSCAN”) a wholly owned subsidiary of POSCO (a South Korean company).
On April 16, 2013, the Company entered into a purchase agreement (the “Purchase Agreement”) with Jose Resk Nara and Carlos Alfonso Iribarren (the “Sellers”) to purchase all of the outstanding shares of SLM Cocina Diecinueve de la Hoyada de Maricunga, a Chilean based company (“SLM”), which will become a wholly owned subsidiary of the Company. SLM owns the group of mining concessions “Cocina 19 through 27”. Pursuant to the Purchase Agreement, the Company paid the Sellers $7.3 million, of which $2.0 million was paid on the Closing Date, $2.0 million to be paid 90 days following the Closing Date, $1.8 million to be paid 180 days after the Closing Date and $100,000 to be paid annually on the anniversary of the Closing Date for fifteen years beginning in 2014. After such payment, the Company´s cash balance was approximately $100,000.
The Company does not believe its cash on hand is sufficient to maintain its basic operations, which do not include future exploration and acquisition activities, for 12 months. The Company requires immediate cash flow for which it is seeking interim funding.
On March 18, 2013, the Company signed a Memorandum of Understanding with Blue Wolf Mongolia Holdings Corp (“BW”). If successful, the transaction could provide Li3 with additional funding allowing the Company to continue advancing the Maricunga project. Under the proposed terms of the merger, BW would establish a new subsidiary which would merge into the Company, with Li3 remaining as the surviving entity as a wholly-owned subsidiary of BW (the “Transaction”). Each shareholder of Li3 would receive 1 share of common stock in BW for every 250 shares of common stock held in Li3. The closing of the proposed transaction with BW is subject to a number of closing conditions, including further due diligence, final approval by the board of Directors of both companies, regulatory and court approvals, shareholder approvals and the execution of a definitive agreement.
In the course of our exploration activities, we have sustained and continue to sustain losses. We cannot predict if and when we may generate profits. In the event we identify commercial reserves of minerals, we will require substantial additional capital to develop those reserves and permits from the Chilean government to exploit the mineral reserves, neither of which is assured (See Operational Update below).
To take us into the operational stage and to begin generating revenues, we will require a substantial injection of funds to progress development of our properties. We expect to finance our future growth primarily through equity and debt financings. However, there exists substantial doubt about our ability to continue as a going concern because there is no assurance that we will be able to obtain such capital. Additionally, no assurance can be given that any such financing, if obtained, will be adequate to meet our ultimate capital needs and to support our growth. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, then our 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 our ability to continue as a going concern. Our continuation as a going concern is dependent on our ability to meet our obligations, to obtain additional financing as may be required until such time as we can generate sources of recurring revenues and to ultimately attain profitability. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Operational Update
Maricunga
On May 20, 2011, we, through our Chilean subsidiary, Minera Li, acquired a 60% interest in each of Sociedades Legales Mineras Litio 1 a 6 de la sierra Hoyada de Maricunga.
The Maricunga property is an exploration property and covers an area of approximately 3,553 acres (1,438 hectares), comprising six concessions 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.
In September 2011, in order to provide funding to begin the initial assessments of producible minerals from the Maricunga Project, we entered into a subscription agreement with POSCO Canada Ltd. (“POSCAN”), a wholly owned subsidiary of POSCO (a South Korean company). In accordance with the subscription agreement, POSCAN purchased 38,095,300 Units of our securities for approximately $8 million, with each “Unit” consisting of one share of our common stock for $0.21 per share and a three-year warrant to purchase one share of our common stock at an exercise price of $0.40 per share.
In December 2011, we completed our phase one exploration work on Maricunga with the $8 million funding from POSCAN. In April 2012, we reported the completion of the NI 43-101 of the Canadian Securities Administrators (NI 43-101) that summarizes and validates the results of our $8 million Phase One Exploration and Development Program on our Maricunga Project in Chile, completed in December 2011. The Technical Report was prepared by Donald H. Hains, P. Geo., Principal of Hains Technology Associates, who is a Qualified Person as defined by NI 43-101. The key highlights of the Compliant Measured Report include:
| · | Further exploration work and expenditures are warranted to advance the Maricunga Project to the Feasibility Stage (economic assessment); |
| · | The property holds significant potential for development as a source of lithium, potassium and boron; |
| · | Exploration work indicates that the brines in the property are enriched in lithium and potassium and that the brine has a sufficient Mg/Li ratio permitting lithium recovery. |
On August 17, 2012, (the “Second Closing”), POSCAN purchased an additional 62,499,938 Units of our securities for gross proceeds of $9,999,990, with each “Unit” consisting of one share of common stock for $0.16 per share and a three-year warrant to purchase one share of common stock for $0.21 per share. In connection with the transaction, we agreed to reduce the exercise price of all of the warrants previously sold to POSCAN from $0.40 per share to $0.21 per share and issued to POSCAN a two-year warrant (the “Bonus Warrant”) to purchase 5,000,000 shares of our common stock at an exercise price of $0.15 per share.
Furthermore, subject to certain exceptions, we must issue additional shares of our common stock to POSCAN in the event that we issue or sell any such shares to third parties for a price of less than $0.16 per share at any time during the 18 months immediately following the Second Closing. During September 2012, the Company entered into settlement agreements providing for the Company to issue one share of the Company’s common stock for every $0.067 of obligations released by the receivable holder. As a result, this provision was triggered and the Company is seeking a waiver.
Due to the uncertainty regarding the lithium permit in Chile, we are evaluating the Maricunga project as a potential producer of potash or potassium nitrate. Our NI 43-101 of the Canadian Securities Administrators (NI 43-101) shows that potassium resources are available in the Maricunga properties. The majority of the past and current technical work performed on the project is applicable to the production of lithium and/or potassium. Potassium exploitation does not require special permits and it is exploitable via regular mining concessions, according to the Chilean Mining Code.
Initial estimations suggest that a potash project is economically feasible. We are evaluating the next steps that would allow us to maximize shareholder value from the Maricunga properties. However, there can be no assurance that we will be able to do so in the near future or at all. 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.
To produce potassium nitrate, the Company will be required to obtain a source of sodium nitrate which could come from either 1) developing a sodium nitrate and iodine project; or 2) buying the sodium nitrate from different producers in the north of Chile.
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.
In March 2013 the Company obtained approval of the Environmental Impact Declaration for the Maricunga project from the Chilean Environmental Authority. The Company is currently in discussions with consultants regarding the next steps to be taken in order to allow on-site work to continue in October 2013, after the winter season.
Also in March 2013, POSCO announced that it has developed a chemical lithium extraction technology that reduces recovery time from around 12 months to just eight hours. The technology increases the lithium recovery rate from a maximum of 50% using traditional evaporation ponds to more than 80%, and the lithium carbonate produced is more than 99.9% pure. If the Company is able to obtain the necessary lithium permit, it will pursue utilizing this technology as the means of extraction in order to gain efficiencies.
Lithium Permit Update
In 2012, the Chilean Government’s Ministry of Mining established its first ever auction for the award of lithium production quotas and licenses (Special Lithium Operations Contracts, or CEOLs), which would permit the exploitation of an aggregate of 100,000 tons of lithium metal (approximately 530,000 tons of lithium carbonate equivalent) over a 20 year period, subject to a seven percent royalty.
In September 2012, we formed a consortium consisting of us, POSCO, Daewoo International Corp, and Mitsui & Co. (the “Consortium”) for the purpose of participating in such CEOL auction. As required under the rules established by the Ministry of Mining, the Consortium submitted its bid for the CEOLs, and in September, 2012, the Company was informed that the Consortium’s bid was not the winning bid.
The Chilean government has since decided to invalidate the CEOL process due to an administrative error, as well as rescinding the CEOL Basis, which defined the regulations of the CEOL process. The Company submitted two appeals to the Chilean government, requesting it to reconsider the invalidation and award the CEOL to the second highest bidder - the Consortium. The appeals have been rejected by the Chilean government.
On January 16, 2013, we submitted a letter to the Chilean Comptroller requesting to review the CEOL process. This is deemed to be the last administrative recourse before pursuing legal remedies. The Company is waiting for an answer.
Maricunga Shareholders’ Lawsuit Update
As the majority shareholder, we have filed lawsuits distributed to four civil courts of Copiapo, third Region of Atacama, Chile, against the minority shareholders seeking either payment of their pro rata portion of costs or an auction of their share of the properties. The minority shareholders have not paid their required contributions to the costs of conservation and exploration, which were agreed upon at the shareholders’ meeting on October 6, 2011. In December 2012, we received a favorable decision from one of the civil courts to auction approximately 4% of the shares once the judgment is executed. This is being opposed by the shareholders, and we are awaiting the court’s decision after which the second court of Copiapo should set a date and time for the auction. Evidence is currently being presented in the lawsuits in the other civil courts, after which a final decision should be issued.
Certain minority shareholders have filed counter claims against us, in two civil courts of Santiago, to declare, among other things, the invalidation of such shareholders’ meeting at which required contributions were established that such minority shareholders failed to make. In one of the courts, the process is on hold because the minority shareholders have not filed a new claim, as requested by the court. In the other court, we have filed our defense claiming that the lawsuits should be dismissed on the basis that the decision made in the shareholders´ meeting on October 6, 2011 was made in accordance with Chilean law, and that the amounts are necessary for the conservation and exploration of the mining property. This lawsuit is still in the discovery stage.
Strategic Plan
Part of our strategic plan is to explore and develop our existing projects as well as to identify other synergistic opportunities with new projects with production potential that could also be advanced in an accelerated manner, with the goal of becoming a company with valuable lithium, potassium, nitrates and other industrial minerals properties. Our primary objective is to become a low cost lithium producer as well as a significant producer of potassium nitrate. The key to achieving this objective is 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. The third leg of our strategic plan is to develop improved technologies for the extraction of lithium from brines.
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 current strategy principally involves the exploration of the Maricunga property and the acquisition of a source of iodine and nitrate. On the Maricunga project, we initially received $8 million of funding from POSCAN, which was spent to complete our Phase One Exploration and Development Plan. Such plan has been completed, and we have successfully produced a technical report in accordance with National Instrument 43-101 of the Canadian Securities Administrators for Maricunga. Upon achieving the NI 43-101 compliant resource, we satisfied the conditions to receive an additional $10 million of funding from POSCAN. In August 2012, we received the $10 million second tranche funding as committed by POSCAN.
Since then, we have continued our efforts to advance the Maricunga project. However, a key element in advancing the project lies in securing a special permit to exploit lithium in Chile. We participated in an international auction for the award of lithium production quotas and licenses (Special Lithium Operations Contracts, or CEOLs) to obtain this permit but we were not successful.
In the event that we ultimately do not obtain the necessary permits for lithium exploitation for our current Maricunga properties, we will likely pursue a strategy for the production of potassium from those properties. Our Technical Report in accordance with National Instrument 43-101 of the Canadian Securities Administrators (“NI 43-101”) shows that potassium resources are available in the Maricunga properties. As part of our strategic plan, we always had plans to produce a potassium by-product alongside the lithium.The majority of the past and current technical work performed on the project is applicable to the production of lithium and/or potassium. Potassium exploitation does not require special permits and is exploitable via regular mining concessions, according to the Chilean Mining Code.
In the event we develop a potash production operation on the Maricunga properties, we would complete a feasibility study of the economics of the project and would be required to raise approximately $100 million to $130 million to bring the project into production.
Another alternative would be producing potash that in combination with sodium nitrates will mix to produce potassium nitrate (KNO3). Potassium nitrate is a valuable product used in fertilizers. Potassium nitrate is used extensively as a fertilizer. Its advantage over commodity based fertilizers such as potash is that it provides two essential elements (nitrogen and potassium) in a single product. Because it has no sodium chloride content, it does not rot or damage delicate plants such as tobacco or the roots of fruit trees. As it is totally water soluble, naturally-derived potassium nitrate is especially suitable for use in organic farming and in hydroponic (soil free) agriculture. There is an increase in demand for this product, particularly in China, India, and Brazil. Chile is today the largest producer of potassium nitrate.
To produce potassium nitrate, we will also be required to obtain a source of sodium nitrate which could come from either 1) developing a sodium nitrate and iodine project; or 2) buying the sodium nitrate from different producers in the north of Chile. The Atacama Desert in the north of Chile is rich in sodium nitrate. The Company previously had an option on the Alfredo iodine and nitrates project. At the time we decided not to pursue that option because we were focused on pursuing the Maricunga properties as a lithium project. This property as well as a number of other projects in the north of Chile with the similar characteristics that we have evaluated in the past may continue to be available. Also, there are a number of producers of iodine in the north of Chile that have nitrates stockpiled which, as nitrates by themselves, are not economically profitable. There would be opportunities for us to acquire these to complement our potash production.
In parallel to these efforts, we continue to consider various alternatives to continue to pursue our lithium strategy. These include the acquisition and/or joint venture of nearby properties within the same Maricunga Salar that do not require special lithium permits for exploitation. On this basis, on April 16, 2013, the Company acquired the exploitation mining concession “Cocina 19 through 27” by the acquisition of 100% of the shares of SLM Cocina Diecinueve de la Hoyada de Maricunga, a Chilean based Company. This exploitation mining concession corresponds to a strategic lithium asset and is located within the northern section of Salar de Maricunga in Region III of Atacama in northern Chile. It is comprised of 450 hectares, increasing the Company´s land holdings within Maricunga to 1,888 hectares. The acquired “Cocina 19 through 27” mining concession adjoins the Company´s existing Litio 1-6 properties and there is no need to apply for a special contract with the State of Chile in order to exploit the lithium of the Cocina 19 through 27 concession. For further clarity, the exploitation of this concession is not subject to obtaining a CEOL permit; however, the acquisition does not provide the necessary permits to exploit lithium from our existing Maricunga property.
Results of Operations
Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012
Revenues
We had no revenues during the three months ended March 31, 2013 and 2012.
Exploration expenses
During the three months ended March 31, 2013 and 2012, we incurred exploration expenses of $79,336 and $2,156,317, respectively. The expenses incurred during the three months ended March 31, 2013 relate to our efforts to obtain the environmental permits that will allow us to take the project to a feasibility stage.
General and administrative expenses
Our general and administrative expenses for the three months ended March 31, 2013 and 2012 consisted of the following:
| | | | | | | | Increase | |
| | March 31, 2013 | | | March 31, 2012 | | | (Decrease) | |
Salaries and wages | | $ | 217,589 | | | $ | 257,760 | | | $ | (40,171 | ) |
Legal fees | | | 239,402 | | | | 307,876 | | | | (68,474 | ) |
Accounting and finance fees | | | 63,960 | | | | 81,424 | | | | (17,464 | ) |
Audit fees | | | 44,015 | | | | 12,000 | | | | 32,015 | |
Other professional fees | | | 76,162 | | | | 248,774 | | | | (172,612 | ) |
Marketing and investor relations | | | 2,971 | | | | 165,842 | | | | (162,871 | ) |
Travel expenses | | | 35,707 | | | | 277,692 | | | | (241,985 | ) |
Board of Directors expense | | | 61,000 | | | | 151,935 | | | | (90,935 | ) |
Rent | | | 3,720 | | | | 25,755 | | | | (22,035 | ) |
Communications | | | 11,468 | | | | 15,871 | | | | (4,403 | ) |
Office expenses | | | 4,505 | | | | 53,785 | | | | (49,280 | ) |
Relocation expenses | | | 24,414 | | | | - | | | | 24,414 | |
Bank fees | | | 1,767 | | | | 4,674 | | | | (2,907 | ) |
Other | | | 8,218 | | | | 12,158 | | | | (3,940 | ) |
Stock-based compensation | | | 489,705 | | | | 221,554 | | | | 268,151 | |
Depreciation and amortization | | | 7,027 | | | | 13,196 | | | | (6,169 | ) |
Registration rights penalties | | | - | | | | 337,776 | | | | (337,776 | ) |
| | $ | 1,291,630 | | | $ | 2,188,072 | | | $ | (896,442 | ) |
We incurred total general and administrative expenses of $1,291,630 for the three months ended March 31, 2013 compared to $2,188,072 for the three months ended March 31, 2012, a $896,442 decrease, which is comprised mainly of:
| · | Other professional fees decreased by $172,612 primarily due to a reduction in the use of outside professionals and the efforts of the Company to reduce costs; |
| · | Marketing and investor relations and travel expenses decreased by $162,871 and $241,985, respectively, as a result of the decrease in investor relations activities and the efforts of the Company to reduce costs; |
| · | Stock-based compensation increased by $268,151 as a result of accrual for $468,931 in relation to POSCO anti-dilution provisions which may have been triggered during the current year. This has been partially offset by stock issued in settlement of liabilities of $135,000 during the three months ended March 31, 2012 along with reduced amortization of stock based compensation as the stock units and options granted reach their vesting date; |
| · | Registration rights penalties decreased by $337,776 as there were no penalties incurred during the three months ended March 31, 2013.. |
Other income/expense
Other income for the three months ended March 31, 2013, was $155,463 compared to other expense in the amount of $3,873,785 for the three months ended March 31, 2012. The decrease in other income and expense was primarily due to our recognition of an unrealized gain from the change in fair value of the derivative liability related to our outstanding warrant instruments of $213,163 during the three months ended March 31, 2013 compared to a loss of $3,765,995 during the three months ended March 31, 2012.
Net interest expense amounted to $57,274 and $182,048 during the three months ended March 31, 2013 and 2012, respectively. The decrease in interest expense was primarily a result of the decrease in amortization of discount on notes payable, which was $50,037 for the three months ended March 31, 2013, compared to $167,194 for the three months ended March 31, 2012.
During the three months ended March 31, 2013, we recorded a loss on foreign currency transactions of $426 compared to a gain on foreign currency transactions of $74,258 for the three months ended March 31, 2012. Such activity was related to our operations in Peru and Chile.
Nine Months Ended March 31, 2013 Compared with Nine Months Ended March 31, 2012
Revenues
We had no revenues during the nine months ended March 31, 2013 and 2012.
Exploration expenses
During the nine months ended March 31, 2013 and 2012, we incurred exploration expenses of $456,945 and $5,608,579, respectively. The expenses incurred during the nine months ended March 31, 2013 relate to our efforts to obtain the environmental permits that will allow us take the project to a feasibility stage.
General and administrative expenses
Our general and administrative expenses for the nine months ended March 31, 2013 and 2012 consisted of the following:
| | | | | | | | Increase | |
| | March 31, 2013 | | | March 31, 2012 | | | (Decrease) | |
Salaries and wages | | $ | 1,046,200 | | | $ | 627,304 | | | $ | 418,896 | |
Legal fees | | | 590,779 | | | | 802,288 | | | | (211,509 | ) |
Accounting and finance fees | | | 252,575 | | | | 294,491 | | | | (41,916 | ) |
Audit fees | | | 178,640 | | | | 111,943 | | | | 66,697 | |
Other professional fees | | | 209,816 | | | | 633,841 | | | | (424,025 | ) |
Marketing and investor relations | | | 26,946 | | | | 288,894 | | | | (261,948 | ) |
Travel expenses | | | 139,645 | | | | 777,128 | | | | (637,483 | ) |
Board of Directors expense | | | 183,000 | | | | 151,935 | | | | 31,065 | |
Rent | | | 71,179 | | | | 97,540 | | | | (26,361 | ) |
Communications | | | 46,105 | | | | 51,646 | | | | (5,541 | ) |
Office expenses | | | 32,119 | | | | 107,152 | | | | (75,033 | ) |
Relocation expenses | | | 40,479 | | | | - | | | | 40,479 | |
Bank fees | | | 6,012 | | | | 5,703 | | | | 309 | |
Other | | | 25,917 | | | | 13,279 | | | | 12,638 | |
Stock based compensation | | | 819,804 | | | | 529,937 | | | | 289,867 | |
Depreciation and amortization | | | 31,113 | | | | 15,579 | | | | 15,534 | |
Registration rights penalties | | | - | | | | 479,776 | | | | (479,776 | ) |
| | $ | 3,700,329 | | | $ | 4,988,436 | | | $ | (1,288,107 | ) |
We incurred total general and administrative expenses of $3,700,329 for the nine months ended March 31, 2013 compared to $4,988,436 for the nine months ended March 31, 2012, a $1,288,107 decrease, which is comprised mainly of:
| · | Salaries and wages increased by $418,896 mainly due to hiring a full-time CFO and Vice President in March 2012, redundancy payments and bonus payments, partially offset by reduced salaries in Peru due to office closure and the resignation of the COO in December 2012; |
| · | Legal fees decreased by $211,509 due to reduced legal activity. For the period ended March 31, 2012, significant legal fees were incurred in relation to financing and capital raising, potential transactions, structures, tax issues and equity incentive plans; |
| · | Other professional fees decreased by $424,025 primarily due to a reduction in the use of outside professionals and the efforts of the Company to reduce costs; |
| · | Marketing and investor relations and travel expenses decreased by $261,948 and $637,483, respectively, as a result of the decrease in investor relations activities and the efforts of the Company to reduce costs; |
| · | Stock-based compensation increased by $289,867 as a result of accrual for $468,931 in relation to POSCO anti-dilution provisions which may have been triggered during the current year. This has been partially offset by stock issued in settlement of liabilities of $135,000 during the nine months ended March 31, 2012 compared with $20,700 during the nine months ended March 31, 2013, along with reduced amortization of stock based compensation as the stock units and options granted reach their vesting date; |
| · | Registration rights penalties decreased by $479,776 as there were no penalties incurred during the nine months ended March 31, 2013. |
Loss on settlements, net
The Company recorded a loss on settlements of $5,816 as a result of settlement agreements with respect to an aggregate of $390,336 of obligations, under which the Company issued an aggregate of 5,825,761 shares of the Company’s common stock, valued at $396,152.
Other income
Other income for the nine months ended March 31, 2013, was $5,966,674 compared to $6,148,875 for the nine months ended March 31, 2012. The decrease in other income was primarily due to the change in loss on debt extinguishment, recognition of change in fair value of warrant derivative liabilities, warrant modification expense, and the change in interest expense.
We recognized a loss on debt extinguishment of $37,235 compared with a loss on debt extinguishment of $841,752 for the nine months ended March 31, 2013 and 2012, respectively. The differences related to the difference in the terms of existing debt compared to debt under the modified terms of the debt agreements.
We recognized an unrealized gain from the change in the fair value of the derivative liability related to our outstanding warrant instruments of $6,453,869 during the nine months ended March 31, 2013 compared to $7,837,564 during the nine months ended March 31, 2012. The change in fair value of our derivative warrant liability has no impact on our cash flows from operations.
We recognized warrant modification expense in conjunction with the closing of POSCAN’s second tranche of investment on August 17, 2012, when the Company adjusted the exercise price of the warrants previously issued to POSCAN from $0.40 to $0.21 per share. The incremental value of the warrants before and after the modification was $171,150 and was reported as current period expense.
Net interest expense amounted to $298,533 and $880,332 during the nine months ended March 31, 2013 and 2012, respectively. The decrease in interest expense was primarily a result of the decrease in amortization of discount on notes payable and deferred financing costs, which was $827,032 during the nine months ended March 31, 2012 and $109,534 during the nine months ended March 31, 2013, and interest income of $35,000 earned on funds on deposit during the nine months ended March 31, 2013. This decrease in interest expense has been partially offset by an increase in interest expense for the nine months ended March 31, 2013 on: registration rights penalties of $69,963, notes payable entered into during 2012 of $57,760, and interest related to late payment of supplier invoices of $37,710.
During the nine months ended March 31, 2013 and 2012, we recorded gains on foreign currency transactions of $19,723 and $33,395, respectively, and such activity was related to our operations in Peru and Chile.
Fiscal Year Ended June 30, 2012 Compared with Fiscal Year Ended June 30, 2011
Revenues
We had no revenues during the years ended June 30, 2012 and 2011.
Exploration Expenses
During the years ended June 30, 2012 and 2011, we incurred exploration expenses of $6,193,533 and $560,075, respectively. The expenses incurred during the year ended June 30, 2012, relate to our efforts to begin exploration activities on our Maricunga project in Chile and principally include drilling expenses and other related expenses. The expenses incurred during the year ended June 30, 2011, relate primarily to our other properties which we no longer are exploring.
Mineral Rights Impairment Expense
During the years ended June 30, 2012 and 2011, we incurred impairment expenses of $300,000 and $4,120,000, respectively. Mineral rights impairment expense for the year ended June 30, 2012, is a result of the impairment of the Noto properties. Mineral rights impairment expense recorded during the year ended June 30, 2011 is a result of the impairments of the Alfredo property ($4,070,000) and the Peru property ($50,000). We determined that these projects did not meet our requirements for additional mining development activities.
Loss on Settlements, Net
During the year ended June 30, 2011, we recorded a loss on settlement of $1,920,000 as a result of issuing 6,000,000 shares of our common stock in connection with a settlement related to the Puna property obligation. In addition, we recorded a gain on settlement of $422,500 as a result of a settlement with Lacus (payment of $150,000 in cash and 500,000 shares of the Company’s common stock), which was less than we had accrued for these expenses as of June 30, 2010. The Puna and Lacus settlements were related to the Argentinean properties that were terminated. There were no similar transactions during the year ended June 30, 2012.
General and Administrative Expenses
Our general and administrative expenses for the years ended June 30, 2012 and 2011 consisted of the following:
| | | | | | | | Increase | |
| | June 30, 2012 | | | June 30, 2011 | | | (Decrease) | |
Professional fees-legal | | $ | 1,210,123 | | | $ | 1,021,198 | | | $ | 188,925 | |
Wages and salaries | | | 1,115,824 | | | | 571,337 | | | | 544,487 | |
Travel expenses | | | 896,898 | | | | 697,729 | | | | 199,169 | |
Stock based compensation | | | 649,580 | | | | 1,941,862 | | | | (1,292,282 | ) |
Registration rights penalties | | | 479,777 | | | | 38,750 | | | | 441,027 | |
Write-offs of deposits on potential acquisitions | | | 400,000 | | | | - | | | | 400,000 | |
Marketing and investor relations | | | 395,416 | | | | 232,289 | | | | 163,127 | |
Professional fees-others | | | 375,881 | | | | 45,868 | | | | 330,013 | |
Professional fees-finance/accounting | | | 330,798 | | | | 414,804 | | | | (84,006 | ) |
Office expenses | | | 307,320 | | | | 91,864 | | | | 215,456 | |
Board of Directors expenses | | | 215,935 | | | | - | | | | 215,935 | |
Professional fees-audit | | | 205,273 | | | | 150,710 | | | | 54,563 | |
Insurance | | | 100,079 | | | | 63,828 | | | | 36,251 | |
Filing fees | | | 99,791 | | | | 57,536 | | | | 42,255 | |
Other | | | 213,348 | | | | 120,892 | | | | 92,456 | |
| | $ | 6,996,043 | | | $ | 5,448,667 | | | $ | 1,547,376 | |
We incurred total general and administrative expenses of $6,996,043 for the year ended June 30, 2012 compared to $5,448,667 for the year ended June 30, 2011, a $1,547,376 increase, which comprised of:
| · | Professional fees-legal increased by $188,925 due to due diligence expenses in connection to potential acquisitions and the POSCAN funding; |
| · | Wages and salaries expense increased by $544,487 due to the increase in hiring of new employees, including a CEO, a full time CFO, and office staff; |
| · | Travel expenses increased by $199,169 due to investor relations activities in relation to seeking sources of funding; |
| · | Registration rights penalties increased by $441,027 due to penalties incurred in connection with the failure to file a timely registration statement; |
| · | Write-offs of deposits on potential acquisitions increased by $400,000 due to write-offs of payments to New World Resource Corp. and to the Claritas and Bongos properties; |
| · | Marketing and investor relations increased by $163,127 due to activities for actively seeking various sources of funding; |
| · | Professional fees-others increased by $330,013 due to consulting fees related to the acquisition and development of the Maricunga project; |
| · | Office expenses increased by $215,456 mainly due to the opening of our new office in Chile; |
| · | Board of Directors fees increased by $215,935 due to the approval of fees to be paid to the Board of Directors in 2012; |
| · | Professional fees-audit increased by $54,563 due to higher activity as a result of the development of the Maricunga project; |
| · | Insurance increased by $36,251 mainly due to insurance costs related to the new Chile location; |
| · | Filing fees increased by $42,255 mainly due to the Form S-1 filings during the year 2012, XBRL requirements which started during 2012 and an increase in press release activities in 2012; |
| · | Other expenses increased by $92,456 mainly due to the higher activity as result of the development of the Maricunga project. |
| · | These increases were partially offset by an $84,006 decrease in professional fees-finance/accounting due to the hiring of new employees during 2012 and a $1,292,282 decrease in stock compensation to as a result of fewer services paid for with stock. |
Other (Income) Expense
Loss on Debt Extinguishment
We incurred a loss on debt extinguishment of $841,752 during the year ended June 30, 2012 as a result of entering into a waiver agreement with the lenders whereby the terms of the notes were extended and the conversion price was reduced from $0.40 per share to $0.12 per share, which resulted in us 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. There were no similar transactions during the year ended June 30, 2011.
Change in Fair Value of Derivative Liability - Warrant Instruments
During the year ended June 30, 2012, we recorded a gain of $10,780,342 on the change in fair value of derivative liability - warrant instruments, compared to a loss of $6,116,147 during the year ended June 30, 2011. The change in fair value of our derivative warrant liability has no impact on our cash flows from operations and was primarily a result of the decrease in our stock price during the year ended June 30, 2012.
Warrant Modification Expense
During the year ended June 30, 2011, we modified certain warrants by which new warrants were issued in exchange for the exercise of previously issued warrants. The newly issued warrants were treated as derivatives as they contain certain anti-dilution features. We valued the new warrants issued as a result of the modification using a modified lattice model and recorded expense of $1,068,320 during the year ended June 30, 2011. There were no similar transactions during the year ended June 30, 2012.
Interest Expense
During the years ended June 30, 2012 and 2011, interest expense was $1,150,634 and $410,056, respectively. The increase in interest expense was a result of interest and amortization of the debt discount on the $1.5 million zero coupon convertible notes issued in May 2011, and interest on new promissory notes issued during the second half of fiscal year 2012.
Gain on Foreign Currency Transactions
During the years ended June 30, 2012 and 2011, gain on foreign currency transactions amounted to $14,142 and $1,383, respectively.
Net Loss
Net loss for the year ended June 30, 2012 was $4,687,478 compared to a net loss of $19,219,382 for the year ended June 30, 2011. The decrease is primarily due to an unrealized gain on the change in fair value of derivative liabilities - warrant instruments of $10,780,342 in 2012 compared to an unrealized loss of $6,116,147 in 2011. This decrease was partially offset by a $1,863,334 increase in our total operating expenses in 2012, compared to the prior year.
Net Loss Attributable to Non-Controlling Interest
During the years ended June 30, 2012 and 2011, the net loss attributable to non-controlling interests was $2,375,407 and $-0-, respectively. This represents the non-controlling interest’s 40% share of expenses relating to the exploration of the Maricunga Property.
Liquidity and Capital Resources
We are primarily engaged in exploration and acquisition of new properties and do not generate income from operations currently. Our primary source of liquidity has been debt and equity financing.
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, potassium nitrate and other minerals, overall market and economic conditions, the volatility in equity markets may limit our ability to raise the capital needed to execute our plan of operations. 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.
As of March 31, 2013, the Company had a cash balance on hand of $2,349,834, which is not sufficient to maintain its basic operations, which do not include future exploration and acquisition activities, for 12 months. We have implemented a cost reduction program and we are taking the necessary actions to preserve cash. We are in progress of evaluating the total costs and activities that a potassium project requires. The Company has no source of revenue; however management is actively seeking additional funding in the form of equity and/or debt from potential investors.
On April 16, 2013, the Company made a $2,000,000 initial cash payment to acquire additional property in the Maricunga Salar. After such payment, the Company´s cash balance was approximately $100,000.
On March 18, 2013, the Company signed a Memorandum of Understanding with BW. If successful, the transaction could provide Li3 with additional funding allowing the Company to continue advancing the Maricunga project. Under the proposed terms of the merger, BW would establish a new subsidiary which would merge into the Company, with Li3 remaining as the surviving entity as a wholly-owned subsidiary of BW. Each shareholder of Li3 would receive 1 share of common stock in BW for every 250 shares of common stock held in Li3. The Company´s existing warrants will exchange in the same ratio. The closing of the proposed transaction with BW is subject to a number of closing conditions, including further due diligence, final approval by both board of Directors of both companies, regulatory and court approvals, shareholder approvals and the execution of a definitive agreement.
POSCAN funding
In September 2011, POSCAN purchased 38,095,300 Units of our securities for approximately $8 million (or $0.21 per Unit), 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 per share.
In August 2012, we received the second tranche of funding by POSCAN. We issued 62,499,938 Units to POSCAN for gross proceeds of $9,999,990 (or $0.16 per Unit), with each “Unit” consisting of one share of common stock and a three-year warrant to purchase one share of common stock for $0.21 per share.
Pursuant to the Additional Agreement, we reduced POSCAN’s purchase price per Unit for the second tranche from $0.21 per share to $0.16 per share, and reduced the exercise price of all of the warrants sold under the POSCAN SPA from $0.40 per share to $0.21 per share.
Pursuant to the Additional Agreement, we also agreed to issue to POSCAN a two-year Bonus Warrant to purchase 5,000,000 shares of our common stock at an exercise price of $0.15 per share. Furthermore, subject to certain exceptions, we must issue additional shares of our common stock to POSCAN in the event that we issue or sell any such shares to third parties for a price of less than $0.16 per share at any time during the 18 months immediately following the Second Closing.
POSCAN has no current commitments to provide us with funding in the future.
Shares for Debt Settlement
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. In September 2012, we issued 5,825,761 shares of our common stock for the settlement of $390,336 relating to certain outstanding liabilities at June 30, 2012. In April and May 2013, we issued 1,372,533 shares of our common stock for the settlement of $91,960 relating to certain outstanding liabilities at March 31, 2013.
Convertible Notes
In September 2012, the Company entered into a Second Amendment and Waiver Agreement with the holders of the zero-coupon convertible notes (the “Second Waiver Agreement”). Pursuant to the Second Waiver Agreement, the zero-coupon convertible notes maturity date was extended to September 28, 2013, and the aggregate principal amount thereof was increased to $1,880,000, which includes an Original Issue Discount of 12.1% or $202,926. The Waiver Agreement also reduced the conversion price of the zero-coupon bridge notes from $0.12 to $0.095 per share.
Common Stock Subject to Rescission
On March 19, 2012, the Securities and Exchange Commission declared effective a registration statement that we had filed to cover the resale of shares previously issued and sold (or to be issued upon the exercise of warrants). On March 1, 2013, we filed a post-effective amendment for that registration statement that included our audited financial statements as of and for the year ended June 30, 2012 as had been filed on our Annual Report on Form 10-K for the year ended June 30, 2012 (the “2012 Annual Report”). We believe that the filing of the post-effective amendment fulfilled our obligation to update the registration with current financial information pursuant to Section 10(a)(3) of the Act. However, there were approximately three months when our registration statement contained financial information that was not current. During that period, 65,000 shares sold pursuant to that prospectus in open market transactions which may have violated Section 5 of the Securities Act of 1933, as amended, and, as a result, the purchasers of those shares may have rescission rights or claims for damages. Accordingly, we have reduced shareholders’ equity at March 31, 2013 by $3,041, the total amount that we would have to refund if all the purchasers of those shares exercised their rescission right.
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.
MANAGEMENT OF Li3
Executive Officers and Directors
Below are the names and certain information regarding Li3’s current executive officers and directors:
Name | | Age | | Title | | Date First Appointed |
Luis Francisco Saenz | | 41 | | President, Chief Executive Officer and Director | | October 19, 2009 |
Luis Santillana | | 37 | | Chief Financial Officer, Secretary and Treasurer | | July 1, 2012 |
Patrick Cussen | | 63 | | Chairman of the Board | | December 5, 2011 |
Alan S. Fraser | | 50 | | Director | | October 23, 2011 |
Patricio A. Campos | | 66 | | Director | | October 23, 2011 |
Eduardo G. de Aguirre | | 65 | | Director | | October 23, 2011 |
SungWon Lee | | 46 | | Director | | December 19, 2012 |
Harvey McKenzie | | 66 | | Director | | June 27, 2011 |
David G. Wahl | | 68 | | Director | | February 18, 2010 |
Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Executive officers are appointed by the board of directors and serve at its pleasure.
Certain biographical information for each of the executive officers and directors is set forth below.
Luis Francisco Saenz joined Li3’s board of directors on October 19, 2009. Mr. Saenz has been its Chief Executive Officer since October 19, 2009 and President since September 14, 2011. He is currently, and has been since July 21, 2008, the President and a Director of the publicly traded Loreto Resources Corporation (LRTC.OB), and he also served as their Chief Executive Officer from July 21, 2008 until August 25, 2011. Mr. Saenz was formerly employed at Standard Bank (“Standard”) with Standard’s investment banking unit, Standard Americas, Inc. Mr. Saenz joined Standard in New York in 1997 and relocated to Peru in 1998 to establish Standard’s Peru representative office. While in Peru, Mr. Saenz led Standard’s mining and metals organization effort in the Latin America region. Mr. Saenz returned to New York in 2007 to head Standard’s mining and metals team in the Americas. Mr. Saenz previously worked for Pechiney World Trade in the base metals trading area before joining Merrill Lynch as Vice-President for Commodities in Latin America. Mr. Saenz graduated from Franklin and Marshall College in 1991 with a Bachelor of Arts degree in economics and international affairs.
Luis Santillana became Vice President of Finance on March 1, 2012, and has been Chief Financial Officer, Treasurer and Secretary of Li3 since July 1, 2012. Mr. Santillana strengthens the existing management team and brings additional domain expertise, having over 13 years of experience in the mining industry, specifically in finance, fund raising, debt facilities, deal negotiation and execution, strategic and financial planning, financial valuations, treasury management, and improvement of management reporting. Prior to joining Li3, Mr. Santillana held the position of Strategic Planning Manager for ENRC plc,, a $7 billion revenue, diversified mining company listed on the London Stock Exchange (FTSE 100). Based in London, he was involved in strategic and financial planning and management reporting for ENRC. From September 2008 to June 2010, Mr. Santillana was responsible for the financial planning and treasury functions at London Mining plc, an iron-ore mining company listed on the London Stock Exchange (AIM). Prior to joining London Mining plc, Mr. Santillana worked for Hochschild Mining plc, a Peruvian gold and silver producer, where he was part of the core management team that led Hochschild Mining’s successful IPO and listing on the London Stock Exchange (FTSE 250). Mr. Santillana holds an MBA from IESE Business School (Spain) and a Bachelor’s Degree in Industrial Engineering from Universidad de Lima (Peru).
Patrick Cussen joined Li3 as Chairman of the board of directors in September 2011. Mr. Cussen brings us 40 years of mineral and mining expertise and is currently the President of Celta, a Chilean mining consulting and service company to the Latin American mining industry advising global clients including: Antofagasta Minerals, Vale, Phelps Dodge (Freeport), Placer Dome (Barrick), Codelco, Citibank, LS-Nikko Copper and Royal Gold. From 1972 - 1985, Mr. Cussen held numerous positions within Codelco, the world’s largest copper producer, culminating as Managing Director, Chile Copper Ltd., a London based Codelco subsidiary. From 1985 - 1990, Mr. Cussen was VP Sales, Empresa Minera de Mantos Blancos S.A. (subsidiary of Anglo American Chile). Mr. Cussen is currently Chairman of the Board of the Center for Copper and Mining Studies, Cesco, the Chilean think-tank on mining. Mr. Cussen is also a former member of the board of the Chilean Copper Commission. Mr. Cussen is an industrial civil engineer and holds an MA in economics from the University of Chile.
Mr. Cussen’s qualifications to serve on the board of directors include his experience with the mining industry.
Patricio Campos joined Li3’s board of directors in September 2011. Mr. Campos brings valuable domain expertise having over 39 years’ experience in the mining industry, specifically in project exploration, evaluation, technical and economic preparation. His mineral and mining experience includes copper, gold and non-metallic (coal, phosphate, limestone, nitrate and iodine, lithium (brines) minerals, boron and potassium chloride projects. Mr. Campos has also acted as a consultant in the evaluation of ore deposit reserves, copper, gold, iodine, nitrate, coal, phosphate, lithium salars, boron, potassium chloride and potassium sulphate projects. Prior to joining Li3, Mr. Campos previously led and supervised the construction of several plants (iodine, bagging) for Chemical & Mining Co. of Chile Inc. (NYSE: SQM), a multi-national global producer and seller of fertilizers and specialty chemicals and Bifox Ltd. (phosphoric acid, grinding, crushing). Additionally, Mr. Campos has worked as a consultant spanning 30 years for companies such as Anglo American (Salar de Atacama Project), SQM (Salar de Atacama Project), Falcon Mines, MAGSA, ACF Minera S.A., SCM Montevideo & Montecristo, and Sociedad Minera Isla Riesco. Mr. Campos has also actively participated in due diligence processes and negotiations for assets such as Algorta Norte S.A.’s iodine project, SQM’s Salar de Atacama and Antucoya copper projects, Codelco´s El Hueso gold mine and other exploration projects, Phelp Dodge’s Safford project, among others. Mr. Campos is a former Professor of Mining Economy at the Mining Department, Universidad de Chile and a former Professor for due diligence, Mining Department, Escuela de Ingenieria, Unversidad de Chile and Instituto de Indenieros de Minas de Chile. Currently Mr. Campos is a member of the Comité de Recursos Mineros del IIMCh (Mining Resources Committee, Chile). Mr. Campos received his Civil Mining Engineering degree from Universidad de Chile and Graduated in economic evaluation and project preparation, Bid-Odeplan-Universidad Católica de Chile.
Mr. Campos’s qualifications to serve on the board of directors include his experience with the mining industry.
Alan S. Fraser joined Li3’s board of directors in September 2011 and brings over 24 years of experience in Engineering Business Development specifically for Mining Projects, Mining Project Evaluations, Due Diligence Studies, Process Plants, Power Plants, Petrochemical Process Plants, Sulphuric Acid Plants, Infrastructure and Environmental Assessments. Currently, Mr. Fraser is the Managing Director and shareholder of P3 Consultores S.A, a Project Management Services Company providing risk administration to clients including Anglo American, Colahuasi and others. From 2001 to 2009, Mr. Fraser held numerous positions, culminating as the Director, Business Development for Fluor, Chile S.A. servicing global clients including BHP Billiton Base Metals, Rio Tinto, Anglo American, Xstrata, Codelco, Antofagasta Minerals, Southern Peru Copper Corporation, General Atomics. While in this capacity, Mr. Fraser actively participated in numerous resource projects including; winning the Gaby SX-EW EPCM Project for Codelco, ($900 million), Pascua Lama EPC Project for Barrack Gold ($2.3 billion), Gold Mill EPCM Project for Minera Yanacocha ($240 million), Sulphide Leach EPCM Project of Minera Escondida Ltda. ($780 million), Ilo Smelter Modernization EPCM Project ($400 million), and engineering studies as Codelco Minco 230 k tpd, Salobo Feasibility Study for CVRD (Brazil), additional work for Newmont/Minera Yanacocha including the Gold Mill Project, Collahuasi SX/EW expansion studies and Material Handling support, Minera Escondida Water Supply Studies. Also recent detail engineering services for the expansion of Lomas Bayas ($47 million) and the Feasibility Study of the El Morro project ($1.5 billion). Mr. Fraser is a Civil Mining Engineer, Universidad de Chile, Santiago, Chile.
Mr. Fraser’s qualifications to serve on the board of directors include his experience with the mining industry.
Eduardo de Aguirre joined Li3’s board of directors in October 2011. Mr. de Aguirre brings over 35 years' experience in business development, project management and finance. Since 2007, Mr. de Aguirre has served as Legal Representative to General Dynamics Installation Services Inc., Chile who are building and commissioning radio telescopes for the ALMA Project for a total value of about $150MMUS. ALMA is the largest astronomical project in existence in the world, now in construction in the Atacama desert in Chile and will be fully operational in 2013. Its total cost is in the range of billions of dollars. In addition, since 2005, he has acted as Consultant and Sales Representative for Latin America to General Dynamics SATCOM Technologies Inc. Prior to that, from 2000 - 2011, he acted as a consultant for various Chilean entities including Target-DDI, AACA, ASL, Filmosonido and ViaSat. From 1989 - 2000, Mr. de Aguirre served as Regional Manager in South America and as General Manager of the Chilean Subsidiary of Scientific Atlanta, Inc. Mr. de Aguirre is a Civil Industrial Engineer and attended Engineering School at the Catholic University, Santiago, Chile.
Mr. de Aguirre’s qualifications to serve on the board of directors include his experience in business development, project management and finance.
SungWon Lee, PhD. was appointed to Li3’s board of directors on December 19, 2012, in connection with the closing of POSCAN’s initial investment in Li3’s securities. Dr. Lee is a metallurgist with vast knowledge in aluminum forming and superplasticity. Dr. Lee joined POSCO in 2000 and has held various roles including Team Leader of the New Business Development Department where his activities included sourcing and reviewing numerous investment projects, joint ventures and organic growth projects. Dr. Lee led the development of the Magnesium Coil Project and the Fe-Mn Alloy Joint Venture both of which are operating units within POSCO Group. Dr. Lee has been serving as the Director of the Lithium Project Department within POSCO since 2010. Dr. Lee graduated with a Bachelor of Science from Yonsei University, Korea, M.S. Metallurgical Engineering, Yonsei University, Korea and PhD. Materials Science and Engineering, University of Southern California, USA.
Dr. Lee’s qualifications to serve on the board of directors include his experience with metallic minerals.
Harvey McKenzie was appointed to Li3’s board of directors on June 27, 2011. Mr. McKenzie is a Chartered Accountant and has been the CFO and corporate secretary of Anconia Resources Corp. (TSXV: ARA.V) since June 2011 and the CFO and a director of Martina Minerals Corp. (TSXV: MTN.V) (formerly Manor Global Inc., a capital pool company), since February 2005. Prior thereto, Mr. McKenzie served as the CFO of several Canadian publicly listed exploration, development and producing mining companies, including Eurotin Inc. from May 2011 to September 2011, Sino Vanadium Inc. from May 2010 to March 2011, Iberian Minerals Corp. from July 2007 to June 2009, Carlisle Goldfields Limited from September 2006 to July 2007, and Asian Mineral Resources Limited from July 2006 to January 2008. From August 2005 to July 2007, he was the CFO and a director of Card One Plus, Ltd., an electronic payment solutions company. Prior thereto he was the CFO of Thistle Mining Inc. from March 1999 to August 2005 (TSXV: TMG.V). He has also served as a consultant for several private companies and on the boards of several junior Canadian natural resource companies for over a decade. Prior thereto, he was in the financial services sector from 1987 to 1995; and from 1983 to 1987 he served as Director of Information Services of Ernst & Young, Chartered Accountants, in Toronto. From 1977 to 1983, he provided management and controllership functions for various financial institutions. From 1970 to 1977, he served as an Auditor for PricewaterhouseCoopers, Chartered Accountants. Mr. McKenzie obtained his Diploma in Alternate Dispute Resolution from the University of Toronto in 2001. He obtained his C.A. from the Institute of Chartered Accountants of Ontario in 1973 and his B.Sc. (Hons.) in Mathematics from the University of Toronto in 1970.
Mr. McKenzie’s qualifications to serve on the board of directors include his experience with companies involved in the mining and mineral industry.
David G. Wahl, P. Eng., P.Geo. ICD.D was appointed to Li3’s Board of Directors on February 18, 2010. From 2005 to the present, Mr. Wahl has been the President and CEO of Southampton Associates - Consulting Engineers & Geoscientist, a private consulting concern specializing in mining and technical issues for corporate clients, financial institutions and governments. Mr. Wahl is a Director of Renforth Resources Inc. (TSX-V) and Femin Inc (Frankfurt). Mr. Wahl also has served in a technical advisory capacity to certain financial institutions, government agencies, and national legal and accounting firms. As a past director of the Prospectors and Developers Association, Mr. Wahl provided independent peer review of the OSC/TSE Mining Standard Task Force and for Canadian National Instrument 43-101. Mr. Wahl contributed to a similar review process as co-chair of the Professional Engineers of Ontario Review Committee. Mr. Wahl is a graduate of the Colorado School of Mines and received a degree as an Engineer of Mines in 1968.
Mr. Wahl’s qualifications to serve on the board of directors include his experience with companies involved in the mining and mineral industry.
Rights to Nominate Directors
Li3 has agreed with the Maricunga Sellers: (a) to increase the number of directors constituting its board of directors to seven; (b) that the Maricunga Sellers will have the right to nominate three of Li3’s 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 Li3’s 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 of directors 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 Li3’s management at the next and subsequent annual meetings of stockholders, and at any special meeting of the stockholders at which directors are to be elected (collectively, a “Meeting”), during the Lock-Up period (but the Nominees will be subject to reelection by the stockholders as provided in Li3’s 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. To date, the Maricunga Sellers have exercised their right to nominate the following board members: Eduardo de Aguirre, Patricio Campo, and Alan Fraser. All three Nominees were appointed to Li3’s Board of Directors on October 23, 2011. Thereafter, Li3’s Chairman of the Board, Patrick Cussen, was appointed to the board on December 5, 2011.
Pursuant to the Investor’s Rights Agreement between POSCAN and Li3, dated as of August 24, 2011, Li3 was required to appoint a director nominated by POSCAN to the board of directors, and we must 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 common stock. Li3 appointed Mr. SungWon Lee to the board of directors on December 19, 2012.
Involvement in Certain Legal Proceedings
To the best of Li3’s knowledge, other than as disclosed below, none of its directors or executive officers has, during the past ten years:
| ● | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| ● | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
| ● | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; |
| ● | been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| ● | been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| ● | been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Harvey McKenzie was the Chief Financial Officer of Thistle Mining Inc. when, on January 7, 2005, Thistle Mining obtained protection from creditors pursuant to the Companies’ Creditors Arrangement Act, (Canada). The restructuring was completed on June 30, 2005.
Board of Director Meetings
Li3’s business is under the general oversight of the board of directors as provided by the laws of Nevada and its by-laws. During the fiscal year ended June 30, 2012, the board of directors held seven meetings and took action by unanimous written consent in lieu of a meeting two times. Except as set forth below, each incumbent director attended at least 75% of the board of directors meetings and the meetings of the committees on which he served during fiscal 2012 (or the portion thereof during which he has been a director).
Director | | Percentage of meetings attended | |
Hyundae Kim | | | 11 | % |
Patricio Campos | | | 50 | % |
David Wahl | | | 57 | % |
Eduardo Aguirre | | | 63 | % |
Board Committees
Until December 5, 2011, Li3 had not established any committees of its board of directors. The entire board of directors has historically performed all functions that would otherwise be performed by committees, including audit and nominating committees. Effective December 5, 2011, the board of directors formed an Audit Committee, a Compensation Committee, a Health, Safety, Environment and Community Committee and a Nominating and Corporate Governance Committee. It has subsequently adopted charters for all such committees.
Audit Committee
The purpose of the Audit Committee of the board of directors is to represent and assist the board in monitoring (i) accounting, auditing, and financial reporting processes; (ii) the integrity of the financial statements; (iii) Li3’s internal controls and procedures designed to promote compliance with accounting standards and applicable laws and regulations; and (iv) the appointment of and evaluating the qualifications and independence of the independent registered public accounting firm. The Audit Committee’s responsibilities are set forth in its formal charter. The Audit Committee consists of Mr. McKenzie (Chairperson) and Messrs. Cussen and Fraser. The Audit Committee was formed on December 5, 2011, and has met two times during fiscal 2012.
Li3’s board of directors has determined that all Audit Committee members are financially literate under the Nasdaq rules of. The board also determined that Mr. McKenzie qualifies as an “audit committee financial expert” within the meaning of Item 407 of Regulation S-K promulgated under the Exchange Act.
Compensation Committee
The purpose of the Compensation Committee of Li3’s board of directors is to (i) assist the board in discharging its responsibilities with respect to compensation of executive officers, (ii) evaluate the performance of executive officers, and (iii) administer the stock and incentive compensation plans and recommend changes in such plans to the board as needed. The Compensation Committee’s specific responsibilities are set forth in its formal charter. The Compensation Committee currently consists of Mr. De Aguirre (Chairman) and Messrs. Cussen and Saenz. Mr. Saenz, as Chief Executive Officer, is not independent within the meaning of the Nasdaq rules; nonetheless, Li3 believes that his presence on the Compensation Committee is productive, given the size and history of Li3. The Compensation Committee was formed on December 5, 2011, and has met two times during fiscal 2012.
Health, Safety, Environment and Community Committee
The purpose of the Health, Safety, Environment and Community Committee of Li3’s board of directors is to assist the board in discharging its responsibilities with respect to (i) employee health and safety, (ii) the protection of the environment, and (iii) the relationship to the local communities affected by its operations. The Health, Safety, Environment and Community Committee’s specific responsibilities are set forth in its formal charter. The Health, Safety, Environment and Community Committee currently consists of Mr. Campos (Chairman) and Messrs. Fraser and Wahl. The Health, Safety, Environment and Community Committee was formed on December 5, 2011, and has not met during fiscal 2012.
Nominating and Corporate Governance Committee
The purpose of the Nominating and Corporate Governance Committee of the board of directors is to assist the board in identifying qualified individuals to become board members, in determining the composition of the board and its committees, in monitoring a process to assess board effectiveness and in developing and implementing corporate procedures and policies. The Nominating and Corporate Governance Committee’s specific responsibilities are set forth in its formal charter. The Nominating and Corporate Governance Committee currently consists of Mr. Cussen (Chairman) and Messrs. McKenzie and Saenz. Mr. Saenz, as Chief Executive Officer, is not independent within the meaning of the Nasdaq rules; nonetheless, we believe that his presence on the Nominating and Corporate Governance Committee is productive, given the size and history of Li3. The Nominating and Corporate Governance Committee was formed on December 5, 2011, and has not met during fiscal 2012.
Shareholder Communications
Currently, Li3 does not have a policy with regard to the consideration of any director candidates recommended by security holders. To date, no security holders have made any such recommendations.
Director Independence
Because the common stock is not currently listed on a national securities exchange, Li3 has used the definition of “independence” of The Nasdaq Stock Market to make this determination. Nasdaq Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of Li3 or any other individual having a relationship which, in the opinion of Li3’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The Nasdaq listing rules provide that a director cannot be considered independent if:
| · | the director is, or at any time during the past three years was, an employee of Li3; |
| · | the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service); |
| · | a family member of the director is, or at any time during the past three years was, an executive officer of Li3; |
| · | the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which Li3 made, or from which Li3 received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions); and |
| · | the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of Li3 served on the compensation committee of such other entity; or the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of Li3’s outside auditor, and who worked on Li3’s audit. |
The board of directors has determined that each of Messrs. De Aguirre, Campos, Cussen, Fraser, Lee, McKenzie and Wahl- is an “Independent Director” within the meaning of the rules of the Nasdaq Stock Market. Furthermore, the board has determined that each member of the Audit Committee is “independent” within the meaning of Rule 10A-3(b)(1) under the Exchange Act.
EXECUTIVE COMPENSATION OF Li3
The following table sets forth information concerning the total compensation paid or accrued by Li3 during the last two fiscal years ended June 30, 2012 and June 30, 2011 to (i) all individuals that served as principal executive officer or acted in a similar capacity for Li3 at any time during the fiscal year ended June 30, 2012; and (ii) all individuals that served as executive officers at any time during the fiscal year ended June 30, 2011 that received annual compensation during such fiscal year in excess of $100,000.
Summary Compensation Table
| | | | | | | | | | | | | | | | | | | | Change | | | | | | | |
| | | | | | | | | | | | | | | | | | | | in | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Pension | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Value | | | | | | | |
| | | | | | | | | | | | | | | | | | | | and Non- | | | | | | | |
| | | | | | | | | | | | | | | | | Non-Equity | | | qualified | | | | | | | |
| | | | | | | | | | | | | | | | | Incentive | | | Deferred | | | | | | | |
Name and | | | | | | | | | | | Stock | | | Option | | | Plan | | | Compensation | | | All Other | | | | |
Principal | | | | | Salary | | | Bonus | | | Awards | | | Awards | | | Compensation | | | Earnings | | | Compensation | | | | |
Position | | Year | | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | | | ($) | | | Total ($) | |
Luis Francisco Saenz | | | 2012 | | | | 225,000 | | | | 200,000 | | | | - | | | | - | | | | - | | | | - | | | | 19,070 | | | | 444,070 | |
Chief Executive Officer (1) | | | 2011 | | | | 75,000 | | | | - | | | | 154,000 | | | | - | | | | - | | | | - | | | | - | | | | 229,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Thomas E. Currin | | | 2012 | | | | 212,500 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 212,500 | |
Chief Operating Officer (2) | | | 2011 | | | | 75,000 | | | | 100,000 | | | | 1,232,500 | | | | 343,310 | | | | - | | | | - | | | | - | | | | 1,750,810 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Luis Santillana | | | 2012 | | | | 61,667 | | | | 20,000 | | | | 34,500 | | | | 30,725 | | | | - | | | | - | | | | - | | | | 146,892 | |
Chief Financial Officer (3) | | | 2011 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Eric E. Marin | | | 2012 | | | | 201,772 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 201,772 | |
Interim Chief Financial Officer (4) | | | 2011 | | | | 10,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 10,000 | |
| (1) | Mr. Saenz was appointed Chief Executive Officer as of October 19, 2009. Mr. Saenz has an employment agreement as described below. Li3 granted Mr. Saenz 1,500,000 shares of restricted common stock upon his initial hire and 700,000 restricted stock units on June 27, 2011, which had a grant date fair value of $154,000. Li3 has been paying Mr. Saenz at the rate of $100,000 per annum for the first calendar quarter of 2011 and $200,000 per annum thereafter. On May 2, 2012, the board of directors approved a cash bonus of $200,000 for Mr. Saenz’ achievements for fiscal years 2010 and 2011 and an increase to Mr. Saenz’ compensation from $200,000 per annum to $250,000 per annum, retroactive as of January 1, 2012. In December 2011, Li3 paid approximately $19,070 for Mr. Saenz’ rental expenses for an apartment located in Chile. |
(2) Mr. Currin was appointed Chief Operating Officer on August 11, 2010. Li3 granted 2,500,000 shares of restricted stock to MIZ under the 2009 Plan, which vest upon the achievement of certain milestones, and the grant date fair value of which is $950,000. During the year ended June 30, 2011, Li3 also granted to MIZ 736,842 shares of common stock outside of the 2009 Plan with a grant date fair value of $282,500. In connection with the hiring of Mr. Currin, Li3 granted 1,000,000 stock options under the 2009 Plan to MIZ, having a grant date fair value of $343,310. Mr. Currin’s base salary was $200,000 per annum. However, pursuant to an amendment to the Employment Services Agreement with MIZ, Li3 issued an aggregate of 500,000 shares of common stock in lieu of (i) all base salary earned in calendar year 2010 and (ii) one-half of the base salary for the first calendar quarter of 2011. On May 2, 2012, the board of directors approved an increase to Mr. Currin’s compensation from $200,000 per annum to $225,000 per annum, retroactive as of January 1, 2012. On December 5, 2012, Mr. Currin submitted a letter of resignation to Li3, effective immediately. He will continue providing services for Li3 as an independent consultant.
(3) Mr. Santillana served as Vice President of Finance from March 1, 2012 until June 30, 2012, when he was appointed Chief Financial Officer. Mr. Santillana has an employment agreement with Li3 as described below. Li3 agreed to grant Mr. Santillana restricted stock units under the 2009 Plan with respect to 250,000 shares of common stock and options under the 2009 Plan to purchase another 250,000 shares of common stock. Li3 paid Mr. Santillana a $20,000 bonus during fiscal year 2012, and it has been paying Mr. Santillana at the rate of $185,000 per annum for the entire period of his employment.
(4) Mr. Marin was appointed Interim Chief Financial Officer on January 13, 2010. On November 23, 2011, Li3 entered into a Contractor Services Agreement (the “R&M Agreement”) with R&M Global Advisors, Inc., an entity controlled by Mr. Marin, pursuant to which Li3 retained Mr. Marin’s services as Interim Chief Financial Officer for a term beginning on September 15, 2011, and continuing for six months thereafter with provision for automatic renewal for successive six month periods unless either provides notice of non-renewal. Under the R&M Agreement, Li3 paid an initial fee of $15,000 plus a monthly fee of $15,000 per month, commencing retroactively on September 15, 2011. The amounts for the fiscal year 2012 represent billings for professional services by R&M Global Advisors. Mr. Marin resigned at the close of business on June 30, 2012.
Outstanding Equity Awards at Fiscal Year-End
Li3 has not issued any stock options or maintained any stock option or other incentive plans other than the 2009 Equity Incentive Plan. (See “Market for Common Equity and Related Stockholder Matters - Securities Authorized for Issuance under Equity Compensation Plans,” above).
The following tables set forth information regarding stock options held by the Li3 Named Executive Officers at March 31, 2013.
Option Awards |
| | | | | | | | Equity incentive | | | | | | | |
| | | | | | | | plan awards: | | | | | | | |
| | Number of | | | Number of | | | Number of | | | | | | | |
| | securities | | | securities | | | securities | | | | | | | |
| | underlying | | | underlying | | | underlying | | | | | | | |
| | unexercised | | | unexercised | | | unexercised | | | Option plan | | | | |
| | options | | | options | | | unearned | | | exercise | | | Option | |
Name | | exercisable (#) | | | unexercisable (#) | | | options (#) | | | price ($) | | | expiration date | |
Luis Saenz (2) | | | - | | | | - | | | | - | | | | - | | | | - | |
Luis Santillana (3) | | | - | | | | 250,000 | | | | 250,000 | | | $ | 0.40 | | | | 3-1-2017 | |
Thomas Currin (4) | | | 1,000,000 | | | | - | | | | - | | | $ | 0.16 | | | | 8-11-2017 | |
Eric E. Marin | | | - | | | | - | | | | - | | | | - | | | | - | |
Stock Awards |
Name | | Number of Shares or Units of Stock That Have Not Vested (#) | | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#) (1) | |
Luis Saenz (2) | | | - | | | | - | | | | 233,333 | | | $ | 13,533 | |
Luis Santillana(3) | | | - | | | | - | | | | 166,666 | | | $ | 9,667 | |
Thomas Currin (4) | | | - | | | | - | | | | - | | | | - | |
Eric E. Marin | | | - | | | | - | | | | - | | | | - | |
| (1) | Value is based on last sale price of the common stock on March 31, 2013, which was $0.058 per share. |
| (2) | In May 2011, Mr. Saenz received a grant of 700,000 restricted stock units (each unit is equivalent to one common share) under the 2009 Plan of which 466,667 units were vested on March 31, 2013 and the remaining 233,333 units will vest on January 15, 2014. |
| (3) | Pursuant to an Employment Agreement, Li3 agreed to grant Mr. Santillana 250,000 restricted stock units under the 2009 Equity Incentive Plan, which shall vest in three equal installments on each of March 1, 2013, 2014 and 2015. Li3 also agreed to grant Mr. Santillana an option under the 2009 Equity Incentive Plan to purchase an aggregate of 250,000 shares of common stock, exercisable for a term of five years at an exercise price of $0.40 per share, which option shall vest in its entirety on September 1, 2013. In April 2013, Li3 issued 83,334 shares of common stock in respect to the restricted stocks units that vested in March 2013. |
| (4) | Consists of awards granted to MIZ Comercializadora, S. de R.L. (“MIZ”), a corporation owned in part by Mr. Currin. Mr. Currin was granted 2,500,000 restricted common shares under the 2009 Plan subject to vesting upon achievement of various milestones. 800,000 shares vested as of June 30, 2012. Also includes options granted under the 2009 Plan to purchase 1,000,000 shares of common stock which vests in three equal installments on each of August 10, 2011, 2012 and 2013. Pursuant to a termination agreement dated December 5, 2012, the remaining 1,700,000 restricted stocks units were deemed fully vested and issued. The options to purchase 1,000,000 shares of common stock were also deemed fully vested and the exercise price of the options was adjusted to $0.16 per share. |
Li3 has no plans in place and have never maintained any plans that provide for the payment of retirement benefits or benefits that will be paid primarily following retirement, including, but not limited to, tax qualified deferred benefit plans, supplemental executive retirement plans, tax-qualified deferred contribution plans and nonqualified deferred contribution plans.
Agreements with Executive Officers
Li3 has an employment agreement with each of its Chief Executive Officer, Chief Financial Officer and Executive Vice President. Each of the former Interim Chief Financial Officer and former Chief Operating Officer is compensated through an agreement between Li3 and his affiliate.
Employment Agreement with Luis Saenz
Li3 has entered into an Employment Services Agreement with its Chief Executive Officer, Luis Saenz, effective as of August 24, 2011. Under the Employment Services Agreement Li3 will pay Mr. Saenz such base salary as may be determined by the board of directors, which is currently $250,000. The Employment Services Agreement has an initial term of one year and is automatically renewed for successive one-year terms unless either party delivers timely notice of its intention not to renew. Li3 may also pay Mr. Saenz an annual bonus at such time and in such amount as may be determined by the board of directors in its sole discretion.
Mr. Saenz’s employment by remains “at-will” and terminable at any time for any reason or for no reason. If Mr. Saenz’s employment is terminated without Cause, Li3 must continue to pay him any base salary at the rate then in effect for a period of 18 months. If Mr. Saenz terminates the Employment Services Agreement for Good Reason, or in the event of a termination of employment due to a permanent disability, Li3 will continue to pay him any base salary at the rate then in effect for a period of 18 months.
For the duration of the employment period and, unless Li3 terminates Mr. Saenz’s employment without Cause, for a period of 18 months thereafter, Mr. Saenz has agreed not to directly or indirectly compete with any business engaged in by Li3 or proposed to be engaged in by it during the period of his employment anywhere within the countries in which Li3 is then operating.
The foregoing is a summary of the principal terms of the Employment Services Agreement and is qualified in its entirety by the detailed provisions of the actual agreement, which is incorporated by reference as an exhibit to this Report and is incorporated herein by reference.
Employment Services Agreement with MIZ Comercializadora
Mr. Currin formerly served as Chief Operating Officer from August 11, 2010 until December 5, 2012. During this period Mr. Currin and his consulting firm MIZ Comercializadora, S. de R.L. received compensation starting at a base fee of $200,000 per year and including the ability to participate in the 2009 Plan. Following his resignation on December 5, 2012, Li3 and Mr. Currin entered into a termination agreement,pursuant to which all previous awards granted under the 2009 Plan vested immediately. Mr. Currinwill continue providing services for Li3 as an independent consultant.
Employment Services Agreement with Luis Santillana
Li3 and Minera Li have entered into separate Employment Services Agreements with Mr. Santillana, dated as of December 1, 2011, amended as of March 1, 2012 and dated July 12, 2012, respectively (the “Employment Agreements”). Under the Employment Agreements, Mr. Santillana shall devote his full-time efforts to Li3, and Li3 has been paying Mr. Santillana an annual base salary of $185,000. The Employment Agreements have each an initial term of one year and are automatically renewed for successive one-year terms unless either party delivers timely notice of its intention not to renew. Pursuant to the Employment Agreements, Li3 has agreed to pay Mr. Santillana an initial bonus of $40,000, and it may also pay Mr. Santillana an annual bonus of up to 50% of his base salary, at such time and in such amount as may be determined by the board of directors in its sole discretion. Li3 has agreed to grant Mr. Santillana 250,000 restricted stock units under the 2009 Equity Incentive Plan, which shall vest in three equal installments on each of March 1, 2013, 2014 and 2015. Li3 has also agreed to grant Mr. Santillana an option under the 2009 Equity Incentive Plan to purchase an aggregate of 250,000 shares of common stock, exercisable for a term of five years at an exercise price of $0.40 per share, which option shall vest in its entirety on September 1, 2013. In April 2013, Li3 issued 83,334 shares of common stock in respect to the restricted stock units that vested in March 2013.
Mr. Santillana’s employment is “at-will” and terminable at any time for any reason or for no reason. If Mr. Santillana’s employment is terminated without Cause or in connection with a Change of Control (as such terms are defined in the Employment Agreements) or if he terminates his employment for Good Reason (as defined in the Employment Agreements), his restricted stock units and options will vest immediately and expire nine months after such termination. If Li3 terminates Mr. Santillana’s employment without Cause, or in connection with a Change of Control, or if Mr. Santillana terminates his employment for Good Reason, or in the event of a termination of employment due to a permanent disability, Li3 will continue to pay Mr. Santillana his base salary at the rate then in effect for a period of nine months.
For the duration of the employment period and, unless Li3 terminates Mr. Santillana’s employment without Cause, for a period of nine months thereafter, Mr. Santillana has agreed not to directly or indirectly compete with any business engaged in by Li3 or proposed to be engaged in by Li3 during the period of his employment anywhere within the countries in which Li3 is then operating.
The foregoing is a summary of the principal terms of the Employment Agreements and is qualified in its entirety by the detailed provisions of the actual agreements, which are filed as exhibits to Li3’s Annual Report and are incorporated herein by reference.
Compensation of Non-Employee Directors
On May 2, 2012, the Li3 board adopted a plan of compensation for its non-employee directors’ services to Li3, pursuant to which each current and former non-employee director shall be paid cash (the “Cash Director Compensation”) at the greatest of the following annual rates that applies to such director during the relevant time periods: $64,000 for the Chairman of the board; $40,000 for the Audit Committee Chairman; $34,000 for the Chairman of any other standing board committee; and $24,000 for directors who do not chair any committees. The Cash Director Compensation shall be deemed to begin to accrue retroactively for each non-employee director on the later of such director’s initiation of substantial involvement with the board, as determined in good faith by the Chief Executive Officer, and July 1, 2011 (each such director’s “Compensation Start Date”). The increased rates of Cash Director Compensation for the Chairman of the board and committee chairmen shall only apply to the period of time that the relevant director served in such capacity.
The board also determined to grant to each of its non-employee directors other than the Chairman of the board 100,000 Restricted Stock Units under the 2009 Plan, which shall vest in three equal installments on each of the first three anniversaries of such director’s Compensation Start Date. Finally, the board determined to grant to the Chairman of the board 300,000 Restricted Stock Units under the 2009 Plan, which shall vest in three equal installments on each of the first three anniversaries of his becoming Chairman of the board. Such restricted stock units have not yet been granted, as Li3 does not have sufficient shares authorized at this time for issuance pursuant to awards under the 2009 Plan to accommodate all of such restricted stock units.
Equity Compensation Plan Information
On October 19, 2009, the board of directors adopted, and our stockholders approved, the 2009 Equity Incentive Plan (the “2009 Plan”), which reserved a total of 5,000,000 shares of common stock for issuance under the 2009 Plan (3,050,001 shares of which have been issued and the restrictions thereon lapsed). If an incentive award granted under the 2009 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the 2009 Plan.
In addition, the number of shares of common stock subject to the 2009 Plan, any number of shares subject to any numerical limit in the 2009 Plan, and the number of shares and terms of any incentive award are expected to be adjusted in the event of any change in outstanding common stock by reason of any stock dividend, spin-off, split-up, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares or similar transaction.
Administration
It is expected that the Compensation Committee of the board of directors, or the board of directors in the absence of such a committee, will administer the 2009 Plan. Subject to the terms of the 2009 Plan, the Compensation Committee would have complete authority and discretion to determine the terms of awards under the 2009 Plan.
Grants
The 2009 Plan authorizes the grant to participants of nonqualified stock options, incentive stock options, restricted stock awards, restricted stock units, performance grants intended to comply with Section 162(m) of the Internal Revenue Code (as amended, the “Code”) and stock appreciation rights, as described below:
| · | Options granted under the 2009 Plan entitle the grantee, upon exercise, to purchase a specified number of shares at a specified exercise price per share. The exercise price for shares of common stock covered by an option cannot be less than the fair market value of the common stock on the date of grant unless agreed to otherwise at the time of the grant. |
| · | Restricted stock awards and restricted stock units may be awarded on terms and conditions established by the compensation committee, which may include performance conditions for restricted stock awards and the lapse of restrictions on the achievement of one or more performance goals for restricted stock units. |
| · | The compensation committee may make performance grants, each of which will contain performance goals for the award, including the performance criteria, the target and maximum amounts payable, and other terms and conditions. |
| · | The 2009 Plan authorizes the granting of stock awards. The compensation committee will establish the number of shares of common stock to be awarded and the terms applicable to each award, including performance restrictions. |
| · | Stock appreciation rights (“SARs”) entitle the participant to receive a distribution in an amount not to exceed the number of shares of common stock subject to the portion of the SAR exercised multiplied by the difference between the market price of a share of common stock on the date of exercise of the SAR and the market price of a share of common stock on the date of grant of the SAR. |
Duration, Amendment and Termination
The Board has the power to amend, suspend or terminate the 2009 Plan without stockholder approval or ratification at any time or from time to time. No change may be made that increases the total number of shares of common stock reserved for issuance pursuant to incentive awards or reduces the minimum exercise price for options or exchange of options for other incentive awards, unless such change is authorized by our stockholders within one year. Unless sooner terminated, the 2009 Plan would terminate ten years after its adoption.
Grants to Officers and Directors
On December 9, 2009, the board approved non-incentive stock option grants under the 2009 Plan to the individual non-employee directors, and in the amounts, listed in the table below. These options can be exercised at a price of $0.25 per share, the fair market value of common stock on the date of grant, as determined by the Board, based on the offering price of common stock sold in relatively contemporaneous private placement transactions, vest in three equal installments on each of the first, second and third anniversaries of the date of grant and expire after ten years.
Name of Optionee | | Number of Shares | |
Douglas Perkins | | | 50,000 | |
Anthony Hawkshaw | | | 50,000 | |
Kjeld Thygesen | | | 500,000 | |
In connection with Mr. Perkins’s departure from the board on February 18, 2010, the options granted to him on December 9, 2009, terminated. At such time, Mr. Perkins entered into a consulting arrangement, and the board granted him non-statutory stock options under the 2009 Plan to purchase 50,000 shares of common stock at an exercise price of $1.00 per share, which option vested immediately and expires after two years.
In addition, the Chief Executive Officer gave Anthony Hawkshaw 50,000 of his common stock for services rendered during the year ended June 30, 2010.
Upon Mr. Thygesen’s resignation from the board of directors on September 14, 2011, his options, to the extent unvested, terminated immediately. Accordingly, only 166,667 of his options remained outstanding following such resignation, and they expired unexercised on December 14, 2011. Upon Mr. Hawkshaw’s resignation from the board of directors on October 14, 2011, his options, to the extent unvested, terminated immediately. Accordingly, only 16,667 of his options remain outstanding following such resignation, and they expired on January 14, 2012.
As noted above, pursuant to the Employment Services Agreement, Li3 has granted to MIZ an option to purchase an aggregate of 1,000,000 shares of common stock under the 2009 Plan, exercisable at $0.16 per share. All of the options have a five year term and are fully vested.
The Board granted 700,000 restricted stock units to Luis Saenz, which vest in three equal installments on January 15, 2012, 2013 and 2014.
Pursuant to an Employment Agreement, Li3 agreed to grant Mr. Santillana 250,000 restricted stock units under the 2009 Plan, which shall vest in three equal installments on each of March 1, 2013, 2014 and 2015. Li3 also agreed to grant Mr. Santillana an option under the 2009 Plan to purchase an aggregate of 250,000 shares of common stock, exercisable for a term of five years at an exercise price of $0.40 per share, which option shall vest in its entirety on September 1, 2013.
The board also determined to grant to each of its non-employee directors other than the Chairman of the board 100,000 Restricted Stock Units under the 2009 Plan, which shall vest in three equal installments on each of the first three anniversaries of such director’s Compensation Start Date. Finally, the board determined to grant to the Chairman of the board 300,000 Restricted Stock Units under the 2009 Plan, which shall vest in three equal installments on each of the first three anniversaries of his becoming Chairman of the board. Such restricted stock units have not yet been granted, as Li3 does not have sufficient shares authorized at this time for issuance pursuant to awards under the 2009 Plan to accommodate all of such restricted stock units.
MANAGEMENT FOLLOWING THE TRANSACTION
Directors and Executive Officers
Pursuant to the terms of the Agreement and Plan of Merger,the parties shall take all necessary action, including causing the directors of Blue Wolf prior to the Closing to resign, so that seven individuals (a majority of whom shall be independent under the applicable rules of the Nasdaq) shall be appointed to Blue Wolf’s board of directors immediately after the Closing Date. Li3 shall have the right to designate four directors to serve on our board of directors immediately after the Closing Date andBlue Wolfshall have the right to designate three directors.
Immediately following the consummation of the Transaction, our directors and executive officers will be as follows:
Name | | Age | | Position |
| | | | |
Luis Francisco Saenz | | 41 | | President, Chief Executive Officer and Director(2) |
Luis Santillana | | 37 | | Chief Financial Officer |
Patrick Cussen | | 63 | | Chairman of the Board(1) |
Patricio Campos | | 66 | | Director(1) |
Harvey McKenzie | | 66 | | Director(1) |
SungWon Lee | | 46 | | Director(1) |
Jonathan Lee | | 32 | | Director(2) |
Myron Manternach | | 49 | | Director(2) |
For biographical information for Messrs. Saenz, Santillana, Cussen, Campos, McKenzie and SungWon Lee, see “Management of Li3.”
Jonathan G. Lee is President of JGL Partners LLC and an independent consultant to investment funds and capital market firms specializing in the natural resources and metals industries. Prior, Mr. Lee was an equity research analyst with Byron Capital Markets Ltd. where he specialized in the specialty metals industry including the lithium, vanadium, cobalt, and graphite markets, and where he developed a network of contacts within the industry. Additionally, Mr. Lee has advised a number of clients in the lithium sector on project due diligence, structuring, capital allocation, and strategic options. Prior, Mr. Lee was an environmental engineer for Camp, Dresser & McKee, Inc., where he designed, constructed and managed treatment facilities for EPA projects listed under the National Priorities List. Mr. Lee began his career with NAC Consultants, Inc. where he managed environmental situations for a wide range of industrial companies. Mr. Lee holds an MBA from the NYU Stern School of Business and a BS degree in Chemical Engineering from Tufts University where he graduated cum laude.
We believe Mr. Lee is well qualified to serve as a director of the combined company because of his scientific background and his significant experience in the specialty metals industry.
Myron Manternach is an independent advisor to investment funds and companies in the natural resources and transportation industries. Mr. Manternach’s current advisory projects include work as a Managing Director of Composite Capital, an Ulaanbaatar-based investment advisory firm focused on the natural resources sector, and ACA Associates, Inc., a New York-based advisory firm focused on the transportation industry. Mr. Manternach has 19 years of experience in managing investments for institutional investment funds and providing financial advice to companies, financial sponsors and projects. Mr. Manternach began his investment career in 1994 as an investment banker at Chase Securities Inc., where he rose to vice president of investment banking of JPMorgan. Mr. Manternach has worked for 10 years as a manager of institutional investment funds, including those of EagleRock Capital, Robeco Investment Management and Octavian Advisors. Mr. Manternach currently serves on the Board of Directors of Prophecy Platinum Corp., a publicly-listed Canadian mining company, and is a member of its Audit Committee, Corporate Governance & Nominating Committee and Compensation Committee. Mr. Manternach also serves as a director of Bosques Amazonicos, a privately-held forestry company based in Peru and focused on the development of REDD projects for the production of carbon credits. Mr. Manternach was an electrical engineer for Texas Instruments, where he designed integrated circuits and was awarded a United States patent. Mr. Manternach holds an MBA from the Wharton School of the University of Pennsylvania and a BS in Electrical Engineering with distinction from Iowa State University.
We believe Mr. Manternach is well qualified to serve as a director of the combined company due to his public company experience as well as his experience in operations, financing and natural resources. We believe Mr. Manternach’s access to a network of contacts and sources, ranging from private and public company contacts, private equity groups and investment bankers will enable him to advise us to find and complete mergers and acquisitions and financing for the merged company.
Board Committees
Following completion of the Transaction, our board of directors will have four standing committees: the audit committee, the compensation committee, the health, safety, environment and community committee and the nominating and corporate governance committee.
Audit Committee
The audit committee will assist our board of directors in overseeing:
| · | Li3’s accounting and financial reporting processes; |
| · | the integrity and audits of Li3’s financial statements; |
| · | Li3’s compliance with legal and regulatory requirements; |
| · | the qualifications and independence of Li3’s independent registered public accounting firm; and |
| · | the performance of Li3’s independent registered public accounting firm and any internal auditors. |
The committee will also be responsible for engaging Li3’s independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm, reviewing the independence of the independent registered public accounting firm, considering the range of audit and non-audit fees and reviewing the adequacy of our internal accounting controls.
Compensation Committee
The compensation committee will:
| · | evaluate the performance of our CEO; |
| · | review the compensation and fees payable to our CEO; and |
| · | administer the issuance of any stock to our employees. |
Health, Safety, Environment and Community Committee
The health, safety, environment and community committee is responsible for assisting our board of directors in discharging its responsibilities with respect to (i) employee health and safety, (ii) the protection of the environment, and (iii) our relationship to the local communities affected by our operations.
Corporate Governance and Nominating Committee
The corporate governance and nominating committee will be responsible for seeking, considering and recommending to the full board of directors qualified candidates for election as directors and recommending a slate of nominees for election as directors at the annual meeting of shareholders. It also will periodically prepare and submit to the board of directors for adoption the committee’s selection criteria for director nominees. It will review and make recommendations on matters involving the general operation of our board of directors and its corporate governance, and annually recommend to the board of directors nominees for each committee of the board of directors. In addition, the committee will facilitate the assessment of our board of directors’ performance as a whole and of the individual directors and report thereon to the board of directors.
Code of Business Conduct and Ethics
Our board of directors will amend Li3’s existing code of business conduct and ethics that applies to our executive officers and directors. Among other matters, this code of business conduct and ethics will be designed to deter wrongdoing and to promote:
| · | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| · | full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications; |
| · | compliance with applicable governmental laws, rules and regulations; |
| · | prompt internal reporting of violations of the code to appropriate persons identified in the code; and |
| · | accountability for adherence to the code. |
Any waiver of the code of business conduct and ethics for executive officers or directors may be made only by our Audit Committee and will be promptly disclosed as required by law or stock exchange regulations.
Compensation of Directors
Following the closing of the Transaction, the Company will determine the compensation to be paid to non-employee directors for their services.
Compensation of Executive Officers
Following the closing of the Transaction, the Company will enter into employment agreements with its Mr. Santillana and Mr. Saenz.
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS
The following unaudited condensed combined pro forma balance sheets as ofMarch 31, 2013 and June 30, 212 and the unaudited condensed combined pro forma statements of operations for the nine months ended March 31, 2013 and year ended June 30, 2012, are basedon the separate historical financial statements of Li3 and Blue Wolf included elsewhere in this Offer to Purchase.
The unaudited condensed combined pro forma statement of operations for the nine months ended March 31, 2013 gives pro forma effect to the Transaction as if it had occurred on July 1, 2012, and the unaudited condensed combined pro forma statement of operations for the year ended June 30, 2012 gives pro forma effect to the Transaction as if it had occurred on July 1, 2011. The unauditedcondensed combined pro forma balance sheets as of March 31, 2013 and June 30, 2012 give pro forma effect to the Transaction as if it had occurred on each such date, respectively.
The historical financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the Transaction, are factually supportable and, in the case of the unaudited pro forma condensed combined statements of operations data, are expected to have a continuing impact on the combined results. The adjustments presented on the unaudited condensed combined pro forma financial information have been identified and presented in“Unaudited Condensed Combined Pro Forma Financial Data”to provide relevant information necessary for an accurate understanding of the combined company upon consummation of the Transaction.
On May 21, 2013, Blue Wolf entered into an Agreement and Plan of Merger with Li3, pursuant to which Blue Wolf will merge with and into Merger Sub, a wholly-owned subsidiary of Li3.The Transaction will be accounted for as a recapitalization by Li3 based on the evaluation by Blue Wolf’s management of the facts and circumstances of the Transaction.See “The Transaction — Accounting Treatment” for more information.
This information should be read together with the financial statements of Blue Wolf and Li3 and the respective notes thereto includedelsewhere in this Offer to Purchase, “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Blue Wolf” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Li3.”
The unauditedcondensed combined pro forma financial statements have been prepared assuming (a) the issuance of 1,581,990 registeredOrdinary Sharesas Merger Consideration upon consummation of the Transaction and (b) withrespect to the number of outstanding Ordinary Shares, the following:
| · | Assuming No Tender of Ordinary Shares: This presentation assumes that no Blue Wolf shareholders validly tender their Ordinary Shares pursuant to the Offer. |
| · | Assuming Maximum Allowable Tender of Ordinary Shares: This presentation assumes that Blue Wolf shareholders validly tender and do not properly withdraw, and that Blue Wolf purchases, 1,467,970 Ordinary Shares at a price of $9.97 per Ordinary Share pursuant to the Offer. |
The pro forma adjustments principally give effect to:
The unaudited condensed combined pro forma financial statements are presented for informational purposes only and are subject to a number of uncertainties and assumptions and do not purport to represent what the combined companies’ actual performance or financial position would have been had the Transaction occurred on the dates indicated and does not purport to indicatethe financial position or results of operations as of any future date or for any future period.
Blue Wolf Mongolia Holdings Corp. and Li3 Energy, Inc.
Unaudited Condensed Combined Pro Forma Balance Sheet
As ofMarch 31, 2013
Assuming No Tender of Ordinary Shares
| | | | | Blue Wolf | | | | | | No Tender | |
| | | | | Mongolia Holdings | | | | | | Pro forma | |
| | Li3 Energy, Inc. | | | Corp. | | | Pro forma | | | Combined | |
| | March 31, 2013 | | | March 31, 2013 | | | Adjustments | | | March 31, 2013 | |
Assets | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | |
Cash | | $ | 2,349,834 | | | $ | 49,340 | | | | 80,248,791 | (1) | | $ | 21,288,339 | |
| | | | | | | | | | | (57,767,366 | ) (2) | | | | |
| | | | | | | | | | | (1,392,260 | ) (3) | | | | |
| | | | | | | | | | | (1,900,000 | ) (7) | | | | |
| | | | | | | | | | | (300,000 | ) (8) | | | | |
Prepaid expenses and other current assets | | | 99,931 | | | | 6,967 | | | | | | | | 106,898 | |
Total current assets | | | 2,449,765 | | | | 56,307 | | | | | | | | 21,395,237 | |
| | | | | | | | | | | | | | | | |
Mineral rights | | | 63,741,000 | | | | - | | | | | | | | 63,741,000 | |
Property and equipment, net | | | 137,551 | | | | - | | | | | | | | 137,551 | |
Other assets | | | 11,183 | | | | - | | | | | | | | 11,183 | |
Investment held in Trust Account | | | - | | | | 80,248,791 | | | | (80,248,791 | ) (1) | | | - | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 66,339,499 | | | $ | 80,305,098 | | | $ | (61,359,626 | ) | | $ | 85,284,971 | |
| | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 246,104 | | | | - | | | | | | | $ | 246,104 | |
Accounts payable - related parties | | | 6,329 | | | | - | | | | | | | | 6,329 | |
Accrued expenses | | | 555,102 | | | | 86,566 | | | | | | | | 641,668 | |
Accrued registration rights penalties | | | 518,243 | | | | - | | | | | | | | 518,243 | |
Common stock payable | | | 489,631 | | | | | | | | | | | | 489,631 | |
Zero-coupon convertible debt | | | 1,779,371 | | | | - | | | | | | | | 1,779,371 | |
Notes payable | | | 95,000 | | | | - | | | | | | | | 95,000 | |
Note payable to affiliate | | | | | | | 300,000 | | | | (300,000 | ) (8) | | | - | |
Total current liabilities | | | 3,689,780 | | | | 386,566 | | | | | | | | 3,776,346 | |
| | | | | | | | | | | | | | | | |
Long-term liabilities: | | | | | | | | | | | | | | | | |
Derivative liabilities - warrant instruments | | | 5,849,223 | | | | 4,886,667 | | | | | | | | 10,735,890 | |
Deferred underwriters compensation | | | - | | | | 2,415,000 | | | | (1,392,260 | ) (3) | | | - | |
| | | | | | | | | | | (1,022,740 | ) (4) | | | | |
Total liabilities | | | 9,539,003 | | | | 7,688,233 | | | | | | | | 14,512,236 | |
| | | | | | | | | | | | | | | | |
Ordinary shares subject to possible redemption | | | - | | | | 67,616,855 | | | | (57,767,366 | )(2) | | | - | |
| | | | | | | | | | | (9,849,489 | )(5) | | | | |
Common stock subject to rescission | | | 3,041 | | | | | | | | | | | | 3,041 | |
| | | | | | | | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Preferred stock | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Ordinary shares, no par value | | | - | | | | 5,000,010 | | | | 394,042 | (6) | | | 84,119,362 | |
| | | | | | | | | | | 69,253,081 | (6) | | | | |
| | | | | | | | | | | (1,400,000 | ) (7) | | | | |
| | | | | | | | | | | 1,022,740 | (4) | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | 9,849,489 | (5) | | | | |
| | | | | | | | | | | | | | | | |
Common stock | | | 394,042 | | | | - | | | | (394,042 | ) (6) | | | - | |
| | | | | | | | | | | | | | | | |
Additional paid-in capital | | | 69,253,081 | | | | - | | | | (69,253,081 | ) (6) | | | - | |
| | | | | | | | | | | | | | | | |
Accumulated deficit | | | (35,782,363 | ) | | | - | | | | (500,000 | ) (7) | | | (36,282,363 | ) |
Total stockholders’ equity of Company | | | 33,864,760 | | | | 5,000,010 | | | | | | | | 47,836,999 | |
| | | | | | | | | | | | | | | | |
Non-controlling interests | | | 22,932,695 | | | | | | | | | | | | 22,932,695 | |
Total stockholders’ equity | | | 56,797,455 | | | | 5,000,010 | | | | | | | | 70,769,694 | |
| | | | | | | | | | | | | | | | |
Total Liabilities and stockholders’ equity | | $ | 66,339,499 | | | $ | 80,305,098 | | | $ | (61,359,626 | ) | | $ | 85,284,971 | |
(1) To record the release of Blue Wolf's investments held in trust account and transfer to cash.
(2) To record the payment of approximately $57.8 million for the tender of 5,794,119 ordinary shares of Blue Wolf at $9.97 per share for the ordinary shares redeemed.
(3) To record the payment of deferred underwriters compensation.
(4) To record the reduction of the deferred underwriters compensation liability by Blue Wolf that was settled as a reduction to offering costs.
(5) To reclassify ordinary shares subject to redemption to additional paid in capital.
(6) To record the 1 for 250 share exchange.
(7) To record payment of estimated merger costs - $1.4 million incurred by Blue Wolf. and $0.5 million incurred by Li3 Energy, Inc.
(8) To record payment of affiliate note payable.
Blue Wolf Mongolia Holdings Corp. and Li3 Energy, Inc.
Unaudited Condensed Combined Pro Forma Balance Sheet
As ofMarch 31, 2013
Assuming Maximum Tender of Ordinary Shares
| | | | | Blue Wolf | | | | | | Maximum Tender | |
| | | | | Mongolia Holdings | | | | | | Pro forma | |
| | Li3 Energy, Inc. | | | Corp. | | | Pro forma | | | Combined | |
| | March 31, 2013 | | | March 31, 2013 | | | Adjustments | | | March 31, 2013 | |
Assets | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | | | |
Cash | | $ | 2,349,834 | | | $ | 49,340 | | | | 80,248,791 | (1) | | $ | 6,908,044 | |
| | | | | | | | | | | (72,403,027 | ) (2) | | | | |
| | | | | | | | | | | (1,136,894 | ) (3) | | | | |
| | | | | | | | | | | (1,900,000 | ) (7) | | | | |
| | | | | | | | | | | (300,000 | ) (8) | | | | |
Prepaid expenses and other current assets | | | 99,931 | | | | 6,967 | | | | | | | | 106,898 | |
Total current assets | | | 2,449,765 | | | | 56,307 | | | | | | | | 7,014,942 | |
| | | | | | | | | | | | | | | | |
Mineral rights | | | 63,741,000 | | | | - | | | | | | | | 63,741,000 | |
Property and equipment, net | | | 137,551 | | | | - | | | | | | | | 137,551 | |
Other assets | | | 11,183 | | | | - | | | | | | | | 11,183 | |
Investment held in Trust Account | | | - | | | | 80,248,791 | | | | (80,248,791 | ) (1) | | | - | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 66,339,499 | | | $ | 80,305,098 | | | $ | (75,739,921 | ) | | $ | 70,904,676 | |
| | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 246,104 | | | | - | | | | | | | $ | 246,104 | |
Accounts payable - related parties | | | 6,329 | | | | - | | | | | | | | 6,329 | |
Accrued expenses | | | 555,102 | | | | 86,566 | | | | | | | | 641,668 | |
Accrued registration rights penalties | | | 518,243 | | | | - | | | | | | | | 518,243 | |
| | | 489,631 | | | | | | | | | | | | 489,631 | |
Zero-coupon convertible debt | | | 1,779,371 | | | | - | | | | | | | | 1,779,371 | |
Notes payable | | | 95,000 | | | | - | | | | | | | | 95,000 | |
| | | | | | | 300,000 | | | | (300,000 | ) (8) | | | - | |
Total current liabilities | | | 3,689,780 | | | | 386,566 | | | | | | | | 3,776,346 | |
| | | | | | | | | | | | | | | | |
Long-term liabilities: | | | | | | | | | | | | | | | | |
Derivative liabilities - warrant instruments | | | 5,849,223 | | | | 4,886,667 | | | | | | | | 10,735,890 | |
Deferred underwriters compensation | | | - | | | | 2,415,000 | | | | (1,136,894 | ) (3) | | | - | |
| | | | | | | | | | | (1,278,106 | ) (4) | | | | |
Total liabilities | | | 9,539,003 | | | | 7,688,233 | | | | | | | | 14,512,236 | |
| | | | | | | | | | | | | | | | |
Ordinary shares subject to possible redemption | | | - | | | | 67,616,855 | | | | (72,403,027 | ) (2) | | | - | |
| | | | | | | | | | | 4,786,172 | (5) | | | | |
Common stock subject to rescission | | | 3,041 | | | | | | | | - | | | | 3,041 | |
| | | | | | | | | | | | | | | | |
Stockholders’ equity: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Preferred stock | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Ordinary shares, no par value | | | - | | | | 5,000,010 | | | | 394,042 | (6) | | | 69,739,067 | |
| | | | | | | | | | | 69,253,081 | (6) | | | | |
| | | | | | | | | | | (1,400,000 | ) (7) | | | | |
| | | | | | | | | | | (4,786,172 | ) (5) | | | | |
| | | | | | | | | | | 1,278,106 | (4) | | | | |
| | | | | | | | | | | | | | | | |
Common stock | | | 394,042 | | | | - | | | | (394,042 | ) (6) | | | - | |
| | | | | | | | | | | | | | | | |
Additional paid-in capital | | | 69,253,081 | | | | - | | | | (69,253,081 | ) (6) | | | - | |
| | | | | | | | | | | | | | | | |
Accumulated deficit | | | (35,782,363 | ) | | | - | | | | (500,000 | ) (7) | | | (36,282,363 | ) |
Total stockholders’ equity of Company | | | 33,864,760 | | | | 5,000,010 | | | | | | | | 33,456,704 | |
| | | | | | | | | | | | | | | | |
Non-controlling interests | | | 22,932,695 | | | | | | | | | | | | 22,932,695 | |
Total stockholders’ equity | | | 56,797,455 | | | | 5,000,010 | | | | | | | | 56,389,399 | |
| | | | | | | | | | | | | | | | |
Total Liabilities and stockholders’ equity | | $ | 66,339,499 | | | $ | 80,305,098 | | | $ | (75,739,921 | ) | | $ | 70,904,676 | |
(1) To record the release of Blue Wolf's investments held in trust account and transfer to cash.
(2) To record the payment of approximately $72.4 million for the tender of 7,262,089 ordinary shares of Blue Wolf at $9.97 per share for the ordinary shares redeemed.
(3) To record the deferred underwriters compensation.
(4) To record the reduction of the deferred underwriters compensation liability by Blue Wolf that was settled as a reduction to offering costs.
(5) To reclassify ordinary shares subject to redemption to additional paid in capital.
(6) To record the 1 for 250 share exchange.
(7) To record payment of estimated merger costs - $1.4 million incurred by Blue Wolf. and $0.5 million incurred by Li3 Energy, Inc.
(8) To record payment of affiliate note payable.
Blue Wolf Mongolia Holdings Corp. and Li3 Energy, Inc.
Unaudited Condensed Combined Pro Forma Statements of Operations
For the Nine Months Ended March 31, 2013
| | | | | Blue Wolf | | | | | | | | | | |
| | | | | Mongolia Holdings | | | | | | Pro forma | | | | |
| | Li3 Energy, Inc. | | | Corp. | | | | | | Combined | | | | |
| | Nine months ended | | | Nine months ended | | | Pro forma | | | Nine months ended | | | | |
| | March 31, 2013 | | | March 31, 2013 | | | Adjustments (3) | | | March 31, 2013 | | | | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Exploration expense | | $ | 456,945 | | | $ | - | | | | | | | $ | 456,945 | | | | | |
Selling, general and administrative | | | 3,700,329 | | | | 607,559 | | | | (607,559 | ) (1) | | | 3,700,329 | | | | | |
Loss on settlements, net | | | 5,816 | | | | | | | | | | | | 5,816 | | | | | |
Total operating expenses | | | 4,163,090 | | | | 607,559 | | | | | | | | 4,163,090 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Operating loss | | | 4,163,090 | | | | 607,559 | | | | | | | | 4,163,090 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Change in fair value of derivative liabilities - warrant instruments | | | 6,453,869 | | | | 2,443,333 | | | | | | | | 8,897,202 | | | | | |
Gain on foreign currency transactions | | | 19,723 | | | | - | | | | | | | | 19,723 | | | | | |
Warrant modification expense | | | (171,150 | ) | | | - | | | | | | | | (171,150 | ) | | | | |
Interest expense | | | (298,533 | ) | | | 4,595 | | | | (4,595 | ) (2) | | | (298,533 | ) | | | | |
Loss on debt extinguishment | | | (37,235 | ) | | | - | | | | | | | | (37,235 | ) | | | | |
Total other income | | | 5,966,674 | | | | 2,447,928 | | | | | | | | 8,410,007 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 1,803,584 | | | | 1,840,369 | | | | | | | | 4,246,917 | | | | | |
Loss attributable to the noncontrolling interest | | | 187,898 | | | | | | | | | | | | 187,898 | | | | | |
Net income attributable to the Company | | $ | 1,991,482 | | | $ | 1,840,369 | | | | | | | $ | 4,434,815 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Net income per share attributable to shareholders: | | | | | | | | | | | | | | | No Tender | | | | Maximum Tender | |
Basic | | | | | | $ | 0.57 | | | | | | | $ | 1.06 | | | $ | 1.64 | |
Diluted | | | | | | $ | 0.57 | | | | | | | $ | 1.05 | | | $ | 1.60 | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | |
Basic | | | | | | | 3,234,334 | | | | | | | | 4,729,162 | | | | | |
Diluted | | | | | | | 3,234,334 | | | | | | | | 4,792,521 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding: | | �� | No Tender | | | | Maximum Tender | | | | | | | | No Tender | | | | Maximum Tender | |
Basic | | | 2,800,411 | | | | 4,268,381 | | | | | | | | 4,179,875 | | | | 2,711,905 | |
Diluted | | | 2,800,411 | | | | 4,268,381 | | | | | | | | 4,241,746 | | | | 2,773,776 | |
(1) To remove general and administrative expenses that will not be incurred by the new Company following the acquisition.
(2) Reflects the adjustment to eliminate interest income earned on cash held in trust.
(3) Merger costs are not reflected in the pro-formas as they are not recurring in nature.
BENEFICIAL OWNERSHIP OF SECURITIES
Blue Wolf
The following table sets forth information known to us regarding the beneficial ownership of the Ordinary Shares as of the date of this Offer to Purchase (pre-Transaction) and the beneficial ownership of the Ordinary Shares immediately followingconsummation of the Transaction (post-Transaction) by:
| · | each person known by us to be the beneficial owner of more than 5% of the outstanding Ordinary Shares on the date of this Offer to Purchase (pre-Transaction) and of our Ordinary Shares outstanding after the consummation of the Transaction (post-Transaction); |
| · | each of our current executive officers and directors; |
| · | each person who will become an executive officer or director upon consummation of the Transaction; |
| · | all pre-Transaction executive officers and directors as a group; and |
| · | all post-Transaction executive officers and directors as a group. |
As of the date of this Offer to Purchase, Blue Wolf had 4,268,381 Ordinary Shares issued and outstanding and no outstanding preferred shares.
Unlessotherwise indicated, we believe that all persons named in the table below have sole voting and investment power with respect to all securities that they beneficially own (within the meaning of Rule 13d-3 of the Exchange Act).
Information (pre-Transaction) with respect to Blue Wolf’s Ordinary Shares does not reflect beneficial ownership of our outstanding Warrants or Sponsor Warrants.
Information (post-Transaction) with respect to our Ordinary Shares assumes:(i) the issuance of 1,581,990 registered Ordinary Shares as Merger Consideration, (ii) that no Warrants are exercised (including the Sponsor Warrants and Converted Warrants); (iii) that1,610,000 founder shares and 3,333,333 Sponsor Warrants are forfeited pursuant to the Sponsor Agreement; (iv) that no Converted Options are exercised; and (v) that 1,467,970 Ordinary Shares held by our public shareholders are validly tendered pursuant to the Offer.
| | Pre-Transaction | | | Post-Transaction | |
| | Amount and Nature of Beneficial Ownership of Ordinary Shares | | | Approx. Percentage of Outstanding Ordinary Shares | | | Amount and Nature of Beneficial Ownership of Ordinary Shares | | | Approx. Percentage of Outstanding Ordinary Shares | |
Name and address of beneficial owners | | | | | | | | | | | | | | | | |
Blue Wolf MHC Ltd.(1)(2) | | | 2,012,500 | | | | 47.1 | % | | | 402,500 | | | | 14.5 | % |
Lee Kraus (1)(2)(3) | | | 2,012,500 | | | | 47.1 | % | | | 402,500 | | | | 14.5 | % |
Nicholas Edwards (1)(2)(3) | | | 2,012,500 | | | | 47.1 | % | | | 402,500 | | | | 14.5 | % |
Composite Capital, LLC (3) | | | 1,417,500 | | | | 33.2 | % | | | 130,972 | | | | 4.7 | % |
John A. Shapiro (1) | | | — | | | | * | | | | — | | | | * | |
Koji Fusa (1) | | | — | | | | * | | | | — | | | | * | |
Stephen Quin (1) | | | — | | | | * | | | | — | | | | * | |
Giacomo E. Di Mase (1) | | | — | | | | * | | | | — | | | | * | |
Buyankhishig Ishdorj (1) | | | — | | | | * | | | | — | | | | * | |
Elena Bagayeva (1) | | | — | | | | * | | | | — | | | | * | |
Arrowgrass Capital Partners (US) LP (4) | | | 309,100 | | | | 7.2 | % | | | 309,100 | | | | 11.1 | % |
AQR Capital Management LLC (5) | | | 650,000 | | | | 15.2 | % | | | 650,000 | | | | 23.4 | % |
George Ireland (6) | | | 875,000 | | | | 20.4 | % | | | 589,583 | | | | 21.3 | % |
Geologic Resource Partners, LLC (6) | | | 875,000 | | | | 20.4 | % | | | 589,583 | | | | 21.3 | % |
POSCO Canada Ltd. | | | — | | | | * | | | | 402,381 | | | | 14.5 | % |
Luis Francisco Saenz (7) | | | — | | | | * | | | | 14,231 | | | | * | |
Luis Santillana (7) | | | — | | | | * | | | | 1,527 | | | | * | |
Patrick Cussen (7) | | | — | | | | * | | | | 14,540 | | | | * | |
Harvey McKenzie (7) | | | — | | | | * | | | | 2,573 | | | | * | |
SungWon Lee (7) | | | — | | | | * | | | | — | | | | * | |
Eduardo G. de Aguirre (7) | | | — | | | | * | | | | 1,774 | | | | * | |
David G. Wahl (7) | | | — | | | | * | | | | 1,612 | | | | * | |
Alan S. Fraser (7) | | | — | | | | * | | | | 1,421 | | | | * | |
Patricio A. Campos (7)(9) | | | — | | | | * | | | | 75,781 | | | | 2.7 | % |
Myron Manternach | | | 70,000 | | | | 1.6 | % | | | 31,944 | | | | 1.2 | % |
Jonathan Lee | | | — | | | | * | | | | — | | | | * | |
Calcata Sociedad Anónima S.A. (7)(8) | | | — | | | | * | | | | 204,167 | | | | 7.4 | % |
Campos Mineral Asesorias Professionales Ltd. (7)(9) | | | — | | | | * | | | | 73,500 | | | | 2.7 | % |
Roberto Gaona Velasco | | | — | | | | * | | | | 65,334 | | | | 2.4 | % |
Christian H. Reyes | | | — | | | | * | | | | 65,334 | | | | 2.4 | % |
Jorge Barrozo Sankan | | | — | | | | * | | | | 49,000 | | | | 1.8 | % |
Jean Pierre Naciff Catalano | | | — | | | | * | | | | 32,667 | | | | 1.2 | % |
| | | | | | | | | | | | | | | | |
All pre-transaction directors and executive officers as a group (9 persons) | | | 2,362,500 | | | | 55.3 | % | | | 752,500 | | | | 27.1 | % |
All post-transaction directors and executive officers as a group (8 persons) | | | - | | | | - | | | | 67,096 | | | | 2.4 | % |
*Less than 1 percent.
| (1) | Unless otherwise noted, the business address of each of the following is Suite 409, Central Tower, 2 Sukhbaatar Square, Sukhbaatar District 8, Ulaanbaatar 14200, Mongolia. The figures in the “Post-Transaction” columns reflect the forfeiture of1,610,000founder shares and 3,333,333Sponsor Warrants pursuant to the Sponsor Agreement. |
| (2) | These shares represent one hundred percent of our Ordinary Shares held by our Sponsor. Each of Messr. Kraus and Edwards are directors of our Sponsor and share voting and dispositive power over shares held by our Sponsor. Each director of our Sponsor disclaims beneficial ownership of these shares except to the extent of his or its pecuniary interest therein. The figures in the “Post-Transaction” columns reflect the forfeiture of1,610,000founder shares and 3,333,333Sponsor Warrants pursuant to the Sponsor Agreement. |
| (3) | Messr. Kraus and Edwards each own 50% of the membership interests of Composite Capital, LLC,which through its ownership of ourSponsor, owns 1,417,500 Ordinary Shares indirectly through our Sponsor. Each of Messr. Kraus and Edwards disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. The figures in the “Post-Transaction” columns reflect the forfeiture of1,610,000founder shares and 3,333,333Sponsor Warrants pursuant to the Sponsor Agreement as well as the reallocation of the Ordinary Shares between the members of our Sponsor. |
| (4) | Pursuant to a Schedule 13G/A filed with the SEC on February 14, 2013, Arrowgrass Capital Partners (US) LP (“Arrowgrass LP”) serves as the investment manager to Arrowgrass Master Fund, Ltd. with respect to the shares and Arrowgrass Capital Services (US) Inc. (“Arrowgrass Inc”) serves as the general partner of Arrowgrass LP. Arrowgrass LP and Arrowgrass Inc. share the power to vote and direct the disposition of the indicated shares and their address is 1330 Avenue of the Americas, 32nd Floor, New York, NY 10019. Michael Edwards serves as director to both Arrowgrass LP and Arrowgrass Inc. The calculation of Arrowgrass LP’s existing holdings is based upon the Schedule 13G/A filed by Arrowgrass LP and information received by Blue Wolf’s information agent in connection with Blue Wolf’s prior tender offer. |
| (5) | Pursuant to a Schedule 13G/A filed with the SEC by AQR Capital Management LLC on February 14, 2013, AQR Capital Management LLC serves as the investment manager to the AQR Diversified Arbitrage Fund which holds 5.3% of the Ordinary Shares. Abdon Bolivar serves as the chief compliance officer for AQR Capital Management LLC, whose principal business address is Two Greenwich Plaza, 3rd Floor, Greenwich, CT 06830. |
| (6) | These shares represent an indirect interest in the Ordinary Shares held by our Sponsor as well as 350,000 units purchased in our initial public offering. Mr. Ireland controls Geologic Resource Partners, LLC and has voting and investment control over these shares. The figures in the “Post-Transaction” columns reflect the forfeiture of1,610,000founder shares and 3,333,333Sponsor Warrants pursuant to the Sponsor Agreement as well as the reallocation of the Ordinary Shares between the members of our Sponsor. |
| (7) | The business address of each of the following is c/o Li3 Energy, Inc., Marchant Pereira 150 Of. 803 Providencia, Santiago de Chile, Chile. |
| (8) | Calcata Sociedad Anónima S.A. is managed by its Chief Executive Officer, Paolo Cifuentes Corona. |
| (9) | Campos Mineral Asesorias Profesionales Limitad is controlled by Patricio Campos, its Chief Executive Officer. Mr. Campos’ holdings Post-Transaction include 73,500 shares held by Campos Mineral Asesorias Profesionales Limitada. |
Transfers of Founder Shares and Sponsor Warrants
All of the founder shares, Sponsor Warrants and Ordinary Shares issued upon exercise of the Sponsor Warrants are subject to transfer restrictions and are not transferable or salable (i) in the case of the founder shares, until the earlier of (A) one year after the completion of our initial business combination or (B) the date on which we consummate a liquidation, merger, share exchange or other similar transaction after our initial business combination that results in all of our shareholders having the right to exchange their Ordinary Shares for cash, securities or other property, and (ii) in the case of the Sponsor Warrants and the Ordinary Shares underlying such Warrants, until 30 days after the completion of our initial business combination, except in the case of both (i) and (ii) (a) to our officers or directors, any affiliates or family members of any of our officers or directors, any members of our Sponsor, or any affiliates of our Sponsor, (b) by gift to a member of one of the members of our Sponsor’s immediate family or to a trust, the beneficiary of which is a member of one of the members of our Sponsor’s immediate family, an affiliate of our Sponsor or to a charitable organization; (c) by virtue of laws of descent and distribution upon death of one of the members of our Sponsor; (d) pursuant to a qualified domestic relations order; (e) by virtue of the laws of the state of Delaware or our Sponsor’s limited liability company agreement upon dissolution of our Sponsor; (f) in the event of our liquidation prior to our completion of our initial business combination; or (g) in the event of our consummation of a liquidation, merger, share exchange or other similar transaction which results in all of our shareholders having the right to exchange their Ordinary Shares for cash, securities or other property subsequent to our consummation of our initial business combination; provided, however, that in the case of each of clauses (a) through (e), these permitted transferees must enter into a written agreement agreeing to be bound by these transfer restrictions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Blue Wolf
Founder Shares and Sponsor Warrants
In March 2011, we issued an aggregate of 2,012,500 founder shares to our Sponsor for an aggregate purchase price of $25,000 in cash, or approximately $0.012 per share, of which 591,912 founder shares were subject to forfeiture as follows: (1) 304,924 founder shares were originally subject to forfeiture in the event the last sales price of our shares does not equal or exceed $15.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of our initial business combination and (2) 286,988 founder shares will be subject to forfeiture in the event the last sales price of our shares does not equal or exceed $12.50 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of our initial business combination. Any forfeiture of shares will be effected by our redeeming such shares from the Sponsor for nominal consideration pursuant to the provisions of the insider letter entered into between us, the Sponsor and the representative of the underwriters prior to the consummation of our IPO. Upon receipt, such forfeited shares would then be immediately cancelled.
In connection with the Transaction, the Sponsor entered into an agreement with Blue Wolf concurrent with the execution of the Agreement and Plan of Merger pursuant to which it has agreed to forfeit1,610,000 (or80%) of its founder shares (including all of the founder shares that were originally subject to forfeiture) and 3,333,333 (or80%) of its Sponsor Warrants. Such forfeiture will be effected by way of redemption. The remaining founder shares held by the Sponsor subsequent to the closing of the Transaction will not be subject to any forfeiture provisions currently in effect. See “Related Agreements—Sponsor Agreement.”
Members of our Sponsor purchased an aggregate of 4,166,167 Sponsor Warrants in a private placement that occurred simultaneously with the closing of our IPO. Each Sponsor Warrant entitles the holder to purchase one ordinary share at $12.00 per share. The Sponsor Warrants (including the Ordinary Shares issuable upon exercise of the Sponsor Warrants) may not, subject to certain limited exceptions, be transferred, assigned or sold by it until 30 days after the completion of our initial business combination. For a description of transfer restrictions with respect to such securities, see “Beneficial Ownership of Securities—Transfers of Founder Shares and Sponsor Warrants.
Presentation of Opportunities
Each of Messr. Kraus and Edwards is a member and director of Blue Wolf MHC Ltd., our Sponsor. Mr. Ireland is the chief executive officer and managing member of Geologic Resource Partners, LLC, which is a member of our Sponsor. Each of our executive officers and directors (other than our independent directors) has agreed, pursuant to a written agreement with us, that until the earliest of our initial business combination, our liquidation or such time as he ceases to be an officer or director, to present to us for our consideration, prior to presentation to any other entity, any business opportunity with an enterprise value of $60,000,000 or more, subject to any pre-existing fiduciary or contractual obligations he might have.
Below is a table summarizing the companies to which our directors owe fiduciary obligations that would conflict with their fiduciary obligations to us, all of which would have to (i) be presented appropriate potential target businesses, and (ii) reject the opportunity to acquire such potential target business, prior to their presentation of such target business to us:
Individual | | Entity | | Affiliation |
Lee Kraus | | Composite Capital, LLC/Blue Wolf Fund L.P. | | Managing Partner |
| | Duraseal Holding S.r.l. | | Board member |
Nicholas Edwards | | Composite Capital, LLC/Blue Wolf Fund L.P. | | Managing Partner |
John A. Shapiro | | Blueknight Energy Partners, L.P. | | Board member |
George Ireland | | Geologic Resource Partners, LLC | | Chief Executive Officer/Managing Member |
| | Kiska Metals Corporation | | Board member |
| | Merrill & Ring Inc. | | Board member |
Koji Fusa | | Sandringham Capital Partners Limited | | Chief Executive Officer/Board member |
| | Collabrium Japan Acquisition Corporation | | Chief Executive Officer/Board member |
Stephen Quinn | | Midas Gold Corp. | | Chief Executive Officer/Board member |
| | Mercator Minerals Ltd. | | Board member |
| | Troon Ventures Ltd. | | Board member |
| | Chalice Gold Mines Ltd. | | Board member |
Giacomo E. Di Mase | | Orange Park Records srl | | Chief Executive Officer/Board member |
| | Xurex Inc | | Board member |
| | Duraseal Coatings Company | | Board member |
| | Universal Nanotech Ltd. | | Board member |
If any of our officers or directors (other than our independent directors) becomes aware of our initial business combination opportunity that falls within the line of business of any entity to which he has pre-existing fiduciary or contractual obligations, he may be required to present such business combination opportunity to such entity prior to presenting such business combination opportunity to us. With the exception of Messr. Kraus and Edwards, respectively, none of our officers or directors currently has fiduciary duties or contractual obligations that may take priority over their duties to us.
Administrative Services
Blue Wolf MHC Ltd., our Sponsor, an entity controlled by our officers and directors, has agreed, from the date that our securities are first listed on the Nasdaq through the earlier of our consummation of our initial business combination and our liquidation, to make available to us office space, utilities and secretarial and administrative services, as we may require from time to time. We have agreed to pay our Sponsor $10,000 per month for these services, which commenced on July 15, 2011. We had a balance outstanding of $60,000 for unpaid fees as of March 31, 2013.
Sponsor Advance; Sponsor Loan
Our Sponsor advanced to us an aggregate of $200,000 to cover expenses related to the IPO. This loan was paid without interest upon the closing of our IPO from the proceeds of the IPO not placed in the Trust Account.
As of the date of this Offer to Purchase, our Sponsor advanced us $400,000 to cover expenses related to the business combination, which amount is due upon consummation of the business combination.
Registration Rights
The holders of the founder shares, Sponsor Warrants and Warrants that may be issued upon conversion of working capital loans have registration rights pursuant to a registration rights agreement that require us to register a sale of any of our securities held by them. These shareholders are entitled to make up to three demands, excluding short form registration demands, that we register such securities for sale under the Securities Act. In addition, these shareholders have “piggy-back” registration rights to include their securities in other registration statements filed by us. However, the registration rights agreement provides that we will not permit any registration statement filed under the Securities Act to become effective until termination of the applicable lock-up period, which occurs (i) in the case of the founder shares, upon the earlier of (1) one year after the completion of our initial business combination and (2) the date on which when we consummate a liquidation, merger, share exchange or other similar transaction after our initial business combination that results in all of our shareholders having the right to exchange their Ordinary Shares for cash, securities or other property, and (ii) in the case of the Sponsor Warrants and the respective Ordinary Shares underlying such Warrants, 30 days after the completion of our initial business combination. Notwithstanding the foregoing, in the event the sales price of our shares reaches or exceeds $12.00 for any 20 trading days within any 30-trading day period during such one year period, 50% of the founder shares shall be released from the lock-up and, if the sales price of our shares reaches or exceeds $15.00 for any 20 trading days within any 30-trading day period during such one year period, the remaining 50% of the founder shares shall be released from the lock-up. We will bear the costs and expenses of filing any such registration statements.
Future Transactions
All ongoing and future transactions between us and any member of our management team or his or her respective affiliates will be on terms believed by us at that time, based upon other similar arrangements known to us, to be no less favorable to us than are available from unaffiliated third parties. It is our intention to obtain estimates from unaffiliated third parties for similar goods or services to ascertain whether such transactions with affiliates are on terms that are no less favorable to us than are otherwise available from such unaffiliated third parties. If a transaction with an affiliated third party were found to be on terms less favorable to us than with an unaffiliated third party, we would not engage in such transaction.
We are not prohibited from pursuing an initial business combination with a company that is affiliated with our Sponsor, officers or directors. In the event we seek to complete our initial business combination with a company that is affiliated with our Sponsor, officers or directors, we, or a committee of independent directors, would obtain an opinion from an independent investment banking firm which is a member of the Financial Industry Regulatory Authority, or FINRA, that our initial business combination is fair to our shareholders from a financial point of view.
Li3
In November 2009, Li3 started utilizing the administrative personnel and office space with an office located in Lima, Peru, in which Li3’s Chief Executive Officer functioned in the same capacities (the “Related Party Company”), for which Li3 was obligated for reimbursement of administrative salaries, rent, utilities and maintenance expenses. On July 31, 2010, Li3 was assigned the lease from the Related Party Company and as a result, Li3 did not incur related party expenses related to this lease during the years ended June 30, 2012 and 2011. As of June 30, 2012 and 2011, the payable due to the Related Party Company is $11,400 and $10,986, respectively.
Li3 has retained Mr. Currin’s services as its Chief Operating Officer under an Employment Services Agreement, dated as of August 11, 2010, with MIZ Comercializadora, S. de R.L. (“MIZ”), a corporation owned in part by Mr. Currin.On December 5, 2012, Mr. Currin submitted a letter of resignation to the Company, effective immediately. He will continue providing services for the Company as an independent consultant. See “Executive Compensation of Li3 - Employment Services Agreement with MIZ Comercializadora.
Li3 is a party to a services agreement (the “R&M Agreement”) between R&M Global Advisors, LLC. (“R&M Global Advisors”), in which Eric Marin (a partial owner of R&M Global Advisors) served as Li3’s interim Chief Financial Officer. R&M Global Advisors was paid $145,187 and $10,000 in cash for compensation during the years ended June 30, 2012 and 2011, respectively.
On June 30, 2012, Li3 entered into Amendment No. 1 to the R&M Agreement (the “R&M Amendment”) with R&M Global Advisors. Pursuant to the R&M Amendment, R&M Global Advisors and Li3 mutually agreed to terminate Eric Marin’s services as Interim Chief Financial Officer at the close of business on June 30, 2012.
Appraisal Rights
No appraisal rights are available under the Companies Act to the shareholders of Blue Wolf in connection with the Offer.
Where you can find more information
Blue Wolf is subject to certain of the informational filing requirements of the Exchange Act. Since we are a “foreign private issuer,” we are exempt from the rules and regulations under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act, with respect to their purchase and sale of our shares. In addition, we are not required to file reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we are required to file with the SEC an Annual Report on Form 20-F containing financial statements audited by an independent accounting firm. We also furnish to the SEC, on Form 6-K, unaudited financial information after each of our first three fiscal quarters. We also have filed, pursuant to Rule 13e-4(c)(2), an Issuer Tender Offer Statement on Schedule TO as may be amended from time to time (the “Schedule TO”) with the SEC that includes additional information relating to the Offer. The SEC also maintains a website at http://www.sec.gov that contains reports and other information that we file with or furnish electronically with the SEC, including the Schedule TO. You may also request a copy of the Schedule TO and related exhibits, at no cost, by writing or calling the Information Agent for the Offer at the telephone numbers set forth on the back cover of this Offer to Purchase.
Li3 files annual, quarterly, and current reports and other information with the SEC. Li3’s filings with the SEC are available to the public on the SEC’s website atwww.sec.gov and on Li3’s corporate website at www.li3energy.com. The information Li3 files with the SEC or contained on, or linked to through, its corporate website or any other website that we may maintain is not part of the Schedule TO.
You may also read and copy, at the SEC’s prescribed rates, any document filed with the SEC, including the Schedule TO (and its exhibits), at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. You can call the SEC at 1-800-SEC-0330 to obtain information on the operation of the Public Reference Room.
INDEX TO FINANCIAL STATEMENTS
BLUE WOLF MONGOLIA HOLDINGS CORP.
As of June 30, 2012 and 2011, and for the four months ended June 30, 2012, for the period from March 11, 2011 (date of inception) to June 30, 2011 and for the period from March11, 2011 (date of inception) to June 30, 2012
Report of Independent Registered Public Accounting Firm | F-2 |
Balance Sheets | F-3 |
Statements of Operations | F-4 |
Statements of Shareholders’ Equity | F-5 |
Statements of Cash Flows | F-6 |
Notes to Financial Statements | F-7 |
As of February 29, 2012 and for the period March 11, 2011 (date of inception) to February 29, 2012
Report of Independent Registered Public Accounting Firm | F-19 |
Balance Sheets | F-20 |
Statements of Operations | F-21 |
Statements of Shareholders’ Equity | F-22 |
Statements of Cash Flows | F-23 |
Notes to Financial Statements | F-24 |
As of March 31, 2013 and June 30, 2012, and for the nine months ended March 31, 2013 and 2012, for the period from March 11, 2011 (date of inception) to March 31, 2012 and for the period from March11, 2011 (date of inception) to March 31, 2013
| |
Balance Sheets | F-34 |
Statements of Operations | F-35 |
Statements of Shareholders’ Equity | F-36 |
Statements of Cash Flows | F-37 |
Notes to Financial Statements | F-38 |
Li3 ENERGY, INC.
As of June 30, 2012 and 2011 and for the years ended June 30, 2012 and 2011 and the period June 24, 2005 (inception) through June 30, 2012
Report of Independent Registered Public Accounting Firm | F-48 |
Balance Sheets | F-49 |
Statements of Operations | F-50 |
Statements of Stockholder’s Equity | F-51 |
Statements of Cash Flows | F-52 |
Notes to Financial Statements | F-53 |
As of March 31, 2013 and June 30, 2012 and for the three and nine months ended March 31, 2013 and 2012, and the period from June 24, 2005 (inception) through March 31, 2013.
Balance Sheets | F-81 |
Statements of Operations | F-82 |
Statement of Stockholder’s Equity | F-83 |
Statements of Cash Flows | F-84 |
Notes to Financial Statements | F-85 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Blue Wolf Mongolia Holdings Corp.
We have audited the accompanying balance sheet of Blue Wolf Mongolia Holdings Corp. (the “Company”) as of June 30, 2012 and the related statements of operations, changes in shareholders’ equity, and cash flows for the for the period from March 1, 2012 to June 30, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2012, and the results of its operations and its cash flows for the period from March 1, 2012 to June 30, 2012, in conformity with U.S. generally accepted accounting principles.
/s/ Rothstein Kass
Roseland, New Jersey
May 9, 2013
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
INTERIM BALANCE SHEET
| | June 30, 2012 | | | June 30, 2011 | |
| | (Audited) | | | (Unaudited) | |
| | As Restated | | | | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 231,400 | | | $ | 84,042 | |
Deferred offering costs | | | - | | | | 153,908 | |
Prepaid insurance and other current assets | | | 62,045 | | | | 8,550 | |
Total current assets | | | 293,445 | | | | 246,500 | |
| | | | | | | | |
Investments held in Trust Account | | | 80,244,448 | | | | - | |
| | | | | | | | |
Total assets | | $ | 80,537,893 | | | $ | 246,500 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Note payable to affiliate | | $ | - | | | $ | 200,000 | |
Accrued expenses | | | 16,398 | | | | 5,000 | |
Accrued offering costs | | | - | | | | 21,500 | |
| | | | | | | | |
Other liabilities: | | | | | | | | |
Deferred underwriters' compensation | | | 2,415,000 | | | | - | |
Warrant liability | | | 7,330,000 | | | | - | |
| | | | | | | | |
Total liabilities | | | 9,761,398 | | | | 226,500 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
Ordinary shares subject to possible redemption; 6,597,441 shares and 0 shares, respectively (at redemption value) | | | 65,776,491 | | | | - | |
| | | | | | | | |
Shareholders' equity: | | | | | | | | |
Preferred shares, no par value; five classes of unlimited shares authorized; none issued and outstanding | | | - | | | | - | |
Ordinary shares, no par value; unlimited shares authorized; 3,465,059 and 2,012,500 issued and outstanding (which excludes 6,597,441 and 0 shares subject to possible redemption, respectively) | | | 5,000,004 | | | | 25,000 | |
Additional paid-in capital | | | - | | | | - | |
Deficit accumulated during the development stage | | | - | | | | (5,000 | ) |
| | | | | | | | |
Total shareholders' equity | | | 5,000,004 | | | | 20,000 | |
| | | | | | | | |
Total liabilities and shareholders' equity | | $ | 80,537,893 | | | $ | 246,500 | |
See accompanying notes to interim financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
INTERIM STATEMENTS OF OPERATIONS
| | | | | For the Period from | | | For the Period from | |
| | Four Months | | | March 11, 2011 | | | March 11, 2011 | |
| | Ended | | | (date of inception) to | | | (date of inception) to | |
| | June 30, 2012 | | | June 30, 2011 | | | June 30, 2012 | |
| | (Audited) | | | (Unaudited) | | | (Audited) | |
| | As Restated | | | | | | As Restated | |
Revenue | | $ | - | | | $ | - | | | $ | - | |
General and administrative expenses | | | 166,702 | | | | 5,000 | | | | 568,643 | |
Loss from operations | | | (166,702 | ) | | | (5,000 | ) | | | (568,643 | ) |
Other income (expense) | | | | | | | | | | | | |
Interest income | | | 2,660 | | | | - | | | | 6,948 | |
Change in fair value of warrant liability | | | 855,167 | | | | - | | | | 1,832,500 | |
Net income (loss) attributable to ordinary shares not subject to possible redemption | | $ | 691,125 | | | $ | (5,000 | ) | | $ | 1,270,805 | |
| | | | | | | | | | | | |
Weighted average number of ordinary shares outstanding, excluding shares subject to possible redemption, basic and diluted | | | 3,531,758 | | | | 2,012,500 | | | | 3,151,064 | |
| | | | | | | | | | | | |
Net income (loss) per ordinary share, excluding shares subject to possible redemption, basic and diluted | | $ | 0.20 | | | $ | (0.00 | ) | | $ | 0.40 | |
See accompanying notes to interim financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Period from March 11, 2011 (date of inception) to June 30, 2012
As Restated
| | | | | | | | | | | Deficit | | | | |
| | | | | | | | | | | Accumulated | | | | |
| | | | | | | | Additional | | | During the | | | Total | |
| | Ordinary Shares | | | Paid-in | | | Development | | | Shareholders' | |
| | Shares | | | Amount | | | Capital | | | Stage | | | Equity | |
| | | | | | | | | | | | | | | |
Sale of ordinary shares to Sponsor on March 11, 2011 at $0.012 per share | | | 2,012,500 | | | $ | 25,000 | | | $ | - | | | $ | - | | | $ | 25,000 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss attributable to ordinary shares not subject to possible redemption | | | | | | | | | | | | | | | (5,000 | ) | | | (5,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balances at June 30, 2011 (unaudited) | | | 2,012,500 | | | | 25,000 | | | | - | | | | (5,000 | ) | | | 20,000 | |
| | | | | | | | | | | | | | | | | | | | |
Sale on July 20, 2011 of 8,050,000 units at $10 per unit (including 6,469,978 shares subject to possible redemption) | | | 8,050,000 | | | | 80,500,000 | | | | - | | | | - | | | | 80,500,000 | |
| | | | | | | | | | | | | | | | | | | | |
Underwriters' discount and offering expenses | | | - | | | | (4,981,810 | ) | | | - | | | | - | | | | (4,981,810 | ) |
| | | | | | | | | | | | | | | | | | | | |
Sale on July 20, 2011 of 4,166,667 private placement warrants to the Sponsor at $0.75 per warrant | | | - | | | | - | | | | 3,125,000 | | | | - | | | | 3,125,000 | |
| | | | | | | | | | | | | | | | | | | | |
Warrant liability recorded on July 20, 2011 | | | | | | | (6,037,500 | ) | | | (3,125,000 | ) | | | | | | | (9,162,500 | ) |
| | | | | | | | | | | | | | | | | | | | |
Proceeds subject to possible redemption of 6,469,978 ordinary shares at redemption value | | | (6,469,978 | ) | | | (64,505,681 | ) | | | - | | | | - | | | | (64,505,681 | ) |
| | | | | | | | | | | | | | | | | | | | |
Change in proceeds subject to possible redemption to 6,597,441 ordinary shares at redemption value | | | (127,463 | ) | | | (5 | ) | | | - | | | | (1,270,805 | ) | | | (1,270,810 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to ordinary shares not subject to possible redemption | | | - | | | | - | | | | - | | | | 1,275,805 | | | | 1,275,805 | |
| | | | | | | | | | | | | | | | | | | | |
Balances at June 30, 2012, restated (audited) | | | 3,465,059 | | | $ | 5,000,004 | | | $ | - | | | $ | - | | | $ | 5,000,004 | |
See accompanying notes to interim financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
INTERIM STATEMENTS OF CASH FLOWS
| | | | | For the Period from | | | For the Period from | |
| | Four Months | | | March 11, 2011 | | | March 11, 2011 | |
| | Ended | | | (date of inception) to | | | (date of inception) to | |
| | June 30, 2012 | | | June 30, 2011 | | | June 30, 2012 | |
| | (Audited) | | | (Unaudited) | | | (Audited) | |
| | As Restated | | | | | | As Restated | |
Cash Flows from Operating Activities | | | | | | | | | | | | |
Net income (loss) | | $ | 691,125 | | | $ | (5,000 | ) | | $ | 1,270,805 | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | | | | |
Change in fair value of warrant liability | | | (855,167 | ) | | | - | | | | (1,832,500 | ) |
Increase (decrease) attributable to changes in operating assets and liabilities | | | | | | | | | | | | |
Prepaid insurance and other current assets | | | 26,284 | | | | (8,550 | ) | | | (62,045 | ) |
Accrued expenses | | | (20,807 | ) | | | 5,000 | | | | 16,398 | |
| | | | | | | | | | | | |
Net cash used in operating activities | | | (158,565 | ) | | | (8,550 | ) | | | (607,342 | ) |
| | | | | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | | | | |
Principal deposited in Trust Account | | | - | | | | - | | | | (80,237,500 | ) |
Interest reinvested in Trust Account | | | (2,660 | ) | | | - | | | | (6,948 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (2,660 | ) | | | - | | | | (80,244,448 | ) |
| | | | | | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | | | | | |
Deferred offering costs | | | - | | | | (132,408 | ) | | | - | |
Proceeds from notes payable to affiliate | | | - | | | | 200,000 | | | | 200,000 | |
Payment of notes payable to affiliate | | | - | | | | - | | | | (200,000 | ) |
Proceeds from sale of ordinary shares to Sponsor | | | - | | | | 25,000 | | | | 25,000 | |
Proceeds from public offering | | | - | | | | - | | | | 80,500,000 | |
Proceeds from issuance of Sponsor Warrants | | | - | | | | - | | | | 3,125,000 | |
Payment of offering costs | | | - | | | | - | | | | (2,566,810 | ) |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | - | | | | 92,592 | | | | 81,083,190 | |
| | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | (161,225 | ) | | | 84,042 | | | | 231,400 | |
Cash and cash equivalents at beginning of the period | | | 392,625 | | | | - | | | | - | |
Cash and cash equivalents at end of the period | | $ | 231,400 | | | $ | 84,042 | | | $ | 231,400 | |
| | | | | | | | | | | | |
Supplemental Schedule of Non-Cash Financing Activities | | | | | | | | | | | | |
Deferred offering costs included in accrued offering costs | | | | | | $ | 21,500 | | | | | |
Deferred underwriters' compensation | | | | | | | | | | $ | 2,415,000 | |
Adjustment for warrant liability in connection with public offering | | | | | | | | | | $ | 9,162,500 | |
See accompanying notes to interim financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 1. Interim Financial Information
The accompanying condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”), and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position as of June 30, 2012 and 2011 and the results of operations for the four months ended June 30, 2012, the period from March 11, 2011 (date of inception) to June 30, 2011 and the period from March 11, 2011 (date of inception) to June 30, 2012. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. Interim results are not necessarily indicative of the results of operations to be expected for a full fiscal year.
Blue Wolf Mongolia Holdings Corp. is filing this Amendment No. 1 to Transition Report on Form 20-F/A (this “Amendment”) to amend and restate its Transition Report on Form 20-F for the period ended June 30, 2012, originally filed on April 1, 2013. This Amendment is being filed to restate our interim financial statements as of June 30, 2012 to correct the accounting for our outstanding warrants. Our original accounting treatment did not recognize a liability for the warrant liability and did not recognize changes in the fair value of that warrant liability in our statement of operations. For additional information regarding this restatement, see “Note 4 – Restatement of Previously Issued Financial Statements”.
Note 2. Organization and Business Operations
Incorporation
Blue Wolf Mongolia Holdings Corp. (the “Company”) was incorporated in the British Virgin Islands on March 11, 2011.
Sponsor
The Company’s sponsor is Blue Wolf MHC Ltd., an exempt company incorporated in the Cayman Islands with limited liability (the “Sponsor”).
Fiscal Year End
Effective December 30, 2012, the Company changed its fiscal year end from February 28 to June 30 solely for financial accounting purposes. As a result of this change, the Company’s current fiscal year will end on June 30, 2013.
Business Purpose
The Company was formed to effect a merger, capital share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (an “Initial Business Combination”).
Financing
The registration statement for the Company’s initial public offering (the “Public Offering”) (as described in Note 4) was declared effective on July 14, 2011. On July 20, 2011, simultaneously with the closing of the Public Offering, the Sponsor purchased $3,125,000 of warrants in a private placement (Note 7).
Upon the closing of the Public Offering and the private placement, $80,237,500 was placed in the Trust Account (discussed below).
Trust Account
The trust account (the “Trust Account”) may only be invested in United States government treasury bills having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act and which invest solely in U.S. Treasuries. The funds in the Trust Account are held in the name of Blue Wolf Mongolia Holdings Corp. (see Note 9).
Except for a portion of the interest income (net of taxes payable) that may be released to the Company to pay any taxes and to fund the Company’s working capital requirements, and any amounts necessary to purchase up to 15% of the Company’s Public Shares (as defined in Note 6) if the Company seeks shareholder approval of its Initial Business Combination, as discussed below, none of the funds will be released from the Trust Account until the earlier of: (i) the consummation of an Initial Business Combination no later than April 20, 2013, (ii) a redemption to public shareholders prior to any voluntary winding-up in the event the Company does not consummate an Initial Business Combination or (iii) pursuant to any liquidation.
Business Combination
An Initial Business Combination is subject to the following size, focus and shareholder approval provisions:
Size — The prospective target business will not have a limitation to size, except that it must have an aggregate fair market value of at least 80% of the value of the Trust Account (excluding any taxes) at the time of the agreement to enter the Initial Business Combination. The Company will not consummate an Initial Business Combination unless it acquires a controlling interest in a target company or is otherwise not required to register as an investment company under the Investment Company Act.
Focus — The Company’s efforts in identifying prospective target businesses will initially be focused on businesses within Mongolia that complement the management team’s background such as in the natural resources sectors and related sectors. The Company may, however, pursue opportunities in other business sectors or geographic regions.
Tender Offer/Shareholder Approval — The Company, after signing a definitive agreement for an Initial Business Combination, will either (i) provide shareholders with the opportunity to sell their shares to the Company by means of a tender offer for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable, or (ii) seek shareholder approval of the Initial Business Combination at a meeting called for such purpose in connection with which shareholders may seek to redeem their shares, regardless of whether they vote for or against the Initial Business Combination, for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less (a) taxes payable, (b) amounts released to fund working capital requirements and (c) any amounts released to the Company and used to purchase up to 15% of the Public Shares sold in the Public Offering. The decision as to whether the Company will seek shareholder approval of the Initial Business Combination or will allow shareholders to sell their shares in a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would otherwise require the Company to seek shareholder approval. If the Company seeks shareholder approval, it will consummate its Initial Business Combination only if a majority of the ordinary shares voted are voted in favor of the Initial Business Combination. However, in no event will the Company redeem its Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001. In certain circumstances, the number of Public Shares the Company offers to redeem may be further limited if the terms and conditions of the Initial Business Combination require the Company to retain more than $5,000,001 in net tangible assets. In such case, if the Company were unable to satisfy the terms and conditions of the Initial Business Combination, it would not proceed with the redemption of its Public Shares and the related Initial Business Combination, and instead may search for an alternate Initial Business Combination.
Regardless of whether the Company holds a shareholder vote or a tender offer in connection with an Initial Business Combination, a public shareholder will have the right to redeem its shares for an amount in cash equal to its pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable plus amounts released to fund working capital requirements and any amounts necessary to purchase up to 15% of the Public Shares sold in the Public Offering. As a result, such ordinary shares are recorded at conversion/tender value and classified as temporary equity, in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity.”
Permitted Purchase of Public Shares — If the Company seeks shareholder approval of its Initial Business Combination and does not conduct redemptions pursuant to the tender offer rules, prior to the Initial Business Combination, the Company’s Memorandum and Articles of Association will permit the release to the Company from the Trust Account, amounts necessary to purchase up to 15% of the Public Shares sold in the Public Offering. All shares so purchased by the Company will be immediately cancelled.
Liquidation/Going Concern Consideration
If the Company does not consummate an Initial Business Combination by April 20, 2013, the Company (i) will distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata, to holders of Public Shares by way of redemption and (ii) intends to cease all operations except for the purposes of winding up of its affairs. This redemption of Public Shares from the Trust Account shall be done automatically by function of the Company’s Memorandum and Articles of Association and prior to any voluntary winding up, although at all times subject to the BVI Business Companies Act, 2004 of the British Virgin Islands.
In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per share in the Public Offering (assuming no value is attributed to the warrants contained in the units offered in the Public Offering discussed in Note 6).
The Company will pay the costs of liquidation from its remaining assets outside the Trust Account. If such funds are insufficient to cover these costs and expenses, up to $50,000 of the net interest earned on the Trust Account may be released to the Company to pay these costs. This mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern.
Note 3. Significant Accounting Policies
Development Stage Company
The Company is considered to be in the development stage as defined by FASB ASC 915, “Development Stage Entities,” and is subject to the risks associated with activities of development stage companies. Through June 30, 2012, the Company’s efforts have been limited to organizational activities, activities relating to its Public Offering and activities relating to identifying and evaluating prospective acquisition candidates. The Company has not generated any revenues, other than interest income earned on the proceeds held in the Trust Account. The Company will not generate any operating revenues until after completion of an Initial Business Combination, at the earliest. The Company will continue to generate non-operating income in the form of interest income on the designated Trust Account.
Cash Equivalents
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents at June 30, 2012 principally consist of cash in a money market account held by the Company through its Trust Account. There were no cash equivalents as of June 30, 2011.
Net Income/(Loss) Per Share
Basic net income/(loss) per share is computed by dividing net income/(loss) by the weighted average number of ordinary shares outstanding during the period in accordance with FASB ASC 260, “Earnings Per Share”. Diluted net income/(loss) per share is computed by dividing net income/(loss) by the weighted average number of ordinary shares outstanding, plus to the extent dilutive, the incremental number of ordinary shares to settle warrants issued in the Public Offering and private placement, as calculated using the treasury stock method. The effect of the 12,216,667 warrants (including 4,166,667 warrants issued to the members of the Sponsor in the private placement), have not been considered in the diluted income/(loss) per ordinary share because their effect would be anti-dilutive. As a result, dilutive income/(loss) per ordinary share is equal to basic income/(loss) per ordinary share.
Reclassifications
Certain reclassifications have been made to amounts previously reported to conform with the current presentation. Such reclassifications have no effect on previously reported net loss.
Redeemable Ordinary Shares
As discussed in Note 2, all of the 8,050,000 ordinary shares sold as part of a Public Unit in the Public Offering contain a redemption feature which allows for their redemption under the Company's liquidation or tender offer/stockholder approval provisions. In accordance with ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity's equity instruments, are excluded from the provisions of ASC 480. Although the Company does not specify a maximum redemption threshold, its Memorandum and Articles of Association provides that in no event will the Company redeem its public shares in an amount that would cause its net tangible assets (shareholders' equity) to be less than $5,000,001.
The Company recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable ordinary shares shall be affected by charges against paid-in capital.
Accordingly, at June 30, 2012 and June 30, 2011, 6,597,441 and 0 shares respectively of the 8,050,000 Public Shares were classified outside of permanent equity at their redemption value. The redemption value (approximately $9.97 per share at June 30, 2012) is equal to the pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times may exceed the federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Income Taxes
Under the laws of the British Virgin Islands, the Company is generally not subject to income taxes. Accordingly, no provision for income taxes has been made in the accompanying financial statements.
The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously recognized results in the Company recording a tax liability that increases ending deficit accumulated during the development stage. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of June 30, 2012 or June 30, 2011. The Company’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analyses of and changes to tax laws, regulations and interpretations thereof.
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized as of June 30, 2012 and for the period from March 11, 2011 (date of inception) to June 30, 2012. The Company is subject to income tax examinations by major taxing authorities since inception.
The Company may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Warrant Liability
The Company accounts for its 12,216,667 warrants (consisting of 8,050,000 warrants issued in the Public Offering and 4,166,667 Sponsor Warrants) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision the warrantsdo not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statement of operations. The fair value of the warrants issued by the Company in connection with the Public Offering has been estimated using the quoted market price of the warrants at the end of the reporting period.
Deferred Offering Costs
Deferred offering costs consist principally of legal and accounting fees incurred through June 30, 2011 that were related to the Public Offering and that were charged to capital upon the receipt of the capital raised in the Public Offering.
Fair Value of Financial Instruments
Unless otherwise disclosed, the fair values of financial instruments, including cash, approximate their carrying amount due primarily to their short-term nature.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
Note 4. Restatement of Previously Issued Financial Statements
The Company has restated its financial statements as of June 30, 2012 to correct its accounting for an adjustment related to its outstanding warrants. The Company’s original accounting treatment did not recognize a derivative liability and did not recognize any changes in the fair value of that derivative liability in its statements of operations. In April 2013, the Company concluded it should correct its accounting related to the Company’s outstanding warrants. The Company had initially accounted for the warrants as a component of equity but upon further evaluation of the terms of the warrants, concluded that the warrants should be accounted for as a derivative liability. The warrants contain a price adjustment provision that in the event the Company completes a business combination subsequent to the initial business combination which results in the Company’s shares no longer being listed on a national exchange or the OTC Bulletin Board, the exercise price of the warrants will decrease by a formula that causes the warrants to not be indexed to the Company’s own shares. As a result of this provision, the Company has restated its financial statements to reflect the Company’s warrants as a derivative liability with changes in the fair value recorded in the current period earnings.
The following tables summarize the adjustments made to the previously reported balance sheet, statements of operations and statements of cash flows:
June 30, 2012
Selected balance sheet information
| | As Previously Reported | | | Effect of Restatement | | | As Restated | |
| | | | | | | | | |
Warrant liability | | $ | - | | | $ | 7,330,000 | | | $ | 7,330,000 | |
Total liabilities | | | 2,431,398 | | | | 7,330,000 | | | | 9,761,398 | |
| | | | | | | | | | | | |
Ordinary shares, subject to possible redemption | | | 73,106,491 | | | | (7,330,000 | ) | | | 65,776,491 | |
| | | | | | | | | | | | |
Ordinary shares | | | 2,436,699 | | | | 2,563,305 | | | | 5,000,004 | |
Additional paid-in capital | | | 3,125,000 | | | | (3,125,000 | ) | | | - | |
Deficit accumulated during the development stage | | | (561,695 | ) | | | 561,695 | | | | - | |
Total shareholders' equity | | | 5,000,004 | | | | - | | | | 5,000,004 | |
| | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 80,537,893 | | | $ | - | | | $ | 80,537,893 | |
For the Four Months Ended June 30, 2012
Selected statement of operations information
| | As Previously Reported | | | Effect of Restatement | | | As Restated | |
| | | | | | | | | |
Other income / (expense): | | | | | | | | | | | | |
Change in fair value of warrant liability | | $ | - | | | $ | 855,167 | | | $ | 855,167 | |
| | | | | | | | | | | | |
Net income / (loss) attributable to ordinary shares not subject to possible redemption | | $ | (164,042 | ) | | $ | 855,167 | | | $ | 691,125 | |
| | | | | | | | | | | | |
Weighted average number of ordinary shares outstanding, excluding shares subject to possible redemption - basic and diluted | | | 2,738,347 | | | | 793,411 | | | | 3,531,758 | |
| | | | | | | | | | | | |
Net income / (loss) per ordinary share, excluding shares subject to possible redemption - basic and diluted | | $ | (0.06 | ) | | $ | 0.26 | | | $ | 0.20 | |
Selected cash flow information
| | As Previously Reported | | | Effect of Restatement | | | As Restated | |
Operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | (164,042 | ) | | $ | 855,167 | | | $ | 691,125 | |
Gain on change in fair value of warrant liability | | $ | - | | | $ | (855,167 | ) | | $ | (855,167 | ) |
For the Period from March 11, 2011 (date of inception) to June 30, 2012
Selected statement of operations information
| | As Previously Reported | | | Effect of Restatement | | | As Restated | |
| | | | | | | | | |
Other income / (expense): | | | | | | | | | | | | |
Change in fair value of warrant liability | | $ | - | | | $ | 1,832,500 | | | $ | 1,832,500 | |
| | | | | | | | | | | | |
Net income / (loss) attributable to ordinary shares not subject to possible redemption | | $ | (561,695 | ) | | $ | 1,832,500 | | | $ | 1,270,805 | |
| | | | | | | | | | | | |
Weighted average number of ordinary shares outstanding, excluding shares subject to possible redemption - basic and diluted | | | 2,508,199 | | | | 642,865 | | | | 3,151,064 | |
| | | | | | | | | | | | |
Net income / loss per ordinary share, excluding shares subject to possible redemption - basic and diluted | | $ | (0.22 | ) | | $ | 0.63 | | | $ | 0.40 | |
Selected cash flow information
| | As Previously Reported | | | Effect of Restatement | | | As Restated | |
Operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | (561,695 | ) | | $ | 1,832,500 | | | $ | 1,270,805 | |
Gain on change in fair value of warrant liability | | $ | - | | | $ | (1,832,500 | ) | | $ | (1,832,500 | ) |
| | | | | | | | | | | | |
Supplemental disclosure of non-cash financing activities: | | | | | | | | | | | | |
Adjustment for warrant liability in connection with the Public Offering | | $ | - | | | $ | 9,162,500 | | | $ | 9,162,500 | |
Note 5. Warrant Liability
The Company sold 8,050,000 units in the Public Offering, which subsequently separated into one warrant at an initial exercise price of $12.00 and one ordinary share. The Sponsor also purchased 4,166,667 warrants in a private placement in connection with the Public Offering. The warrants expire five years after the date of the Company’s initial business combination. The warrants issued contain a restructuring price adjustment provision in the event of any merger or consolidation of the Company with or into another corporation, subsequent to the initial business combination, where the surviving entity is not the Company and whose stock is not listed for trading on a national securities exchange or on the OTC Bulletin Board, or is not to be so listed for trading immediately following such event (the “Applicable Event”). The exercise price of the warrant is decreased immediately following an Applicable Event by a formula that causes the warrants to not be indexed to the Company’s own shares. Management used the quoted market price for the valuation of the warrants to determine the warrant liability to be $7,330,000 as of June 30, 2012. This valuation is revised on a quarterly basis until the warrants are exercised or they expire with the changes in fair value recorded in the statement of operations.
Note 6. Public Offering
Public Units
On July 20, 2011, the Company sold 8,050,000 units (including units sold pursuant to the underwriters’ exercise of their over-allotment option) at a price of $10.00 per unit (the “Public Units”) in the Public Offering. Each unit consists of one ordinary share of the Company, no par value (the “Public Shares”), and one warrant to purchase one ordinary share (the “Public Warrants”).
Public Warrant Terms and Conditions
Exercise Conditions — Each Public Warrant will entitle the holder to purchase from the Company one ordinary share at an exercise price of $12.00 per share commencing on the later of: (i) 30 days after the consummation of an Initial Business Combination, or (ii) July 20, 2012, provided that the Company has an effective registration statement covering the ordinary shares issuable upon exercise of the Public Warrants and such shares are registered or qualified under the securities laws of the state of the exercising holder. The Public Warrants expire five years from the date of the Initial Business Combination, unless earlier redeemed. The Public Warrants will be redeemable in whole and not in part at a price of $0.01 per warrant upon a minimum of 30 days notice after the warrants become exercisable, only in the event that the last sale price of the Company’s ordinary shares exceeds $18.00 per share for any 20 trading days within a 30-trading day period. If the Public Warrants are redeemed by the Company, management will have the option to require all holders that wish to exercise warrants to do so on a cashless basis.
Registration Risk — In accordance with a warrant agreement relating to the Public Warrants, the Company will be required to use its best efforts to maintain the effectiveness of a registration statement relating to the ordinary shares which would be issued upon exercise of the Public Warrants. The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holders of such Public Warrants will not be entitled to exercise such Public Warrants (except on a cashless basis under certain circumstances) and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle or cash settle the Public Warrants. Consequently, the Public Warrants may expire unexercised, unredeemed and worthless, and an investor in the Public Offering may effectively pay the full unit price solely for the ordinary shares included in the Public Units.
Accounting — The Company accounts for the warrants in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued by the Company in connection with the Public Offering has been estimated using the market price of the warrants at each reporting date.
Underwriting Agreement — The Company paid an underwriting discount of $2,012,500, or 2.5% of the Public Unit offering price, to the underwriters at the closing of the Public Offering, with an additional fee of $2,415,000, or 3.0% of the gross offering proceeds, payable upon the Company’s consummation of an Initial Business Combination. The underwriters will not be entitled to any interest accrued on the deferred discount.
Note 7. Related Party Transactions
Founder Shares — In March 2011, the Sponsor purchased 2,012,500 ordinary shares (the “Founder Shares”) for $25,000, or approximately $0.012 per share.
Earnout Shares — In addition, a portion of the Founder Shares in an amount equal to 591,912 shares will be subject to forfeiture by the Sponsor as follows: (1) 304,924 shares are subject to forfeiture in the event the last sale price of the Company’s shares does not equal or exceed $15.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of the Company’s Initial Business Combination and (2) 286,988 shares are subject to forfeiture in the event the last sale price of the Company’s shares does not equal or exceed $12.50 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of the Company’s Initial Business Combination.
Rights — The Founder Shares are identical to the Public Shares except that (i) the Founder Shares are subject to certain transfer restrictions, as described in more detail below, and (ii) the Sponsor agreed to waive its redemption rights with respect to (A) the Founder Shares and any Public Shares it purchases in connection with the Initial Business Combination and (B) the Founder Shares upon liquidation if the Company fails to consummate an Initial Business Combination by April 20, 2013.
Voting — If the Company seeks shareholder approval of its Initial Business Combination, the Sponsor will vote the Founder Shares and any Public Shares it has purchased in favor of the Initial Business Combination.
Liquidation — Although the Sponsor has, and its permitted transferees must agree to, waive their redemption rights with respect to the Founder Shares if the Company fails to consummate an Initial Business Combination by April 20, 2013, they will be entitled to redemption rights with respect to any Public Shares they may own.
Sponsor Warrants — The Sponsor purchased 4,166,667 warrants (the “Sponsor Warrants”) at $0.75 per warrant (for an aggregate purchase price of $3,125,000) from the Company on a private placement basis simultaneously with the closing of the Public Offering.
Exercise Conditions — Each Sponsor Warrant is exercisable for one ordinary share at $12.00 per share. The Sponsor Warrants are identical to the Public Warrants except that the Sponsor Warrants (i) are not redeemable by the Company as long as they are held by the Sponsor, members of the Sponsor or any of their permitted transferees, (ii) are subject to certain transfer restrictions described in more detail below and (iii) may be exercised for cash or on a cashless basis.
Accounting — The Company accounts for the warrants in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued by the Company in connection with private placements of securities has been estimated using the market price of the warrants at each reporting date.
Transfer Restrictions
The Sponsor has agreed not to transfer, assign or sell any of its Founder Shares (except in limited circumstances to permitted transferees) until the earlier of (1) one year after the completion of the Company’s Initial Business Combination and (2) the date on which the Company consummates a liquidation, share exchange, share reconstruction and amalgamation, or other similar transaction after its Initial Business Combination that results in all of its shareholders having the right to exchange their ordinary shares for cash, securities or other property (the “Lock-Up Period”). Notwithstanding the foregoing, if the Company’s share price reaches or exceeds $11.50 for any 20 trading days within at least one 30-trading day period during the Lock-Up Period, 50% of the Founder Shares will be released from the lock-up and, if the Company’s share price reaches or exceeds $15.00 for any 20 trading days within at least one 30-trading day period during such Lock-Up Period, the remaining 50% of the Founder Shares shall be released from the lock-up. In addition, notwithstanding the above, the Sponsor has agreed not to transfer, sell or assign the Founder earnout shares (whether to a permitted transferee or otherwise) before the applicable forfeiture condition lapses. The Sponsor has agreed not to transfer, assign or sell any of the Sponsor Warrants including the ordinary shares issuable upon exercise of the Sponsor Warrants until 30 days after the completion of an Initial Business Combination.
Registration Rights
The holders of the Founder Shares, Sponsor Warrants and warrants that may be issued upon conversion of working capital loans hold registration rights to require the Company to register a sale of any of the securities held by them pursuant to a registration rights agreement entered into in connection with the Public Offering. These shareholders are entitled to make up to three demands, excluding short form demands, that the Company register such securities for sale under the Securities Act of 1933 (the “Securities Act”). In addition, these shareholders have “piggy-back” registration rights to include their securities in other registration statements filed by the Company. However, the registration rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become effective until termination of the applicable Lock-Up Period, which occurs (i) in the case of the Founder Shares, upon the earlier of (1) one year after the completion of the Company’s Initial Business Combination or (2) the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction after the Company’s Initial Business Combination that results in all of the Company’s shareholders having the right to exchange their ordinary shares for cash, securities or other property, and (ii) in the case of the Sponsor Warrants and the respective ordinary shares underlying such warrants, 30 days after the completion of the Company’s Initial Business Combination. The Company will bear the costs and expenses of filing any such registration statements.
Note 8. Other Related Party Transactions
Administrative Services
The Company has agreed to pay up to $10,000 a month for office space, utilities and secretarial and administrative services to the Sponsor. Services commenced on July 15, 2011 (the date the Company’s securities were first listed on the NASDAQ Capital Market) and will terminate upon the earlier of (i) the consummation of an Initial Business Combination or (ii) the liquidation of the Company. Approximately $40,000, $0 and $120,000 was incurred under this agreement for the four months ended June 30, 2012, the period from March 11, 2011 (date of inception) to June 30, 2011 and the period from March 11, 2011 (date of inception) to June 30, 2012, respectively. As of June 30, 2012, there was no outstanding balance payable to the Sponsor for unpaid administrative fees.
Notes Payable
On April 1, 2011, the Company issued an unsecured promissory note for $200,000 to Blue Wolf MHC Ltd. The proceeds from the note were used to fund a portion of the organizational and offering costs owed by the Company to third parties. This note was repaid on July 20, 2011.
Note 9. Trust Account
A total of $80,237,500, which includes $77,112,500 of the net proceeds from the Public Offering and $3,125,000 from the proceeds of the private placement, has been placed in the Trust Account. The trust proceeds are invested in a money market fund which invests exclusively in U.S. Treasuries and meets certain conditions under Rule 2a-7 under the Investment Company Act.
Note 10. Fair Value Measurement
The Company complies with FASB ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
Cash Equivalents and Investments Held in Trust Account
The fair values of the Company’s cash equivalents and investments held in the Trust Account are determined through market, observable and corroborated sources.
Warrant Liability
The fair value of the derivative warrant liability was determined by the Company using the quoted market prices for the publicly traded warrants. On reporting dates where there are no active trades the Company uses the last reported closing trade price of the warrants to determine the fair value (Level 2).
There were no transfers between Level 1, 2 or 3 during any periods presented. There are no assets written down to fair value on a non-recurring basis.
The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of June 30, 2012 and June 30, 2011, respectively, and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability:
Fair Value of Financial Assets and Liabilities as of June 30, 2012
| | | | | Quoted Prices | | | Significant Other | | | Significant Other | |
| | Balances, at | | | in | | | Observable | | | Unobservable | |
| | June 30, | | | Active Markets | | | Inputs | | | Inputs | |
Description | | 2012 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Cash | | $ | 231,400 | | | $ | 231,400 | | | | | | | | | |
Investments held in Trust Account | | | 80,244,448 | | | | 80,244,448 | | | $ | — | | | $ | — | |
Total | | $ | 80,475,848 | | | $ | 80,475,848 | | | $ | — | | | $ | — | |
Liabilities: | | | | | | | | | | | | | | | | |
Warrant liability | | $ | 7,330,000 | | | $ | — | | | $ | 7,330,000 | | | $ | — | |
Total | | $ | 7,330,000 | | | $ | — | | | $ | 7,330,000 | | | $ | — | |
Fair Value of Financial Assets as of June 30, 2011
| | | | | Quoted Prices | | | Significant Other | | | Significant Other | |
| | Balances, at | | | in | | | Observable | | | Unobservable | |
| | June 30, | | | Active Markets | | | Inputs | | | Inputs | |
Description | | 2011 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Cash | | $ | 84,042 | | | $ | 84,042 | | | $ | — | | | $ | — | |
Total | | $ | 84,042 | | | $ | 84,042 | | | $ | — | | | $ | — | |
Note 11. Commitments and Contingencies
The Company has committed to pay a deferred underwriters’ compensation of $2,415,000, or 3.0% of the gross Public Offering proceeds, to the underwriters upon the Company’s consummation of an Initial Business Combination. This deferred underwriters’ compensation is reflected in the accompanying interim balance sheets. The underwriters will not be entitled to any interest accrued on such deferred compensation.
Note 12. Shareholders’ Equity
Ordinary Shares — The Company has unlimited ordinary shares authorized. Holders of the Company’s ordinary shares are entitled to one vote for each ordinary share. At June 30, 2012 and June 30, 2011, there were 3,465,059 and 2,012,500 ordinary shares outstanding, respectively. Ordinary shares outstanding at June 30, 2012 and June 30, 2011 excludes 6,597,441 and 0 ordinary shares subject to possible redemption, respectively.
Preferred Shares — The Company is authorized to issue an unlimited number of preferred shares in five different classes with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At June 30, 2012 and June 30, 2011, there were no preferred shares outstanding.
Note 13. Subsequent Events
On December 30, 2012, the Company changed its fiscal year solely for financial accounting purposes such that the Company’s fiscal year will now end on June 30 of each calendar year. As a result of such change, the current financial accounting fiscal year will end on June 30, 2013. For financial accounting purposes, the period from March 1, 2012 until June 30, 2012 is treated as a transitional period
In January and March 2013, the Company issued a unsecured promissory notes for $200,000 and $100,000 respectively, to Blue Wolf MHC Ltd. The proceeds from the note have been used to fund operating costs.
On April 15, 2013, Blue Wolf Mongolia Holdings Corp. held a Meeting of Shareholders (the “Meeting”). At the Meeting, shareholders approved the following: (i) an amendment to the Company’s Amended and Restated Memorandum and Articles of Association (the “Charter”) extending the date by which the Company must consummate its initial business combination from April 20, 2013 to July 22, 2013 (the “Extension Amendment”), (ii) an amendment to the Charter removing the requirement that the Company acquire a target business that has a fair market value equal to at least 80% of the value of the funds held in the Company’s Trust Account (the “ 80% Amendment”) and (iii) an amendment to the Investment Management Trust Agreement between the Company and Continental Stock Transfer & Trust Company permitting the withdrawal and distribution of an amount not to exceed $69,854,955 from the Company’s Trust Account to certain persons holding ordinary shares who wish to exercise their redemption rights in connection with the Extension Amendment and extending the date on which to liquidate the Company’s Trust Account to July 22, 2013 (the “IMTA Amendment”). The affirmative vote of sixty-five percent of the issued and outstanding shares of the Company was required to approve each of the proposals.
The Company also announced on April 15, 2013 the results of its tender offer to purchase up to 7,006,515 of its ordinary shares in connection with the extension and the other shareholder proposals. The tender offer expired at 11:59 p.m., New York City time, on April 16, 2013. Based upon information provided by Continental Stock Transfer & Trust Company, the depositary for the tender offer, as of the expiration of the tender offer, a total of 5,794,119 ordinary shares had been validly tendered and not properly withdrawn for a total purchase price of approximately $57.8 million. Such ordinary shares represent approximately 58% of the Company’s issued and outstanding ordinary shares as of April 16, 2013.
On April 12, 2013, the Company entered into an agreement with the underwriters to amend the deferred compensation arrangement in the original underwriting agreement (see Note 10). Under the new arrangement, the underwriters will receive upon the closing of an Initial Business Combination, in lieu of the original $2.415 million fee, an amount equal to the sum of (i) $1,000,000 and (ii) (a) $1,400,000, multiplied by (b) the quotient of (x) the amount of cash retained in the Trust Account at the closing of the Initial Business Combination after payment of the aggregate redemption price to holders of Public Shares that have tendered such shares to the Company, divided by (y) $80,237,500. As a result of the tender on April 15, 2013, the maximum fee will be approximately $1.4 million.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Blue Wolf Mongolia Holdings Corp.
We have audited the accompanying balance sheet of Blue Wolf Mongolia Holdings Corp. (a corporation in the development stage) (the “Company”) as of February 29, 2012, and the related statements of operations, changes in shareholders’ equity and cash flows for the period March 11, 2011 (date of inception) to February 29, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Blue Wolf Mongolia Holdings Corp. (a corporation in the development stage) as of February 29, 2012, and the results of its operations and its cash flows for the period March 11, 2011 (date of inception) to February 29, 2012, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the financial statements, the accompanying financial statements have been restated to correct a misstatement.
/s/ Rothstein Kass
Roseland, New Jersey
May 21, 2012, except for Note 3, which is May 9, 2013
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
BALANCE SHEET
February 29, 2012
As Restated
ASSETS | | | | |
Current assets: | | | | |
Cash | | $ | 392,625 | |
Prepaid insurance and other current assets | | | 88,329 | |
Total current assets | | | 480,954 | |
| | | | |
Investments held in Trust Account | | | 80,241,787 | |
| | | | |
Total assets | | $ | 80,722,741 | |
| | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accrued expenses | | $ | 37,204 | |
| | | | |
Other liabilities: | | | | |
Deferred underwriters' compensation | | | 2,415,000 | |
Warrant liability | | | 8,185,167 | |
| | | | |
Total liabilities | | | 10,637,371 | |
| | | | |
Commitments and contingencies | | | | |
| | | | |
Ordinary shares subject to possible redemption; 6,528,120 shares (at redemption value) | | | 65,085,360 | |
| | | | |
Shareholders' equity: | | | | |
Preferred shares, no par value; five classes of unlimited shares authorized; none issued and outstanding | | | - | |
Ordinary shares, no par value; unlimited shares authorized; 3,534,380 issued and outstanding (which excludes 6,528,120 shares subject to possible redemption) | | | 5,000,010 | |
Additional paid-in capital | | | - | |
Deficit accumulated during the development stage | | | - | |
| | | | |
Total shareholders' equity | | | 5,000,010 | |
| | | | |
Total liabilities and shareholders' equity | | $ | 80,722,741 | |
See accompanying notes to financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
STATEMENT OF OPERATIONS
For the Period March 11, 2011 (date of inception) to February 29, 2012
As Restated
Revenue | | $ | - | |
General and administrative expenses | | | 401,940 | |
Loss from operations | | | (401,940 | ) |
Other income (expense) | | | | |
Interest income | | | 4,287 | |
Change in fair value of warrant liability | | | 977,333 | |
Net income attributable to ordinary shares not subject to possible redemption | | $ | 579,680 | |
| | | | |
Weighted average number of ordinary shares outstanding, excluding shares subject to possible redemption basic and diluted | | | 3,020,601 | |
| | | | |
Net income per ordinary share, excluding shares subject to possible redemption - basic and diluted | | $ | 0.19 | |
See accompanying notes to financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Period March 11, 2011 (date of inception) to February 29, 2012
As Restated
| | | | | | | | | | | Deficit | | | | |
| | | | | | | | | | | Accumulated | | | | |
| | | | | | | | Additional | | | During the | | | Total | |
| | Ordinary Shares | | | Paid-in | | | Development | | | Shareholders' | |
| | Shares | | | Amount | | | Capital | | | Stage | | | Equity | |
| | | | | | | | | | | | | | | |
Sale of ordinary shares to Sponsor on March 11, 2011 at $0.012 per share | | | 2,012,500 | | | $ | 25,000 | | | $ | - | | | $ | - | | | $ | 25,000 | |
| | | | | | | | | | | | | | | | | | | | |
Sale on July 20, 2011 of 8,050,000 units at $10 per unit, (including 6,469,978 shares subject to possible redemption) | | | 8,050,000 | | | | 80,500,000 | | | | - | | | | - | | | | 80,500,000 | |
| | | | | | | | | | | | | | | | | | | | |
Underwriters' discount and offering expenses | | | - | | | | (4,981,810 | ) | | | - | | | | - | | | | (4,981,810 | ) |
| | | | | | | | | | | | | | | | | | | | |
Sale on July 20, 2011 of 4,166,667 private placement warrants to the Sponsor at $0.75 per warrant | | | - | | | | | | | | 3,125,000 | | | | - | | | | 3,125,000 | |
| | | | | | | | | | | | | | | | | | | | |
Warrant liability recorded on July 20, 2011 | | | | | | | (6,037,500 | ) | | | (3,125,000 | ) | | | | | | | (9,162,500 | ) |
| | | | | | | | | | | | | | | | | | | | |
Proceeds subject to possible redemption of 6,469,978 ordinary shares at redemption value | | | (6,469,978 | ) | | | (64,505,681 | ) | | | - | | | | - | | | | (64,505,681 | ) |
| | | | | | | | | | | | | | | | | | | | |
Change in proceeds subject to possible redemption to 6,528,120 ordinary shares at redemption value | | | (58,142 | ) | | | 1 | | | | - | | | | (579,680 | ) | | | (579,679 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to ordinary shares not subject to possible redemption | | | - | | | | - | | | | - | | | | 579,680 | | | | 579,680 | |
| | | | | | | | | | | | | | | | | | | | |
Balances at February 29, 2012, restated (audited) | | | 3,534,380 | | | $ | 5,000,010 | | | $ | - | | | $ | - | | | $ | 5,000,010 | |
See accompanying notes to financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
STATEMENT OF CASH FLOWS
For the Period March 11, 2011 (date of inception) to February 29, 2012
As Restated
Cash Flows from Operating Activities | | | | |
Net income | | $ | 579,680 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Change in fair value of warrant liability | | | (977,333 | ) |
Increase (decrease) attributable to changes in operating assets and liabilities | | | | |
Prepaid insurance and other current assets | | | (88,329 | ) |
Accrued expenses | | | 37,204 | |
| | | | |
Net cash used in operating activities | | | (448,778 | ) |
| | | | |
Cash Flows from Investing Activities | | | | |
Principal deposited in Trust Account | | | (80,237,500 | ) |
Interest reinvested in Trust Account | | | (4,287 | ) |
| | | | |
Net cash used in investing activities | | | (80,241,787 | ) |
| | | | |
Cash Flows from Financing Activities | | | | |
Proceeds from notes payable to affiliate | | | 200,000 | |
Payment of notes payable to affiliate | | | (200,000 | ) |
Proceeds from sale of ordinary shares to Sponsor | | | 25,000 | |
Proceeds from public offering | | | 80,500,000 | |
Proceeds from issuance of Sponsor Warrants | | | 3,125,000 | |
Payment of offering costs | | | (2,566,810 | ) |
| | | | |
Net cash provided by financing activities | | | 81,083,190 | |
| | | | |
Increase in cash and cash equivalents | | | 392,625 | |
Cash and cash equivalents at beginning of the period | | | - | |
Cash and cash equivalents at end of the period | | $ | 392,625 | |
| | | | |
Supplemental Schedule of Non-Cash Financing Activities | | | | |
Deferred underwriters' compensation | | $ | 2,415,000 | |
Adjustment for warrant liability in connection with public offering | | $ | 9,162,500 | |
See accompanying notes to financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Business Operations
Restatement
Blue Wolf Mongolia Holdings Corp. is filing this Amendment No. 1 to Annual Report on Form 10-K/A (this “Amendment”) to amend and restate its Annual Report on Form 10-K for the period ended February 29, 2012, originally filed on May 22, 2012. This Amendment is being filed to restate our audited financial statements as of February 29, 2012 to correct the accounting for our outstanding warrants. Our original accounting treatment did not recognize a liability for the warrant liability and did not recognize changes in the fair value of that warrant liability in our audited statement of operations. For additional information regarding this restatement, see Note 3 – Restatement of Previously Issued Financial Statements.
Incorporation
Blue Wolf Mongolia Holdings Corp. (the “Company”) was incorporated in the British Virgin Islands on March 11, 2011.
Sponsor
The Company’s sponsor is Blue Wolf MHC Ltd., an exempt company incorporated in the Cayman Islands with limited liability (the “Sponsor”).
Fiscal Year End
The Company has selected the last day of February as its fiscal year end.
Business Purpose
The Company was formed to effect a merger, capital share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (an “Initial Business Combination”).
Financing
The registration statement for the Company’s initial public offering (the “Public Offering”) (as described in Note 5) was declared effective July 14, 2011. On July 20, 2011, simultaneously with the closing of the Public Offering, the Sponsor purchased $3,125,000 of warrants in a private placement (Note 6).
Upon the closing of the Public Offering and the private placement, $80,237,500 was placed in the Trust Account (discussed below).
Trust Account
The trust account (the “Trust Account”) may only be invested in permitted United States “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act and which invest solely in U.S. Treasuries. The funds in the Trust Account are held in the name of Blue Wolf Mongolia Holdings Corp. (see Note 8).
Except for a portion of the interest income (net of taxes payable) that may be released to the Company to pay any taxes and to fund the Company’s working capital requirements, and any amounts necessary to purchase up to 15% of the Company’s Public Shares (as defined in Note 5) if the Company seeks shareholder approval of its Initial Business Combination, as discussed below, none of the funds will be released from the Trust Account until the earlier of: (i) the consummation of an Initial Business Combination no later than April 20, 2013, (ii) a redemption to public shareholders prior to any voluntary winding-up in the event the Company does not consummate an Initial Business Combination or (iii) pursuant to any liquidation.
Business Combination
An Initial Business Combination is subject to the following size, focus and shareholder approval provisions:
Size — The prospective target business will not have a limitation to size, except that it must have an aggregate fair market value of at least 80% of the value of the Trust Account (excluding any taxes) at the time of the agreement to enter the Initial Business Combination. The Company will not consummate an Initial Business Combination unless it acquires a controlling interest in a target company or is otherwise not required to register as an investment company under the Investment Company Act.
Focus — The Company’s efforts in identifying prospective target businesses will initially be focused on businesses within Mongolia that complement the management team’s background such as in the natural resources sectors and related sectors. The Company may, however, pursue opportunities in other business sectors or geographic regions.
Tender Offer/Shareholder Approval — The Company, after signing a definitive agreement for an Initial Business Combination, will either (i) provide shareholders with the opportunity to sell their shares to the Company by means of a tender offer (and thereby avoid the need for a shareholder vote) for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable, or (ii) seek shareholder approval of the Initial Business Combination at a meeting called for such purpose in connection with which shareholders may seek to redeem their shares, regardless of whether they vote for or against the Initial Business Combination, for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less (a) taxes payable, (b) amounts released to fund working capital requirements and (c) any amounts released to the Company and used to purchase up to 15% of the Public Shares sold in the Public Offering. The decision as to whether the Company will seek shareholder approval of the Initial Business Combination or will allow shareholders to sell their shares in a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would otherwise require the Company to seek shareholder approval. If the Company seeks shareholder approval, it will consummate its Initial Business Combination only if a majority of the ordinary shares voted are voted in favor of the Initial Business Combination. However, in no event will the Company redeem its Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001. In certain circumstances, the number of Public Shares the Company offers to redeem may be further limited if the terms and conditions of the Initial Business Combination require the Company to retain more than $5,000,001 in net tangible assets. In such case, if the Company were unable to satisfy the terms and conditions of the Initial Business Combination, it would not proceed with the redemption of its Public Shares and the related Initial Business Combination, and instead may search for an alternate Initial Business Combination.
Regardless of whether the Company holds a shareholder vote or a tender offer in connection with an Initial Business Combination, a public shareholder will have the right to redeem its shares for an amount in cash equal to its pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable plus amounts released to fund working capital requirements and any amounts necessary to purchase up to 15% of the Public Shares sold in the Public Offering. As a result, such ordinary shares are recorded at conversion/tender value and classified as temporary equity, in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity.”
Permitted Purchase of Public Shares — If the Company seeks shareholder approval of its Initial Business Combination and does not conduct redemptions pursuant to the tender offer rules, prior to the Initial Business Combination, the Company’s Memorandum and Articles of Association will permit the release to the Company from the Trust Account, amounts necessary to purchase up to 15% of the shares sold in the Public Offering. All shares so purchased by the Company will be immediately cancelled.
Liquidation
If the Company does not consummate an Initial Business Combination by April 20, 2013, the Company (i) will distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata, to holders of Public Shares by way of redemption and (ii) intends to cease all operations except for the purposes of any winding up of its affairs. This redemption of Public Shares from the Trust Account shall be done automatically by function of the Company’s Memorandum and Articles of Association and prior to any voluntary winding up, although at all times subject to the BVI Business Companies Act, 2004 of the British Virgin Islands.
In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per share in the Public Offering (assuming no value is attributed to the warrants contained in the units offered in the Public Offering discussed in Note 5).
Note 2. Significant Accounting Policies
Development stage company
The Company is considered to be in the development stage as defined by FASB ASC 915, “Development Stage Entities,” and is subject to the risks associated with activities of development stage companies. Through February 29, 2012, the Company’s efforts have been limited to organizational activities, activities relating to its Public Offering and activities relating to identifying and evaluating prospective acquisition candidates. The Company has not generated any revenues, other than interest income earned on the proceeds held in the Trust Account. The Company will not generate any operating revenues until after completion of an Initial Business Combination, at the earliest. The Company will continue to generate non-operating income in the form of interest income on the designated Trust Account.
Cash Equivalents
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents at February 29, 2012 principally consist of cash in a money market account held by the Company through its Trust Account.
Reclassifications
Certain reclassifications have been made to amounts previously reported to conform with the current presentation. Such reclassifications have no effect on previously reported net loss.
Net Income/(Loss) Per Share
Basic net loss per share is computed by dividing net loss by the weighted average number of ordinary shares outstanding during the period in accordance with FASB ASC 260, “Earnings Per Share”. Diluted net loss per share is computed by dividing net loss by the weighted average number of ordinary shares outstanding, plus to the extent dilutive, the incremental number of ordinary shares to settle warrants issued in the Public Offering and private placement, as calculated using the treasury stock method. For the period from March 11, 2011 (date of inception) to February 29, 2012, the effect of the 12,216,667 warrants (including 4,166,667 warrants issued to the members of the Sponsor in the private placement), have not been considered in the diluted loss per ordinary share because their effect would be anti-dilutive. As a result, dilutive loss per ordinary share is equal to basic loss per ordinary share.
Redeemable Ordinary Shares
As discussed in Note 1, all of the 8,050,000 ordinary shares sold as part of a Unit in the Public Offering contain a redemption feature which allows for their redemption under the Company's liquidation or tender offer/stockholder approval provisions. In accordance with ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity's equity instruments, are excluded from the provisions of ASC 480. Although the Company does not specify a maximum redemption threshold, its Memorandum and Articles of Association provides that in no event will the Company redeem its public shares in an amount that would cause its net tangible assets (shareholders' equity) to be less than $5,000,001.
The Company recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable ordinary shares shall be affected by charges against paid-in capital.
Accordingly, at February 29, 2012, 6,528,120 of the 8,050,000 Public Shares were classified outside of permanent equity at their redemption value. The redemption value is equal to the pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable plus amounts released for working capital. (approximately $9.97 at February 29, 2012).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times may exceed the federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Income Taxes
Under the laws of the British Virgin Islands, the Company is generally not subject to income taxes. Accordingly, no provision for income taxes has been made in the accompanying financial statements.
The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously recognized results in the Company recording a tax liability that increases ending deficit accumulated during the development stage. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of February 29, 2012. The Company’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analyses of and changes to tax laws, regulations and interpretations thereof.
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized as of and for the period ended February 29, 2012. The Company is subject to income tax examinations by major taxing authorities since inception.
The Company may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Warranty Liability
The Company accounts for its 12,216,667 warrants (consisting of 8,050,000 warrants issued in the Public Offering and 4,166,667 Sponsor Warrants) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision the warrantsdo not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statement of operations. The fair value of the warrants issued by the Company in connection with the Public Offering has been estimated using the quoted market price of the warrants at the end of the reporting period.
Fair Value of Financial Instruments
Unless otherwise disclosed, the fair values of financial instruments, including cash, approximate their carrying amount due primarily to their short-term nature.
Recent Accounting Pronouncements
Management does not believe that any other recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
Note 3. Restatement of Previously Issued Financial Statements
The Company has restated its financial statements as of February 29, 2012 to correct its accounting for an adjustment related to its outstanding warrants. The Company’s original accounting treatment did not recognize a derivative liability and did not recognize any changes in the fair value of that derivative liability in its statements of operations. In April 2013, the Company concluded it should correct its accounting related to the Company’s outstanding warrants. The Company had initially accounted for the warrants as a component of equity but upon further evaluation of the terms of the warrants, concluded that the warrants should be accounted for as a derivative liability. The warrants contain a price adjustment provision that in the event the Company completes a business combination subsequent to the initial business combination which results in the Company’s shares no longer being listed on a national exchange or the OTC Bulletin Board, the exercise price of the warrants will decrease by a formula that causes the warrants to not be indexed to the Company’s own shares. As a result of this provision, the Company has restated its financial statements to reflect the Company’s warrants as a derivative liability with changes in the fair value recorded in the current period earnings.
The following tables summarize the adjustments made to the previously reported balance sheet, statement of operations and statement of cash flows:
February 29, 2012
Selected balance sheet information
| | As Previously Reported | | | Effect of Restatement | | | As Restated | |
| | | | | | | | | |
Warrant liability | | $ | - | | | $ | 8,185,167 | | | $ | 8,185,167 | |
Total liabilities | | | 2,452,204 | | | | 8,185,167 | | | | 10,637,371 | |
| | | | | | | | | | | | |
Ordinary shares, subject to possible redemption | | | 73,270,527 | | | | (8,185,167 | ) | | | 65,085,360 | |
| | | | | | | | | | | | |
Ordinary shares | | | 2,272,663 | | | | 2,727,347 | | | | 5,000,010 | |
Additional paid-in capital | | | 3,125,000 | | | | (3,125,000 | ) | | | - | |
Deficit accumulated during the development stage | | | (397,653 | ) | | | 397,653 | | | | - | |
Total shareholders' equity | | | 5,000,010 | | | | - | | | | 5,000,010 | |
| | | | | | | | | | | | |
Total liabilities and shareholders' equity | | $ | 80,722,741 | | | $ | - | | | $ | 80,722,741 | |
For the Period from March 11, 2011 (date of inception) to February 29, 2012
Selected statement of operations information
| | As Previously Reported | | | Effect of Restatement | | | As Restated | |
| | | | | | | | | |
Other income / (expense): | | | | | | | | | | | | |
Change in fair value of warrant liability | | $ | - | | | $ | 977,333 | | | $ | 977,333 | |
| | | | | | | | | | | | |
Net income / (loss) attributable to ordinary shares not subject to possible redemption | | $ | (397,653 | ) | | $ | 977,333 | | | $ | 579,680 | |
| | | | | | | | | | | | |
Weighted average number of ordinary shares outstanding, excluding shares subject to possible redemption - basic and diluted | | | 7,100,281 | | | | (4,079,680 | ) | | | 3,020,601 | |
| | | | | | | | | | | | |
Net loss per ordinary share, excluding shares subject to possible redemption - basic and diluted | | $ | (0.06 | ) | | $ | 0.25 | | | $ | 0.19 | |
Selected cash flow information
| | As Previously Reported | | | Effect of Restatement | | | As Restated | |
Operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | (397,653 | ) | | $ | 977,333 | | | $ | 579,680 | |
Gain on change in fair value of warrant liability | | $ | - | | | $ | (977,333 | ) | | $ | (977,333 | ) |
| | | | | | | | | | | | |
Supplemental disclosure of non-cash financing activities: | | | | | | | | | | | | |
Adjustment for warrant liability in connection with the Public Offering | | $ | - | | | $ | 9,162,500 | | | $ | 9,162,500 | |
Note 4. Warrant Liability
The Company sold 8,050,000 units in the Public Offering, which subsequently separated into one warrant at an initial exercise price of $12.00 and one ordinary share. The Sponsor also purchased 4,166,667 warrants in a private placement in connection with the Public Offering. The warrants expire five years after the date of the Company’s initial business combination. The warrants issued contain a restructuring price adjustment provision in the event of any merger or consolidation of the Company with or into another corporation, subsequent to the initial business combination, where the surviving entity is not the Company and whose stock is not listed for trading on a national securities exchange or on the OTC Bulletin Board, or is not to be so listed for trading immediately following such event (the “Applicable Event”). The exercise price of the warrant is decreased immediately following an Applicable Event by a formula that causes the warrants to not be indexed to the Company’s own shares. Management used the quoted market price for the valuation of the warrants to determine the warrant liability to be $8,185,167 as of February 29, 2012. This valuation is revised on a quarterly basis until the warrants are exercised or they expire with the changes in fair value recorded in the statement of operations.
Note 5. Public Offering
Public Units
On July 20, 2011, the Company sold 8,050,000 units (including units sold pursuant to the underwriters’ exercise of their over-allotment option) at a price of $10.00 per unit (the “Public Units”) in the Public Offering. Each unit consists of one ordinary share of the Company, no par value (the “Public Shares”), and one warrant to purchase one ordinary share (the “Public Warrants”).
Public Warrant Terms and Conditions
Exercise Conditions — Each Public Warrant will entitle the holder to purchase from the Company one ordinary share at an exercise price of $12.00 per share commencing on the later of: (i) 30 days after the consummation of an Initial Business Combination, or (ii) July 20, 2012, provided that the Company has an effective registration statement covering the ordinary shares issuable upon exercise of the Public Warrants and such shares are registered or qualified under the securities laws of the state of the exercising holder. The Public Warrants expire five years from the date of the Initial Business Combination, unless earlier redeemed. The Public Warrants will be redeemable in whole and not in part at a price of $0.01 per warrant upon a minimum of 30 days notice after the warrants become exercisable, only in the event that the last sale price of the Company’s ordinary shares exceeds $18.00 per share for any 20 trading days within a 30-trading day period. If the Public Warrants are redeemed by the Company, management will have the option to require all holders that wish to exercise warrants to do so on a cashless basis.
Registration Risk — In accordance with a warrant agreement relating to the Public Warrants, the Company will be required to use its best efforts to maintain the effectiveness of a registration statement relating to the ordinary shares which would be issued upon exercise of the Public Warrants. The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holders of such Public Warrants will not be entitled to exercise such Public Warrants (except on a cashless basis under certain circumstances) and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle or cash settle the Public Warrants. Consequently, the Public Warrants may expire unexercised, unredeemed and worthless, and an investor in the Public Offering may effectively pay the full unit price solely for the ordinary shares included in the Public Units.
Accounting — The Company accounts for the warrants in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued by the Company in connection with the Public Offering has been estimated using the warrants’ quoted market price at each reporting date.
Underwriting Agreement The Company paid an underwriting discount of $2,012,500, or 2.5% of the Public Unit offering price, to the underwriters at the closing of the Public Offering, with an additional fee of $2,415,000, or 3.0% of the gross offering proceeds, payable upon the Company’s consummation of an Initial Business Combination. The underwriters will not be entitled to any interest accrued on the deferred discount.
Note 6. Related Party Transactions
Founder Shares — In March 2011, the Sponsor purchased 2,012,500 ordinary shares (the “Founder Shares”) for $25,000, or approximately $0.012 per share.
Earnout Shares — In addition, a portion of the Founder Shares in an amount equal to 591,912 shares will be subject to forfeiture by the Sponsor as follows: (1) 304,924 shares are subject to forfeiture in the event the last sale price of the Company’s shares does not equal or exceed $15.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of the Company’s Initial Business Combination and (2) 286,988 shares are subject to forfeiture in the event the last sale price of the Company’s shares does not equal or exceed $12.50 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of the Company’s Initial Business Combination.
Rights — The Founder Shares are identical to the Public Shares except that (i) the Founder Shares are subject to certain transfer restrictions, as described in more detail below, and (ii) the Sponsor agreed to waive its redemption rights with respect to (A) the Founder Shares and any Public Shares it purchases in connection with the Initial Business Combination and (B) the Founder Shares upon liquidation if the Company fails to consummate an Initial Business Combination by April 20, 2013.
Voting — If the Company seeks shareholder approval of its Initial Business Combination, the Sponsor will vote the Founder Shares and any Public Shares it has purchased in favor of the Initial Business Combination.
Liquidation — Although the Sponsor has, and its permitted transferees must agree to, waive their redemption rights with respect to the Founder Shares if the Company fails to consummate an Initial Business Combination by April 20, 2013, they will be entitled to redemption rights with respect to any Public Shares they may own.
Sponsor Warrants — The Sponsor purchased 4,166,667 warrants (the “Sponsor Warrants”) at $0.75 per warrant (for an aggregate purchase price of $3,125,000) from the Company on a private placement basis simultaneously with the closing of the Public Offering.
Exercise Conditions — Each Sponsor Warrant is exercisable for one ordinary share at $12.00 per share. The Sponsor Warrants are identical to the Public Warrants except that the Sponsor Warrants (i) are not redeemable by the Company as long as they are held by the Sponsor, members of the Sponsor or any of their permitted transferees, (ii) are subject to certain transfer restrictions described in more detail below and (iii) may be exercised for cash or on a cashless basis.
Accounting — The Company accounts for the warrants in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued by the Company in connection with private placements of securities has been estimated using the market price of the warrants at each reporting date.
Transfer Restrictions
The Sponsor has agreed not to transfer, assign or sell any of its Founder Shares (except in limited circumstances to permitted transferees) until the earlier of (1) one year after the completion of the Company’s Initial Business Combination and (2) the date on which the Company consummates a liquidation, share exchange, share reconstruction and amalgamation, or other similar transaction after its Initial Business Combination that results in all of its shareholders having the right to exchange their ordinary shares for cash, securities or other property (the “Lock-Up Period”). Notwithstanding the foregoing, if the Company’s share price reaches or exceeds $11.50 for any 20 trading days within at least one 30-trading day period during the Lock-Up Period, 50% of the Founder Shares will be released from the lock-up and, if the Company’s share price reaches or exceeds $15.00 for any 20 trading days within at least one 30-trading day period during such Lock-Up Period, the remaining 50% of the Founder Shares shall be released from the lock-up. In addition, notwithstanding the above, the Sponsor has agreed not to transfer, sell or assign the Founder earnout shares (whether to a permitted transferee or otherwise) before the applicable forfeiture condition lapses. The Sponsor has agreed not to transfer, assign or sell any of the Sponsor Warrants including the ordinary shares issuable upon exercise of the Sponsor Warrants until 30 days after the completion of an Initial Business Combination.
Registration Rights
The holders of the Founder Shares, Sponsor Warrants and warrants that may be issued upon conversion of working capital loans hold registration rights to require the Company to register a sale of any of the securities held by them pursuant to a registration rights agreement entered into in connection with the Public Offering. These shareholders are entitled to make up to three demands, excluding short form demands, that the Company register such securities for sale under the Securities Act of 1933 (the “Securities Act). In addition, these shareholders have “piggy-back” registration rights to include their securities in other registration statements filed by the Company. However, the registration rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become effective until termination of the applicable Lock-Up Period, which occurs (i) in the case of the Founder Shares, upon the earlier of (1) one year after the completion of the Company’s Initial Business Combination or (2) the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction after the Company’s Initial Business Combination that results in all of the Company’s shareholders having the right to exchange their ordinary shares for cash, securities or other property, and (ii) in the case of the Sponsor Warrants and the respective ordinary shares underlying such warrants, 30 days after the completion of the Company’s Initial Business Combination. The Company will bear the costs and expenses of filing any such registration statements.
Note 7. Other Related Party Transactions
Administrative Services
The Company has agreed to pay up to $10,000 a month for office space, utilities and secretarial and administrative services to the Sponsor. Services commenced on July 15, 2011 (the date the Company’s securities were first listed on the NASDAQ Capital Market) and will terminate upon the earlier of (i) the consummation of an Initial Business Combination or (ii) the liquidation of the Company. During the period ended February 29, 2012, $80,000 has been charged to the Company for administrative services. As of February 29, 2012, there is no outstanding balance due to the Sponsor for administrative fees.
Notes Payable
On April 1, 2011 the Company issued an unsecured promissory note for $200,000 to Blue Wolf MHC Ltd. The proceeds from the note were used to fund a portion of the organizational and offering costs owed by the Company to third parties. This note was repaid on July 20, 2011.
Note 8. Trust Account
A total of $80,237,500, which includes $77,112,500 of the net proceeds from the Public Offering and $3,125,000 from the private placement, has been placed in the Trust Account. The trust proceeds are invested in a money market fund which invests exclusively in U.S. Treasuries and meets certain conditions under Rule 2a-7 under the Investment Company Act.
Note 9. Fair Value Measurement
The Company complies with FASB ASC 820, “Fair Value Measurements”, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
Cash Equivalents and Investments Held in Trust Account
The fair values of the Company’s cash equivalents and investments held in the Trust Account are determined through market, observable and corroborated sources.
Warrant Liability
The fair value of the derivative warrant liability was determined by the Company using the quoted market prices for the publicly traded warrants. On reporting dates where there are no active trades the Company uses the last reported closing trade price of the warrants to determine the fair value (Level 2).
There were no transfers between Level 1, 2 or 3 during any periods presented. There are no assets written down to fair value on a non-recurring basis.
The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of February 29, 2012, and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:
Fair Value of Financial Assets and Liabilities as of February 29, 2012
| | | | | Quoted Prices | | | Significant Other | | | Significant Other | |
| | Balances, at | | | in | | | Observable | | | Unobservable | |
| | February 29, | | | Active Markets | | | Inputs | | | Inputs | |
Description | | 2012 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Investments held in Trust Account | | $ | 80,241,787 | | | $ | 80,241,787 | | | $ | — | | | $ | — | |
Total | | $ | 80,241,787 | | | $ | 80,241,787 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Warrant liability | | $ | 8,185,167 | | | $ | — | | | $ | 8,185,167 | | | $ | — | |
Total | | $ | 8,185,167 | | | $ | — | | | $ | 8,185,167 | | | $ | — | |
Note10. Commitments and Contingencies
The Company has committed to pay a deferred underwriters’ compensation of $2,415,000, or 3.0% of the gross Public Offering proceeds, to the underwriters upon the Company’s consummation of an Initial Business Combination. This deferred underwriters’ compensation is reflected in the accompanying balance sheet. The underwriters will not be entitled to any interest accrued on such deferred compensation.
Note 11. Shareholders’ Equity
Ordinary Shares — The Company is authorized to issue an unlimited number of ordinary shares. Holders of the Company’s ordinary shares are entitled to one vote for each ordinary share. At February 29, 2012, there were 3,534,380 ordinary shares outstanding. Ordinary shares outstanding at February 29, 2012 excludes 6,528,120 ordinary shares subject to possible redemption
Preferred Shares — The Company is authorized to issue an unlimited number of preferred shares in five different classes with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At February 29, 2012, there were no preferred shares issued.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
INTERIM BALANCE SHEET
| | March 31, 2013 | | | June 30, 2012 | |
| | (Unaudited) | | | (Audited) | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 49,340 | | | $ | 231,400 | |
Prepaid insurance and other current assets | | | 6,967 | | | | 62,045 | |
| | | | | | | | |
Total current assets | | | 56,307 | | | | 293,445 | |
| | | | | | | | |
Investments held in Trust Account | | | 80,248,791 | | | | 80,244,448 | |
| | | | | | | | |
Total assets | | $ | 80,305,098 | | | $ | 80,537,893 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Note payable to affiliate | | $ | 300,000 | | | $ | - | |
Accrued expenses | | | 86,566 | | | | 16,398 | |
| | | | | | | | |
Other liabilities: | | | | | | | | |
Deferred underwriters' compensation | | | 2,415,000 | | | | 2,415,000 | |
Warrant liability | | | 4,886,667 | | | | 7,330,000 | |
| | | | | | | | |
Total liabilities | | | 7,688,233 | | | | 9,761,398 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
| | | | | | | | |
Ordinary shares subject to possible redemption; 6,782,032 shares and 6,597,441 shares, respectively (at redemption value) | | | 67,616,855 | | | | 65,776,491 | |
| | | | | | | | |
Shareholders' equity: | | | | | | | | |
Preferred shares, no par value; five classes of unlimited shares authorized; none issued and outstanding | | | - | | | | - | |
Ordinary shares, no par value; unlimited shares authorized; 3,280,468 and 3,465,059 issued and outstanding (which excludes 6,782,032 and 6,597,441 shares subject to possible redemption, respectively) | | | 5,000,010 | | | | 5,000,004 | |
Additional paid-in capital | | | - | | | | - | |
Deficit accumulated during the development stage | | | - | | | | - | |
| | | | | | | | |
Total shareholders' equity | | | 5,000,010 | | | | 5,000,004 | |
| | | | | | | | |
Total liabilities and shareholders' equity | | $ | 80,305,098 | | | $ | 80,537,893 | |
See accompanying notes to interim financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
INTERIM STATEMENTS OF OPERATIONS (UNAUDITED)
| | | | | | | | For the Period from | | | For the Period from | |
| | | | | | | | March 11, 2011 | | | March 11, 2011 | |
| | Nine Months Ended | | | (date of inception) to | | | (date of inception) to | |
| | March 31, 2013 | | | March 31, 2012 | | | March 31, 2012 | | | March 31, 2013 | |
| | | | | | | | | | | | |
Revenue | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
General and administrative expenses | | | 607,559 | | | | 437,409 | | | | 442,409 | | | | 1,176,202 | |
Loss from operations | | | (607,559 | ) | | | (437,409 | ) | | | (442,409 | ) | | | (1,176,202 | ) |
Other income (expense) | | | | | | | | | | | | | | | | |
Interest income | | | 4,595 | | | | 4,925 | | | | 4,925 | | | | 11,543 | |
Change in fair value of warrant liability | | | 2,443,333 | | | | 366,500 | | | | 366,500 | | | | 4,275,833 | |
Net income (loss) attributable to ordinary shares not subject to possible redemption | | $ | 1,840,369 | | | $ | (65,984 | ) | | $ | (70,984 | ) | | $ | 3,111,174 | |
| | | | | | | | | | | | | | | | |
Weighted average number of ordinary shares outstanding, excluding shares subject to possible redemption, basic and diluted | | | 3,234,334 | | | | 3,436,601 | | | | 3,024,458 | | | | 3,124,439 | |
| | | | | | | | | | | | | | | | |
Net income (loss) per ordinary share, excluding shares subject to possible redemption, basic and diluted | | $ | 0.57 | | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | 1.00 | |
See accompanying notes to interim financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Period from March 11, 2011 (date of inception) to March 31, 2013
| | | | | | | | | | | Deficit | | | | |
| | | | | | | | | | | Accumulated | | | | |
| | | | | | | | Additional | | | During the | | | Total | |
| | Ordinary Shares | | | Paid-in | | | Development | | | Shareholders' | |
| | Shares | | | Amount | | | Capital | | | Stage | | | Equity | |
| | | | | | | | | | | | | | | |
Sale of ordinary shares to Sponsor on March 11, 2011 at $0.012 per share | | | 2,012,500 | | | $ | 25,000 | | | $ | - | | | $ | - | | | $ | 25,000 | |
| | | | | | | | | | | | | | | | | | | | |
Net loss attributable to ordinary shares not subject to possible redemption | | | | | | | | | | | | | | | (5,000 | ) | | | (5,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balances at June 30, 2011 (unaudited) | | | 2,012,500 | | | | 25,000 | | | | - | | | | (5,000 | ) | | | 20,000 | |
| | | | | | | | | | | | | | | | | | | | |
Sale on July 20, 2011 of 8,050,000 units at $10 per unit, (including 6,469,978 shares subject to possible redemption) | | | 8,050,000 | | | | 80,500,000 | | | | - | | | | - | | | | 80,500,000 | |
| | | | | | | | | | | | | | | | | | | | |
Underwriters' discount and offering expenses | | | - | | | | (4,981,810 | ) | | | - | | | | - | | | | (4,981,810 | ) |
| | | | | | | | | | | | | | | | | | | | |
Sale on July 20, 2011 of 4,166,667 private placement warrants to the Sponsor at $0.75 per warrant | | | - | | | | - | | | | 3,125,000 | | | | - | | | | 3,125,000 | |
| | | | | | | | | | | | | | | | | | | | |
Warrant liability recorded on July 20, 2011 | | | | | | | (6,037,500 | ) | | | (3,125,000 | ) | | | | | | | (9,162,500 | ) |
| | | | | | | | | | | | | | | | | | | | |
Proceeds subject to possible redemption of 6,469,978 ordinary shares at redemption value | | | (6,469,978 | ) | | | (64,505,681 | ) | | | - | | | | - | | | | (64,505,681 | ) |
| | | | | | | | | | | | | | | | | | | | |
Change in proceeds subject to possible redemption to 6,597,441 ordinary shares at redemption value | | | (127,463 | ) | | | (5 | ) | | | - | | | | (1,270,805 | ) | | | (1,270,810 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to ordinary shares not subject to possible redemption | | | - | | | | - | | | | - | | | | 1,275,805 | | | | 1,275,805 | |
| | | | | | | | | | | | | | | | | | | | |
Balances at June 30, 2012 (audited) | | | 3,465,059 | | | | 5,000,004 | | | | - | | | | - | | | | 5,000,004 | |
| | | | | | | | | | | | | | | | | | | | |
Change in proceeds subject to possible redemption to 6,782,032 ordinary shares at redemption value | | | (184,591 | ) | | | 6 | | | | - | | | | (1,840,369 | ) | | | (1,840,363 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income attributable to ordinary shares not subject to possible redemption | | | - | | | | - | | | | - | | | | 1,840,369 | | | | 1,840,369 | |
| | | | | | | | | | | | | | | | | | | | |
Balances at March 31, 2013 (unaudited) | | | 3,280,468 | | | $ | 5,000,010 | | | $ | - | | | $ | - | | | $ | 5,000,010 | |
See accompanying notes to interim financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | | | | | |
| | | | | | | | For the Period from | | | For the Period from | |
| | | | | | | | March 11, 2011 | | | March 11, 2011 | |
| | Nine Months Ended | | | (date of inception) to | | | (date of inception) to | |
| | March 31, 2013 | | | March 31, 2012 | | | March 31, 2012 | | | March 31, 2013 | |
Cash Flows from Operating Activities | | | | | | | | | | | | | | | | |
Net income | | $ | 1,840,369 | | | $ | (65,984 | ) | | $ | (70,984 | ) | | $ | 3,111,174 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | | | | | | | | | |
Change in fair value of warrant liability | | | (2,443,333 | ) | | | (366,500 | ) | | | (366,500 | ) | | | (4,275,833 | ) |
Increase (decrease) attributable to changes in operating assets and liabilities | | | | | | | | | | | | | | | | |
Prepaid insurance and other current assets | | | 55,078 | | | | 80,738 | | | | (81,720 | ) | | | (6,967 | ) |
Accrued expenses | | | 70,168 | | | | 2,787 | | | | 29,287 | | | | 86,566 | |
| | | | | | | | | | | | | | | | |
Net cash used in operating activities | | | (477,718 | ) | | | (348,959 | ) | | | (489,917 | ) | | | (1,085,060 | ) |
| | | | | | | | | | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | | | | | | | | | |
Principal deposited in Trust Account | | | - | | | | (80,237,500 | ) | | | (80,237,500 | ) | | | (80,237,500 | ) |
Interest reinvested in Trust Account | | | (4,342 | ) | | | (4,925 | ) | | | (4,925 | ) | | | (11,290 | ) |
| | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (4,342 | ) | | | (80,242,425 | ) | | | (80,242,425 | ) | | | (80,248,790 | ) |
| | | | | | | | | | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | | | | | | | | | |
Proceeds from notes payable to affiliate | | | 300,000 | | | | - | | | | 200,000 | | | | 500,000 | |
Payment of notes payable to affiliate | | | - | | | | (200,000 | ) | | | (200,000 | ) | | | (200,000 | ) |
Proceeds from sale of ordinary shares to Sponsor | | | - | | | | - | | | | 25,000 | | | | 25,000 | |
Proceeds from public offering | | | - | | | | 80,500,000 | | | | 80,500,000 | | | | 80,500,000 | |
Proceeds from issuance of Sponsor Warrants | | | - | | | | 3,125,000 | | | | 3,125,000 | | | | 3,125,000 | |
Payment of offering costs | | | - | | | | (2,566,810 | ) | | | (2,566,810 | ) | | | (2,566,810 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by financing activities | | | 300,000 | | | | 80,858,190 | | | | 81,083,190 | | | | 81,383,190 | |
| | | | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | (182,060 | ) | | | 266,806 | | | | 350,848 | | | | 49,340 | |
Cash and cash equivalents at beginning of the period | | | 231,400 | | | | 84,042 | | | | - | | | | - | |
Cash and cash equivalents at end of the period | | $ | 49,340 | | | $ | 350,848 | | | $ | 350,848 | | | $ | 49,340 | |
| | | | | | | | | | | | | | | | |
Supplemental Schedule of Non-Cash Financing Activities | | | | | | | | | | | | | | | | |
Deferred underwriters' compensation | | | | | | $ | 2,415,000 | | | $ | 2,415,000 | | | $ | 2,415,000 | |
Adjustment for warrant liability in connection with public offering | | | | | | $ | 9,162,500 | | | $ | 9,162,500 | | | $ | 9,162,500 | |
See accompanying notes to interim financial statements.
BLUE WOLF MONGOLIA HOLDINGS CORP.
(A Corporation in the Development Stage)
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)
Note 1. Interim Financial Information
The accompanying condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”), and reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position as of March 31, 2013 and June 30, 2012 and the results of operations for the nine months ended March 31, 2013, the nine months ended March 31, 2012, the period from March 11, 2011 (date of inception) to March 31, 2012 and the period from March 11, 2011 (date of inception) to March 31, 2013. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. Interim results are not necessarily indicative of the results of operations to be expected for a full fiscal year.
These unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A filed with the SEC on May 14, 2013.
Note 2. Organization and Business Operations
Incorporation
Blue Wolf Mongolia Holdings Corp. (the “Company”) was incorporated in the British Virgin Islands on March 11, 2011.
Sponsor
The Company’s sponsor is Blue Wolf MHC Ltd., an exempt company incorporated in the Cayman Islands with limited liability (the “Sponsor”).
Fiscal Year End
Effective December 30, 2012, the Company changed its fiscal year end from February 28 to June 30 solely for financial accounting purposes. As a result of this change, the Company’s current fiscal year will end on June 30, 2013.
Business Purpose
The Company was formed to effect a merger, capital share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (an “Initial Business Combination”).
Financing
The registration statement for the Company’s initial public offering (the “Public Offering”) (as described in Note 4) was declared effective on July 14, 2011. On July 20, 2011, simultaneously with the closing of the Public Offering, the Sponsor purchased $3,125,000 of warrants in a private placement (Note 6).
Upon the closing of the Public Offering and the private placement, $80,237,500 was placed in the Trust Account (discussed below).
Trust Account
The trust account (the “Trust Account”) may only be invested in United States government treasury bills having a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act and which invest solely in U.S. Treasuries. The funds in the Trust Account are held in the name of Blue Wolf Mongolia Holdings Corp. (see Note 8).
Except for a portion of the interest income (net of taxes payable) that may be released to the Company to pay any taxes and to fund the Company’s working capital requirements, and any amounts necessary to purchase up to 15% of the Company’s Public Shares (as defined in Note 4) if the Company seeks shareholder approval of its Initial Business Combination, as discussed below, none of the funds will be released from the Trust Account until the earlier of: (i) the consummation of an Initial Business Combination no later than April 20, 2013, (ii) a redemption to public shareholders prior to any voluntary winding-up in the event the Company does not consummate an Initial Business Combination or (iii) pursuant to any liquidation.
Business Combination
An Initial Business Combination is subject to the following size, focus and shareholder approval provisions:
Size — The prospective target business will not have a limitation to size, except that it must have an aggregate fair market value of at least 80% of the value of the Trust Account (excluding any taxes) at the time of the agreement to enter the Initial Business Combination. The Company will not consummate an Initial Business Combination unless it acquires a controlling interest in a target company or is otherwise not required to register as an investment company under the Investment Company Act.
Focus — The Company’s efforts in identifying prospective target businesses will initially be focused on businesses within Mongolia that complement the management team’s background such as in the natural resources sectors and related sectors. The Company may, however, pursue opportunities in other business sectors or geographic regions.
Tender Offer/Shareholder Approval — The Company, after signing a definitive agreement for an Initial Business Combination, will either (i) provide shareholders with the opportunity to sell their shares to the Company by means of a tender offer for an amount in cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable, or (ii) seek shareholder approval of the Initial Business Combination at a meeting called for such purpose in connection with which shareholders may seek to redeem their shares, regardless of whether they vote for or against the Initial Business Combination, for cash equal to their pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less (a) taxes payable, (b) amounts released to fund working capital requirements and (c) any amounts released to the Company and used to purchase up to 15% of the Public Shares sold in the Public Offering. The decision as to whether the Company will seek shareholder approval of the Initial Business Combination or will allow shareholders to sell their shares in a tender offer will be made by the Company, solely in its discretion, and will be based on a variety of factors such as the timing of the transaction and whether the terms of the transaction would otherwise require the Company to seek shareholder approval. If the Company seeks shareholder approval, it will consummate its Initial Business Combination only if a majority of the ordinary shares voted are voted in favor of the Initial Business Combination. However, in no event will the Company redeem its Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001. In certain circumstances, the number of Public Shares the Company offers to redeem may be further limited if the terms and conditions of the Initial Business Combination require the Company to retain more than $5,000,001 in net tangible assets. In such case, if the Company were unable to satisfy the terms and conditions of the Initial Business Combination, it would not proceed with the redemption of its Public Shares and the related Initial Business Combination, and instead may search for an alternate Initial Business Combination.
Regardless of whether the Company holds a shareholder vote or a tender offer in connection with an Initial Business Combination, a public shareholder will have the right to redeem its shares for an amount in cash equal to its pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable plus amounts released to fund working capital requirements and any amounts necessary to purchase up to 15% of the Public Shares sold in the Public Offering. As a result, such ordinary shares are recorded at conversion/tender value and classified as temporary equity, in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity.”
Permitted Purchase of Public Shares — If the Company seeks shareholder approval of its Initial Business Combination and does not conduct redemptions pursuant to the tender offer rules, prior to the Initial Business Combination, the Company’s Memorandum and Articles of Association will permit the release to the Company from the Trust Account amounts necessary to purchase up to 15% of the Public Shares sold in the Public Offering. All shares so purchased by the Company will be immediately cancelled.
Liquidation/Going Concern Consideration
If the Company does not consummate an Initial Business Combination by April 20, 2013, the Company (i) will distribute the aggregate amount then on deposit in the Trust Account (less up to $50,000 of the net interest earned thereon to pay dissolution expenses), pro rata, to holders of Public Shares by way of redemption and (ii) intends to cease all operations except for the purposes of winding up of its affairs. This redemption of Public Shares from the Trust Account shall be done automatically by function of the Company’s Memorandum and Articles of Association and prior to any voluntary winding up, although at all times subject to the BVI Business Companies Act, 2004 of the British Virgin Islands.
In the event of liquidation, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per share in the Public Offering (assuming no value is attributed to the warrants contained in the units offered in the Public Offering discussed in Note 4).
The Company will pay the costs of liquidation from its remaining assets outside the Trust Account. If such funds are insufficient to cover these costs and expenses, up to $50,000 of the net interest earned on the Trust Account may be released to the Company to pay these costs. This mandatory liquidation and subsequent dissolution raises substantial doubt about the Company’s ability to continue as a going concern.
Note 3. Significant Accounting Policies
Development Stage Company
The Company is considered to be in the development stage as defined by FASB ASC 915, “Development Stage Entities,” and is subject to the risks associated with activities of development stage companies. Through March 31, 2013, the Company’s efforts have been limited to organizational activities, activities relating to its Public Offering and activities relating to identifying and evaluating prospective acquisition candidates. The Company has not generated any revenues, other than interest income earned on the proceeds held in the Trust Account. The Company will not generate any operating revenues until after completion of an Initial Business Combination, at the earliest. The Company will continue to generate non-operating income in the form of interest income on the designated Trust Account.
Cash Equivalents
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents at March 31, 2013 and June 30, 2012, principally consist of cash invested directly in Treasury securities or in a money market account held by the Company through its Trust Account.
Net Income/(Loss) Per Share
Basic net income/(loss) per share is computed by dividing net income/(loss) by the weighted average number of ordinary shares outstanding during the period in accordance with FASB ASC 260, “Earnings Per Share”. Diluted net income/(loss) per share is computed by dividing net income/(loss) by the weighted average number of ordinary shares outstanding, plus to the extent dilutive, the incremental number of ordinary shares to settle warrants issued in the Public Offering and private placement, as calculated using the treasury stock method. For the periods presented, the effect of the 12,216,667 warrants (including 4,166,667 warrants issued to the members of the Sponsor in the private placement), have not been considered in the diluted income/(loss) per ordinary share because their effect would be anti-dilutive. As a result, dilutive income/(loss) per ordinary share is equal to basic income/(loss) per ordinary share.
Redeemable Ordinary Shares
As discussed in Note 2, all of the 8,050,000 ordinary shares sold as part of a Public Unit in the Public Offering contain a redemption feature which allows for their redemption under the Company's liquidation or tender offer/stockholder approval provisions. In accordance with ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity's equity instruments, are excluded from the provisions of ASC 480. Although the Company does not specify a maximum redemption threshold, its Memorandum and Articles of Association provides that in no event will the Company redeem its public shares in an amount that would cause its net tangible assets (shareholders' equity) to be less than $5,000,001.
The Company recognizes changes in redemption value immediately as they occur and will adjust the carrying value of the security to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable ordinary shares shall be affected by charges against paid-in capital.
Accordingly, at March 31, 2013 and June 30, 2012, 6,782,032 and 6,597,441 shares, respectively, of the 8,050,000 Public Shares were classified outside of permanent equity at their redemption value. The redemption value (approximately $9.97 per share at March 31, 2013 and June 30, 2012) is equal to the pro rata share of the aggregate amount then on deposit in the Trust Account, including interest but less taxes payable.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which at times may exceed the federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Income Taxes
Under the laws of the British Virgin Islands, the Company is generally not subject to income taxes. Accordingly, no provision for income taxes has been made in the accompanying financial statements.
The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously recognized results in the Company recording a tax liability that increases ending deficit accumulated during the development stage. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of March 31, 2013 or June 30, 2012. The Company’s conclusions may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analyses of and changes to tax laws, regulations and interpretations thereof.
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses, respectively. No interest expense or penalties have been recognized as of March 31, 2013 and for the period from March 11, 2011 (date of inception) to March 31, 2013. The Company is subject to income tax examinations by major taxing authorities since inception.
The Company may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Warrant Liability
The Company accounts for its 12,216,667 warrants (consisting of 8,050,000 warrants issued in the Public Offering and 4,166,667 Sponsor Warrants) in accordance with the guidance contained in ASC 815-40-15-7D, "Contracts in Entity's Own Equity" whereby under that provision the warrantsdo not meet the criteria for equity treatment and must be recorded as a liability. Accordingly, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's statement of operations. The fair value of the warrants issued by the Company in connection with the Public Offering has been estimated using the quoted market price of the warrants at the end of the reporting period.
Fair Value of Financial Instruments
Unless otherwise disclosed, the fair values of financial instruments, including cash, approximate their carrying amount due primarily to their short-term nature.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
Note 4. Public Offering
Public Units
On July 20, 2011, the Company sold 8,050,000 units (including units sold pursuant to the underwriters’ exercise of their over-allotment option) at a price of $10.00 per unit (the “Public Units”) in the Public Offering. Each unit consists of one ordinary share of the Company, no par value (the “Public Shares”), and one warrant to purchase one ordinary share (the “Public Warrants”).
Public Warrant Terms and Conditions
Exercise Conditions — Each Public Warrant will entitle the holder to purchase from the Company one ordinary share at an exercise price of $12.00 per share commencing on the later of: (i) 30 days after the consummation of an Initial Business Combination, or (ii) July 20, 2012, provided that the Company has an effective registration statement covering the ordinary shares issuable upon exercise of the Public Warrants and such shares are registered or qualified under the securities laws of the state of the exercising holder. The Public Warrants expire five years from the date of the Initial Business Combination, unless earlier redeemed. The Public Warrants will be redeemable in whole and not in part at a price of $0.01 per warrant upon a minimum of 30 days notice after the warrants become exercisable, only in the event that the last sale price of the Company’s ordinary shares exceeds $18.00 per share for any 20 trading days within a 30-trading day period. If the Public Warrants are redeemed by the Company, management will have the option to require all holders that wish to exercise warrants to do so on a cashless basis.
Registration Risk — In accordance with a warrant agreement relating to the Public Warrants, the Company will be required to use its best efforts to maintain the effectiveness of a registration statement relating to the ordinary shares which would be issued upon exercise of the Public Warrants. The Company will not be obligated to deliver securities, and there are no contractual penalties for failure to deliver securities, if a registration statement is not effective at the time of exercise. Additionally, in the event that a registration statement is not effective at the time of exercise, the holders of such Public Warrants will not be entitled to exercise such Public Warrants (except on a cashless basis under certain circumstances) and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle or cash settle the Public Warrants. Consequently, the Public Warrants may expire unexercised, unredeemed and worthless, and an investor in the Public Offering may effectively pay the full unit price solely for the ordinary shares included in the Public Units.
Accounting — The Company accounts for the warrants in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued by the Company in connection with the Public Offering has been estimated using the market price of the warrants at each reporting date.
Underwriting Agreement — The Company paid an underwriting discount of $2,012,500, or 2.5% of the Public Unit offering price, to the underwriters at the closing of the Public Offering, with an additional fee of $2,415,000, or 3.0% of the gross offering proceeds, payable upon the Company’s consummation of an Initial Business Combination. The underwriters will not be entitled to any interest accrued on the deferred discount.
Note 5. Warrant Liability
The Company sold 8,050,000 units in the Public Offering, which subsequently separated into one warrant at an initial exercise price of $12.00 and one ordinary share. The Sponsor also purchased 4,166,667 warrants in a private placement in connection with the Public Offering. The warrants expire five years after the date of the Company’s Initial Business Combination. The warrants issued contain a restructuring price adjustment provision in the event of any merger or consolidation of the Company with or into another corporation, subsequent to the Initial Business Combination, where the surviving entity is not the Company and whose stock is not listed for trading on a national securities exchange or on the OTC Bulletin Board, or is not to be so listed for trading immediately following such event (the “Applicable Event”). The exercise price of the warrant is decreased immediately following an Applicable Event by a formula that causes the warrants to not be indexed to the Company’s own shares. Management used the quoted market price for the valuation of the warrants to determine the warrant liability to be $4,886,667 and $7,330,000 as of March 31, 2013 and June 30, 2012, respectively. This valuation is revised on a quarterly basis until the warrants are exercised or they expire with the changes in fair value recorded in the statement of operations
Note 6. Related Party Transactions
Founder Shares — In March 2011, the Sponsor purchased 2,012,500 ordinary shares (the “Founder Shares”) for $25,000, or approximately $0.012 per share.
Earnout Shares — In addition, a portion of the Founder Shares in an amount equal to 591,912 shares will be subject to forfeiture by the Sponsor as follows: (1) 304,924 shares are subject to forfeiture in the event the last sale price of the Company’s shares does not equal or exceed $15.00 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of the Company’s Initial Business Combination and (2) 286,988 shares are subject to forfeiture in the event the last sale price of the Company’s shares does not equal or exceed $12.50 per share (as adjusted for share splits, share dividends, reorganizations, recapitalizations and the like) for any 20 trading days within at least one 30-trading day period within 36 months following the closing of the Company’s Initial Business Combination.
Rights — The Founder Shares are identical to the Public Shares except that (i) the Founder Shares are subject to certain transfer restrictions, as described in more detail below, and (ii) the Sponsor agreed to waive its redemption rights with respect to (A) the Founder Shares and any Public Shares it purchases in connection with the Initial Business Combination and (B) the Founder Shares upon liquidation if the Company fails to consummate an Initial Business Combination by April 20, 2013.
Voting — If the Company seeks shareholder approval of its Initial Business Combination, the Sponsor will vote the Founder Shares and any Public Shares it has purchased in favor of the Initial Business Combination.
Liquidation — Although the Sponsor has, and its permitted transferees must agree to, waive their redemption rights with respect to the Founder Shares if the Company fails to consummate an Initial Business Combination by April 20, 2013, they will be entitled to redemption rights with respect to any Public Shares they may own.
Sponsor Warrants — The Sponsor purchased 4,166,667 warrants (the “Sponsor Warrants”) at $0.75 per warrant (for an aggregate purchase price of $3,125,000) from the Company on a private placement basis simultaneously with the closing of the Public Offering.
Exercise Conditions — Each Sponsor Warrant is exercisable for one ordinary share at $12.00 per share. The Sponsor Warrants are identical to the Public Warrants except that the Sponsor Warrants (i) are not redeemable by the Company as long as they are held by the Sponsor, members of the Sponsor or any of their permitted transferees, (ii) are subject to certain transfer restrictions described in more detail below and (iii) may be exercised for cash or on a cashless basis.
Accounting — The Company accounts for the warrants in accordance with the guidance on Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides that the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair value of warrants issued by the Company in connection with private placements of securities has been estimated using the market price of the warrants at each reporting date.
Transfer Restrictions
The Sponsor has agreed not to transfer, assign or sell any of its Founder Shares (except in limited circumstances to permitted transferees) until the earlier of (1) one year after the completion of the Company’s Initial Business Combination and (2) the date on which the Company consummates a liquidation, share exchange, share reconstruction and amalgamation, or other similar transaction after its Initial Business Combination that results in all of its shareholders having the right to exchange their ordinary shares for cash, securities or other property (the “Lock-Up Period”). Notwithstanding the foregoing, if the Company’s share price reaches or exceeds $11.50 for any 20 trading days within at least one 30-trading day period during the Lock-Up Period, 50% of the Founder Shares will be released from the lock-up and, if the Company’s share price reaches or exceeds $15.00 for any 20 trading days within at least one 30-trading day period during such Lock-Up Period, the remaining 50% of the Founder Shares shall be released from the lock-up. In addition, notwithstanding the above, the Sponsor has agreed not to transfer, sell or assign the Founder earnout shares (whether to a permitted transferee or otherwise) before the applicable forfeiture condition lapses. The Sponsor has agreed not to transfer, assign or sell any of the Sponsor Warrants including the ordinary shares issuable upon exercise of the Sponsor Warrants until 30 days after the completion of an Initial Business Combination.
Registration Rights
The holders of the Founder Shares, Sponsor Warrants and warrants that may be issued upon conversion of working capital loans hold registration rights to require the Company to register a sale of any of the securities held by them pursuant to a registration rights agreement entered into in connection with the Public Offering. These shareholders are entitled to make up to three demands, excluding short form demands, that the Company register such securities for sale under the Securities Act of 1933 (the “Securities Act”). In addition, these shareholders have “piggy-back” registration rights to include their securities in other registration statements filed by the Company. However, the registration rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to become effective until termination of the applicable Lock-Up Period, which occurs (i) in the case of the Founder Shares, upon the earlier of (1) one year after the completion of the Company’s Initial Business Combination or (2) the date on which the Company consummates a liquidation, merger, share exchange or other similar transaction after the Company’s Initial Business Combination that results in all of the Company’s shareholders having the right to exchange their ordinary shares for cash, securities or other property, and (ii) in the case of the Sponsor Warrants and the respective ordinary shares underlying such warrants, 30 days after the completion of the Company’s Initial Business Combination. The Company will bear the costs and expenses of filing any such registration statements.
Note 7. Other Related Party Transactions
Administrative Services
The Company has agreed to pay up to $10,000 a month for office space, utilities and secretarial and administrative services to the Sponsor. Services commenced on July 15, 2011 (the date the Company’s securities were first listed on the NASDAQ Capital Market) and will terminate upon the earlier of (i) the consummation of an Initial Business Combination or (ii) the liquidation of the Company. Approximately $90,000, $90,000, $90,000 and $210,000 was incurred under this agreement for the nine months ended March 31, 2013, the nine months ended March 31, 2012, the period from March 11, 2011 (date of inception) to March 31, 2012 and the period from March 11, 2011 (date of inception) to March 31, 2013, respectively. As of March 31, 2013 and June 30, 2012, there were net outstanding balances of $60,000 and nil payable to the Sponsor for unpaid administrative fees.
Notes Payable
On April 1, 2011, the Company issued an unsecured promissory note for $200,000 to Blue Wolf MHC Ltd. The proceeds from the note were used to fund a portion of the organizational and offering costs owed by the Company to third parties. This note was repaid on July 20, 2011.
In January and March 2013, the Company issued unsecured promissory notes for $200,000 and $100,000 respectively, to Blue Wolf MHC Ltd. The proceeds from the notes have been used to fund operating costs. The notes are non-interest bearing and due on demand.
Note 8. Trust Account
A total of $80,237,500, which includes $77,112,500 of the net proceeds from the Public Offering and $3,125,000 from the proceeds of the private placement, has been placed in the Trust Account.The Company is permitted to invest the proceeds of the Trust Account in U.S. “government securities,” within the meaning of Section 2(a)(16) of the 1940 Act with a maturity of 180 days or less or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the 1940 Act.
At June 30, 2012, the proceeds held in trust, including reinvested interest, of $80,244,448 were invested in a money market fund which invested exclusively in U.S. Treasuries and meets certain conditions under Rule 2a-7 under the Investment Company Act.
As of March 31, 2013, the trust proceeds are invested in directly in U.S. government securities with a maturity of 180 days or less, which consist of $80,248,700in United States Treasury Bills and $91 of cash equivalents. The Company classifies its United States Treasury and equivalent securities as held-to-maturity in accordance with FASB ASC 320, "Investments - Debt and Equity Securities.” Held to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost on the accompanying balance sheet and adjusted for the amortization or accretion of premiums or discounts. The carrying amount, gross unrealized holding gains and fair value of held-to-maturity securities at March 31, 2013 a re as follows:
| | | | | Unrealized | | | | |
| | Carrying | | | Holding | | | | |
| | Amount | | | Gain / (Loss) | | | Fair Value | |
Held-to-maturity | | | | | | | | | | | | |
U.S. Treasury Securities - March 31, 2013 | | | 80,248,700 | | | | - | | | | 80,248,700 | |
Note 9. Fair Value Measurement
The Company complies with FASB ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
Cash Equivalents and Investments Held in Trust Account
The fair values of the Company’s cash equivalents and investments held in the Trust Account are determined through market, observable and corroborated sources.
Warrant Liability
The fair value of the derivative warrant liability was determined by the Company using the quoted market prices for the publicly traded warrants. On reporting dates where there are no active trades the Company uses the last reported closing trade price of the warrants to determine the fair value (Level 2).
There were no transfers between Level 1, 2 or 3 during any periods presented. There are no assets written down to fair value on a non-recurring basis.
The following tables presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2013 and June 30, 2012, respectively, and indicate the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability:
Fair Value of Financial Assets and Liabilities as of March 31, 2013
| | | | | Quoted Prices | | | Significant Other | | | Significant Other | |
| | Balances, at | | | in | | | Observable | | | Unobservable | |
| | March 31, | | | Active Markets | | | Inputs | | | Inputs | |
Description | | 2013 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments held in Trust Account | | $ | 80,248,791 | | | $ | 80,248,791 | | | $ | — | | | $ | — | |
Total | | $ | 80,248,791 | | | $ | 80,248,791 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Warrant liability | | $ | 4,886,667 | | | $ | — | | | $ | 4,886,667 | | | $ | — | |
Total | | $ | 4,886,667 | | | $ | — | | | $ | 4,886,667 | | | $ | — | |
Fair Value of Financial Assets and Liabilities as of June 30, 2012
| | | | | Quoted Prices | | | Significant Other | | | Significant Other | |
| | Balances, at | | | in | | | Observable | | | Unobservable | |
| | June 30, | | | Active Markets | | | Inputs | | | Inputs | |
Description | | 2012 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Investments held in Trust Account | | $ | 80,244,448 | | | $ | 80,244,448 | | | $ | — | | | $ | — | |
Total | | $ | 80,244,448 | | | $ | 80,244,448 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Warrant liability | | $ | 7,330,000 | | | $ | — | | | $ | 7,330,000 | | | $ | — | |
Total | | $ | 7,330,000 | | | $ | — | | | $ | 7,330.000 | | | $ | — | |
Note 10. Commitments and Contingencies
The Company has committed to pay a deferred underwriters’ compensation of $2,415,000, or 3.0% of the gross Public Offering proceeds, to the underwriters upon the Company’s consummation of an Initial Business Combination. This deferred underwriters’ compensation is reflected in the accompanying interim balance sheets. The underwriters will not be entitled to any interest accrued on such deferred compensation.
Note 11. Shareholders’ Equity
Ordinary Shares — The Company has unlimited ordinary shares authorized. Holders of the Company’s ordinary shares are entitled to one vote for each ordinary share. At March 31, 2013 and June 30, 2012, there were 3,280,468 and 3,465,059 ordinary shares outstanding, respectively. Ordinary shares outstanding at March 31, 2013 and June 30, 2012 excludes 6,782,032 and 6,597,441 ordinary shares subject to possible redemption, respectively.
Preferred Shares — The Company is authorized to issue an unlimited number of preferred shares in five different classes with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. At March 31, 2013 and June 30, 2012, there were no preferred shares outstanding.
Note 12. Subsequent Events
On April 15, 2013, Blue Wolf Mongolia Holdings Corp. held a Meeting of Shareholders (the “Meeting”). At the Meeting, shareholders approved the following: (i) an amendment to the Company’s Amended and Restated Memorandum and Articles of Association (the “Charter”) extending the date by which the Company must consummate its initial business combination from April 20, 2013 to July 22, 2013 (the “Extension Amendment”), (ii) an amendment to the Charter removing the requirement that the Company acquire a target business that has a fair market value equal to at least 80% of the value of the funds held in the Company’s Trust Account (the “ 80% Amendment”) and (iii) an amendment to the Investment Management Trust Agreement between the Company and Continental Stock Transfer & Trust Company permitting the withdrawal and distribution of an amount not to exceed $69,854,955 from the Company’s Trust Account to certain persons holding ordinary shares who wish to exercise their redemption rights in connection with the Extension Amendment and extending the date on which to liquidate the Company’s Trust Account to July 22, 2013 (the “IMTA Amendment”). The affirmative vote of sixty-five percent of the issued and outstanding shares of the Company was required to approve each of the proposals.
The Company also announced on April 15, 2013 the results of its tender offer to purchase up to 7,006,515 of its ordinary shares in connection with the extension and the other shareholder proposals. The tender offer expired at 11:59 p.m., New York City time, on April 16, 2013. Based upon information provided by Continental Stock Transfer & Trust Company, the depositary for the tender offer, as of the expiration of the tender offer, a total of 5,794,119 ordinary shares had been validly tendered and not properly withdrawn for a total purchase price of approximately $57.8 million. Such ordinary shares represent approximately 58% of the Company’s issued and outstanding ordinary shares as of April 16, 2013.
On April 12, 2013, the Company entered into an agreement with the underwriters to amend the deferred compensation arrangement in the original underwriting agreement (see Note 10). Under the new arrangement, the underwriters will receive upon the closing of an Initial Business Combination, in lieu of the original $2.415 million fee, an amount equal to the sum of (i) $1,000,000 and (ii) (a) $1,400,000, multiplied by (b) the quotient of (x) the amount of cash retained in the Trust Account at the closing of the Initial Business Combination after payment of the aggregate redemption price to holders of Public Shares that have tendered such shares to the Company, divided by (y) $80,237,500. As a result of the tender on April 15, 2013, the maximum fee will be approximately $1.4 million.
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Li3 Energy, Inc.
(An Exploration Stage Company)
Providencia, Santiago, Chile
We have audited the accompanying consolidated balance sheets of Li3 Energy, Inc. (an Exploration Stage Company) as of June 30, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended and for the period from June 24, 2005 (inception) to June 30, 2012. These consolidated financial statements are the responsibility of Li3 Energy, Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Li3 Energy, Inc., as of June 30, 2012 and 2011, and the results of their operations and their cash flows for the years then ended and for the period from June 24, 2005 (inception of the exploration stage) to June 30, 2012 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has no source of recurring revenue; negative working capital and cash flows; and has suffered recurring losses from operations; which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ GBH CPAs, PC | |
GBH CPAs, PC | |
www.gbhcpas.com | |
Houston, Texas | |
| |
October 15, 2012 | |
Li3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Balance Sheets
| | June 30, 2012 | | | June 30, 2011 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 27,689 | | | $ | 952,401 | |
Deferred financing costs | | | - | | | | 103,250 | |
Prepaid expenses and advances | | | 8,841 | | | | 41,809 | |
Total current assets | | | 36,530 | | | | 1,097,460 | |
Mineral rights | | | 63,741,000 | | | | 64,041,000 | |
Property and equipment, net | | | 175,220 | | | | - | |
Other assets | | | 10,650 | | | | - | |
Total non-current assets | | | 63,926,870 | | | | 64,041,000 | |
Total assets | | $ | 63,963,400 | | | $ | 65,138,460 | |
| | | | | | | | |
Liabilities & Stockholders' Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 2,331,722 | | | $ | 259,992 | |
Accounts payable - related parties | | | 104,326 | | | | 110,986 | |
Accrued expenses | | | 994,827 | | | | 433,028 | |
Accrued registration rights penalties | | | 518,243 | | | | - | |
Zero-coupon convertible debt, net of unamortized discount of $-0- and $1,304,674, respectively | | | 1,783,181 | | | | 372,764 | |
Notes payable | | | 1,245,000 | | | | 95,000 | |
Total current liabilities | | | 6,977,299 | | | | 1,271,770 | |
Derivative liabilities - warrant instruments | | | 7,653,928 | | | | 15,244,754 | |
Total liabilities | | | 14,631,227 | | | | 16,516,524 | |
Commitments and contingencies | | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | |
Common stock, $0.001 par value, 990,000,000 shares authorized; 323,782,553 and 279,913,920 shares issued and outstanding as of June 30, 2012 and June 30, 2011, respectively | | | 323,783 | | | | 279,914 | |
Additional paid-in capital | | | 63,578,079 | | | | 58,307,796 | |
Other comprehensive income | | | 83,563 | | | | - | |
Deficit accumulated during exploration stage | | | (37,773,845 | ) | | | (35,461,774 | ) |
Total stockholders' equity of Li3 Energy, Inc. | | | 26,211,580 | | | | 23,125,936 | |
Non-controlling interests | | | 23,120,593 | | | | 25,496,000 | |
Total stockholders' equity | | | 49,332,173 | | | | 48,621,936 | |
Total liabilities and stockholders' equity | | $ | 63,963,400 | | | $ | 65,138,460 | |
See accompanying notes to the consolidated financial statements.
Li3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statements of Operations
| | | | | | | | June 24, 2005 | |
| | | | | (Inception) | |
| | Years ended June 30, | | | through | |
| | 2012 | | | 2011 | | | June 30, 2012 | |
Revenues | | $ | - | | | $ | - | | | | 2,278 | |
| | | | | | | | | | | | |
Cost of goods sold | | | - | | | | - | | | | (1,182 | ) |
| | | | | | | | | | | | |
Gross profit | | | - | | | | - | | | | 1,096 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Exploration expenses | | | 6,193,533 | | | | 560,075 | | | | 9,089,387 | |
Mineral rights impairment expense | | | 300,000 | | | | 4,120,000 | | | | 9,138,785 | |
Loss on settlements, net | | | - | | | | 1,497,500 | | | | 1,497,500 | |
Inventory impairment | | | - | | | | - | | | | 1,469 | |
General and administrative expenses | | | 6,996,043 | | | | 5,448,667 | | | | 15,395,323 | |
Total operating expenses | | | 13,489,576 | | | | 11,626,242 | | | | 35,122,464 | |
| | | | | | | | | | | | |
Other (income) expense: | | | | | | | | | | | | |
Loss on debt extinguishment | | | 841,752 | | | | - | | | | 841,752 | |
Change in fair value of derivative liabilities - warrant instruments | | | (10,780,342 | ) | | | 6,116,147 | | | | 1,559,352 | |
Warrant modification expense | | | - | | | | 1,068,320 | | | | 1,068,320 | |
Gain on foreign currency transactions | | | (14,142 | ) | | | (1,383 | ) | | | (10,365 | ) |
Interest expense | | | 1,150,634 | | | | 410,056 | | | | 1,568,825 | |
Total other (income) expense | | | (8,802,098 | ) | | | 7,593,140 | | | | 5,027,884 | |
| | | | | | | | | | | | |
Net loss | | | (4,687,478 | ) | | | (19,219,382 | ) | | | (40,149,252 | ) |
Net loss attributable to the noncontrolling interest | | | (2,375,407 | ) | | | - | | | | (2,375,407 | ) |
Net loss attributable to Li3 Energy, Inc. | | $ | (2,312,071 | ) | | $ | (19,219,382 | ) | | $ | (37,773,845 | ) |
| | | | | | | | | | | | |
Net loss per common share - basic and diluted | | $ | (0.01 | ) | | $ | (0.16 | ) | | | | |
| | | | | | | | | | | | |
Weighted average number of common shares outstanding - basic and diluted | | | 313,997,372 | | | | 123,690,841 | | | | | |
| | | | | | | | | | | | |
Comprehensive income (loss) | | | | | | | | | | | | |
Net loss | | $ | (4,687,478 | ) | | $ | (19,219,382 | ) | | $ | (40,149,252 | ) |
Other comprehensive income - foreign currency translation adjustments | | | 83,563 | | | | - | | | | 83,563 | |
Total comprehensive loss | | | (4,603,915 | ) | | | (19,219,382 | ) | | | (40,065,689 | ) |
Comprehensive loss attributable to noncontrolling interests | | | (2,375,407 | ) | | | - | | | | (2,375,407 | ) |
Comprehensive loss attributable to Li3 Energy, Inc. | | $ | (2,228,508 | ) | | | - | | | $ | (37,690,282 | ) |
See accompanying notes to the consolidated financial statements.
Li3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statement of Changes in Stockholders’ Equity
From June 24, 2005 (Inception) through June 30, 2012
| | | | | | | | | | | | | | Deficit | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | | | Total | |
| | | | | | | | Additional | | | Other | | | During the | | | Non- | | | Stockholders' | |
| | Common Stock | | | Paid-in | | | Comprehensive | | | Exploration | | | Controlling | | | Equity | |
| | Shares | | | Par Value | | | Capital | | | Loss | | | Stage | | | Interest | | | (Deficit) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at June 24, 2005 (inception) | | | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash, June 2005 | | | 71,052,672 | | | | 71,052 | | | | (63,552 | ) | | | - | | | | - | | | | - | | | | 7,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2005 | | | 71,052,672 | | | | 71,052 | | | | (63,552 | ) | | | - | | | | - | | | | - | | | | 7,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash, March 2006 | | | 47,368,454 | | | | 47,368 | | | | 2,632 | | | | - | | | | - | | | | - | | | | 50,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (14,068 | ) | | | - | | | | (14,068 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2006 | | | 118,421,126 | | | | 118,420 | | | | (60,920 | ) | | | - | | | | (14,068 | ) | | | - | | | | 43,432 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (16,081 | ) | | | - | | | | (16,081 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2007 | | | 118,421,126 | | | | 118,420 | | | | (60,920 | ) | | | - | | | | (30,149 | ) | | | - | | | | 27,351 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash, February 2008 | | | 2,631,595 | | | | 2,632 | | | | 47,368 | | | | - | | | | - | | | | - | | | | 50,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (95,656 | ) | | | - | | | | (95,656 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2008 | | | 121,052,721 | | | | 121,052 | | | | (13,552 | ) | | | - | | | | (125,805 | ) | | | - | | | | (18,305 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (67,905 | ) | | | - | | | | (67,905 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2009 | | | 121,052,721 | | | | 121,052 | | | | (13,552 | ) | | | - | | | | (193,710 | ) | | | - | | | | (86,210 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cancellation of shares in connection with merger | | | (71,052,626 | ) | | | (71,052 | ) | | | 71,052 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock and warrants in offered 2009 Unit Offering and First 2010 Offering, less offering costs of $410,680 | | | 18,000,000 | | | | 18,000 | | | | 2,265,139 | | | | - | | | | - | | | | - | | | | 2,283,139 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock based compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued to chief executive officer for services | | | 1,500,000 | | | | 1,500 | | | | 3,300 | | | | - | | | | - | | | | - | | | | 4,800 | |
Stock issued to a consultant for services | | | 1,125,000 | | | | 1,125 | | | | 805,125 | | | | - | | | | - | | | | - | | | | 806,250 | |
Stock options issued to consultant for services | | | - | | | | - | | | | 114,783 | | | | - | | | | - | | | | - | | | | 114,783 | |
Amortization of stock-based compensation expense | | | - | | | | - | | | | 84,614 | | | | - | | | | - | | | | - | | | | 84,614 | |
Fair value of stock contributed by CEO to employees and director for services | | | - | | | | - | | | | 129,500 | | | | - | | | | - | | | | - | | | | 129,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for property acquisitions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for March 2010 acquisition of mineral rights | | | 4,000,000 | | | | 4,000 | | | | 3,636,000 | | | | - | | | | - | | | | - | | | | 3,640,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (16,048,682 | ) | | | - | | | | (16,048,682 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2010 | | | 74,625,095 | | | | 74,625 | | | | 7,095,961 | | | | - | | | | (16,242,392 | ) | | | - | | | | (9,071,806 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock and warrants offered in First 2010 Unit Offering, less offering costs of $51,991 | | | 2,160,000 | | | | 2,160 | | | | 248,901 | | | | - | | | | - | | | | - | | | | 251,061 | |
Stock and warrants offered in Second 2010 Unit Offering, no offering costs | | | 4,000,000 | | | | 4,000 | | | | 44,639 | | | | - | | | | - | | | | - | | | | 48,639 | |
Stock and warrants offered in Third 2010 Unit Offering, less offering costs of $223,088 | | | 11,666,663 | | | | 11,667 | | | | 757,473 | | | | - | | | | - | | | | - | | | | 769,140 | |
Stock and warrants offered in 2011 Offering, less offering costs totaling $737,271 | | | 23,920,071 | | | | 23,920 | | | | 3,554,723 | | | | - | | | | - | | | | - | | | | 3,578,643 | |
Stock issued for cash upon exercise of Double Options | | | 3,800,000 | | | | 3,800 | | | | 186,200 | | | | - | | | | - | | | | - | | | | 190,000 | |
Exercise of $0.05 per share D Warrants for cash | | | 2,000,000 | | | | 2,000 | | | | 98,000 | | | | - | | | | - | | | | - | | | | 100,000 | |
Cashless exercise of $0.05 per share D warrants | | | 515,254 | | | | 515 | | | | - | | | | - | | | | - | | | | - | | | | 515 | |
Exercise of $0.15 per share E Warrants for cash | | | 7,623,336 | | | | 7,624 | | | | 1,135,926 | | | | - | | | | - | | | | - | | | | 1,143,550 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued to MIZ, a related party, pursuant to vesting of restricted stock units | | | 500,000 | | | | 500 | | | | (500 | ) | | | - | | | | - | | | | - | | | | - | |
Stock issued to MIZ, a related party for salary and bonus under Employment Service Agreement | | | 736,842 | | | | 737 | | | | 281,763 | | | | - | | | | - | | | | - | | | | 282,500 | |
Stock issued for services | | | 2,728,310 | | | | 2,728 | | | | 1,027,871 | | | | - | | | | - | | | | - | | | | 1,030,599 | |
Amortization of stock-based compensation | | | - | | | | - | | | | 777,963 | | | | - | | | | - | | | | - | | | | 777,963 | |
Stock issued for Investment Agreement with investor | | | 1,638,349 | | | | 1,638 | | | | 382,830 | | | | - | | | | - | | | | - | | | | 384,468 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued to settle liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for Lacus settlement | | | 500,000 | | | | 500 | | | | 192,000 | | | | - | | | | - | | | | - | | | | 192,500 | |
Stock issued for settlement with Puna Lithium | | | 6,000,000 | | | | 6,000 | | | | 1,914,000 | | | | - | | | | - | | | | - | | | | 1,920,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity impact of derivative liability warrants and debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of D warrants reclassified from derivative liability to equity upon exercise | | | - | | | | - | | | | 2,582,116 | | | | - | | | | - | | | | - | | | | 2,582,116 | |
Fair value of E warrants reclassified from derivative liability to equity upon exercise | | | - | | | | - | | | | 2,022,430 | | | | - | | | | - | | | | - | | | | 2,022,430 | |
Beneficial conversion of convertible debt issued May 2011 | | | - | | | | - | | | | 368,000 | | | | - | | | | - | | | | - | | | | 368,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for property acquisitions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for August 2010 acquisition of mineral rights | | | 10,000,000 | | | | 10,000 | | | | 3,890,000 | | | | - | | | | - | | | | - | | | | 3,900,000 | |
Stock issued for acquisition of May 2011 mineral rights | | | 127,500,000 | | | | 127,500 | | | | 31,747,500 | | | | - | | | | - | | | | - | | | | 31,875,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidation of Maricunga non-controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | 25,496,000 | | | | 25,496,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock and warrants offered to POSCO, less offering costs of $685,944 | | | 38,095,300 | | | | 38,095 | | | | 3,495,996 | | | | - | | | | - | | | | - | | | | 3,534,091 | |
Exercise of $0.05 per share D Warrants for cash | | | 4,200,000 | | | | 4,200 | | | | 205,800 | | | | - | | | | - | | | | - | | | | 210,000 | |
Equity impact of derivative liability warrants and debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of D warrants reclassified from derivative liability to equity upon exercise | | | - | | | | - | | | | 590,462 | | | | - | | | | - | | | | - | | | | 590,462 | |
Beneficial conversion of convertible debt waiver agreement | | | - | | | | - | | | | 330,019 | | | | - | | | | - | | | | - | | | | 330,019 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock based compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of stock-based compensation | | | - | | | | - | | | | 514,380 | | | | - | | | | - | | | | - | | | | 514,380 | |
Stock issued to MIZ, a related party, pursuant to vesting of restricted stock units | | | 300,000 | | | | 300 | | | | (300 | ) | | | - | | | | - | | | | - | | | | - | |
Common stock issued for services | | | 1,273,333 | | | | 1,274 | | | | 133,926 | | | | - | | | | - | | | | - | | | | 135,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | 83,563 | | | | - | | | | - | | | | 83,563 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | - | | | | - | | | | - | | | | (2,312,071 | ) | | | (2,375,407 | ) | | | (4,687,478 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2012 | | | 323,782,553 | | | $ | 323,783 | | | $ | 63,578,079 | | | $ | 83,563 | | | $ | (37,773,845 | ) | | $ | 23,120,593 | | | $ | 49,332,173 | |
See accompanying notes to the consolidated financial statements.
Li3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statements of Cash Flows
| | | | | | | | June 24, 2005 | |
| | Year | | | Year | | | (Inception) | |
| | Ended | | | Ended | | | through | |
| | June 30, | | | June 30, | | | June 30, | |
| | 2012 | | | 2011 | | | 2012 | |
Cash flows from operating activities | | | | | | | | | | | | |
Net loss | | $ | (4,687,478 | ) | | $ | (19,219,382 | ) | | $ | (40,149,252 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
Depreciation | | | 51,560 | | | | 3,946 | | | | 71,060 | |
Mineral rights impairment expense | | | 300,000 | | | | 4,120,000 | | | | 9,138,785 | |
Loss on settlements, net | | | - | | | | 1,497,500 | | | | 1,497,500 | |
Inventory impairment | | | - | | | | - | | | | 1,469 | |
Stock-based compensation | | | 649,580 | | | | 2,668,520 | | | | 4,458,047 | |
Loss on debt extinguishment | | | 841,752 | | | | - | | | | 841,752 | |
Change in fair value of derivative liabilities - warrant instruments | | | (10,780,342 | ) | | | 6,116,147 | | | | 1,559,352 | |
Warrant modification expense | | | - | | | | 1,068,320 | | | | 1,068,320 | |
Zero coupon interest accretion and amortization of debt | | | | | | | | | | | | |
discount on convertible notes | | | 995,059 | | | | 372,764 | | | | 1,367,823 | |
Amortization of deferred financing costs | | | 36,875 | | | | 29,500 | | | | 66,375 | |
Loss on foreign currency transactions | | | 14,142 | | | | | | | | 14,142 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Increase in inventory | | | - | | | | - | | | | (1,469 | ) |
Decrease (increase) in prepaid expenses and advances | | | 33,295 | | | | 14,667 | | | | (8,514 | ) |
Increase in other assets | | | (10,650 | ) | | | - | | | | (10,650 | ) |
Increase (decrease) in accounts payable | | | 2,055,939 | | | | (397,108 | ) | | | 2,315,931 | |
Increase (decrease) in accounts payable - related parties | | | (6,246 | ) | | | 100,315 | | | | 104,740 | |
Increase in accrued expenses | | | 562,707 | | | | 29,988 | | | | 1,575,245 | |
Increase in accrued registration rights penalties | | | 518,243 | | | | - | | | | 518,243 | |
Net cash used in operating activities | | | (9,425,564 | ) | | | (3,594,823 | ) | | | (15,571,101 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
Acquisition of mineral rights | | | - | | | | (6,550,000 | ) | | | (7,968,785 | ) |
Acquisition of equipment | | | (226,780 | ) | | | - | | | | (236,280 | ) |
Payments for leasehold improvements | | | - | | | | - | | | | (10,000 | ) |
Net cash used in investing activities | | | (226,780 | ) | | | (6,550,000 | ) | | | (8,215,065 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
Proceeds from zero coupon convertible debt offering | | | - | | | | 1,500,000 | | | | 1,500,000 | |
Payment of deferred financing costs | | | - | | | | (75,000 | ) | | | (75,000 | ) |
Payment of waiver fee for convertible debt | | | (30,000 | ) | | | - | | | | (30,000 | ) |
Proceeds from notes payable | | | 1,150,000 | | | | - | | | | 1,245,000 | |
Proceeds from issuance of common stock, net | | | 7,314,069 | | | | 7,935,828 | | | | 19,446,717 | |
Proceeds from exercise of warrants | | | 210,000 | | | | 1,433,575 | | | | 1,643,575 | |
Net cash provided by financing activities | | | 8,644,069 | | | | 10,794,403 | | | | 23,730,292 | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | 83,563 | | | | - | | | | 83,563 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash | | | (924,712 | ) | | | 649,580 | | | | 27,689 | |
| | | | | | | | | | | | |
Cash at beginning of the year | | | 952,401 | | | | 302,821 | | | | - | |
| | | | | | | | | | | | |
Cash at end of the year | | $ | 27,689 | | | $ | 952,401 | | | $ | 27,689 | |
| | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | |
Income taxes | | $ | - | | | $ | - | | | $ | - | |
Interest | | $ | 5,792 | | | $ | - | | | $ | 5,792 | |
Non-cash financing transactions: | | | | | | | | | | | | |
Fair value of derivative warrant instruments issued in | | | | | | | | | | | | |
private offerings | | $ | 3,779,978 | | | $ | 3,228,345 | | | $ | 8,874,504 | |
Reclassification of warrant liabilities to additional paid-in capital | | | | | | | | | | | | |
for warrant exercises | | $ | 590,462 | | | $ | 4,604,000 | | | $ | 5,195,008 | |
Debt discount due to beneficial conversion feature | | $ | 330,019 | | | $ | - | | | $ | 698,019 | |
Issuance of common stock for acquisition of mineral rights | | $ | - | | | $ | 35,775,000 | | | $ | 39,415,000 | |
Warrants issued for services | | $ | - | | | $ | 157,010 | | | $ | 157,010 | |
Warrants issued for offering costs | | $ | - | | | $ | 57,750 | | | $ | 57,750 | |
Debt discount due to warrant derivative liabilities issued with | | | | | | | | | | | | |
convertible debt | | $ | - | | | $ | 1,132,000 | | | $ | 1,132,000 | |
Consolidation of non-controlling interest of the | | | | | | | | | | | | |
Maricunga Companies | | $ | - | | | $ | 25,496,000 | | | $ | 25,496,000 | |
Common stock cancelled | | $ | - | | | $ | - | | | $ | 71,052 | |
See accompanying notes to the consolidated financial statements.
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Li3 Energy, Inc. (“Li3 Energy” or the “Company”) was incorporated under the laws of the State of Nevada on June 24, 2005. Initially, the Company’s principal products were soy-blend wax candles (the “Legacy Business”). In 2009, the Company redirected its business focus and strategy toward identifying and pursuing business opportunities in lithium and industrial minerals mining in North and South America, but has more recently focused solely on South America.
On October 19, 2009, the Company filed an amendment to its articles of incorporation with the Secretary of State of the State of Nevada, pursuant to which it changed its name from NanoDynamics Holdings, Inc., to Li3 Energy, Inc., to reflect the Company’s plans to focus its business strategy on the energy sector and related lithium mining opportunities in North and South America.
The Company’s 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”).
During March 2011, the Company amended its Articles of Incorporation to provide for the issuance of 1,000,000,000 shares of capital stock (increased from 300,000,000 shares of capital stock), of which 990,000,000 are shares of common stock, par value $0.001 per share, and 10,000,000 are undesignated preferred stock, par value $0.001 per share.
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 Energy, Li3 Peru, Alfredo, PRMC, Noto, and Minera Li which holds the six majority-owned subsidiaries consisting of the Maricunga Companies. All intercompany amounts have been eliminated in consolidation.
b. Exploration Stage Company
The Company is in the exploration stage in accordance with SEC guidance and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 915 - Development Stage Entities . Its activities to date have been limited to capital formation, organization, and development of its business, including acquisitions of mineral rights.
c. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company had $0 cash equivalents at June 30, 2012 and 2011. 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 .. During the years ended June 30, 2012 and 2011, the Company recorded mineral rights impairment charges of $300,000 and $4,120,000, respectively.
e. Impairment of long-lived assets
Long-lived assets, including mineral rights, are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. The long-lived assets are tested by comparing the carrying value and fair value of the assets. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair
f. Property and Equipment
Property and equipment are stated at cost. Equipment and fixtures are being depreciated using the straight-line method over the estimated useful lives ranging from 3 to 7 years.
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.
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.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any uncertain income tax positions or accrued interest or penalties included in our consolidated balance sheets at June 30, 2012, or 2011, and did not recognize any interest and/or penalties in its consolidated statements of operations during the years ended June 30, 2012 or 2011.
h. Share-based Payments
Pursuant to the provisions of FASB ASC 718, Compensation - Stock Compensation, which establishes accounting for equity instruments exchanged for employee service, we utilize the Black-Scholes option pricing model to estimate the fair value of employee stock option awards at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.
The Company estimates volatility by considering the historical stock volatility. The Company has opted to use the simplified method for estimating expected term, which is generally equal to the midpoint between the vesting period and the contractual term.
i. Earnings (Loss) per Share
Basic net loss per share amounts are computed by dividing the net loss by the weighted average number of common shares outstanding over the reporting period. In periods in which the Company reports a net loss, dilutive securities are excluded from the calculation of diluted net loss per share amounts as the effect would be anti-dilutive.
For the years ended June 30, 2012 and 2011, the following convertible debt, stock options and warrants to purchase shares of common stock were excluded from the computation of diluted net loss per share, as the inclusion of such shares would be anti-dilutive:
| | Years Ended | |
| | June 30, 2012 | | | June 30, 2011 | |
Stock options | | | 533,333 | | | | 433,333 | |
Stock warrants | | | 89,284,712 | | | | 54,200,565 | |
Convertible debt | | | 14,859,842 | | | | 3,750,000 | |
| | | 104,677,887 | | | | 58,383,898 | |
j. Foreign Currency
The capital accounts are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate during the period. Translation adjustments are included in other comprehensive income (loss) within stockholders’ equity. Foreign currency transaction gains and losses are included in the statement of operations as other income (expense).
k. 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 from those estimates. Management has made significant estimates related to the fair value of shares issued for mineral acquisitions; the fair value of derivative liabilities; stock-based payments; and contingencies.
l. Non-Controlling Interests
The Company is required to report its non-controlling interests as a separate component of shareholders’ equity. The Company is also required to present the consolidated net income and the portion of the consolidated net income allocable to the non-controlling interests and to the shareholders of the Company separately in its consolidated statements of operations. Losses applicable to the non-controlling interests are allocated to the non-controlling interests even when those losses are in excess of the non-controlling interests’ investment basis. During the years ended June 30, 2012 and 2011, the Company recorded a net loss allocable to non-controlling interests of $2,375,407 and $-0-, respectively.
m. Recent Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”, which amends ASC 820, Fair Value Measurement . ASU 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting Standards (IFRSs). ASU 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-04 clarifies the FASB’s intent about the application of existing fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company does not anticipate that the adoption of ASU 2011-04 will have a material impact on its consolidated financial statements.
There were various accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our consolidated financial position, operations or cash flows.
n. Subsequent Events
The Company evaluated material events occurring between the end of our fiscal year, June 30, 2012, and through the date when the consolidated financial statements were issued for disclosure consideration.
NOTE 3. GOING CONCERN
At June 30, 2012, the Company had no source of current revenue, a cash balance on hand of $27,689, negative working capital of $6,940,769 and the Company recognized negative cash flows from operations of $15,567,909 during the period from June 24, 2005 (inception) through June 30, 2012. On August 17, 2012, the Company received $10,000,000 in funding from POSCAN. The Company believes its current positive working capital position is sufficient to maintain its basic operations, which do not include future exploration and acquisition activities, for at least the next 12 months, however, at budgeted levels of activity the Company would be required to raise substantial additional funds.
In the course of its development 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 we identify commercial reserves of lithium or other minerals, we will require substantial additional capital to develop those reserves and certain governmental permits to exploit such resources. The Company expects to finance its future 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.
Further, the development and exploitation of the properties in which we have mineral interests require permits at various stages of development. Mineral resources in our principal project, Maricunga, are designated as a national resource and cannot be mined and sold unless the government of Chile issues a permit which may not occur or could require payments in excess of the Company’s available funds or could be subject to competitive bidding.
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 obtain the necessary rights to exploit its mineral rights; meet its financial and operational 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 these uncertainties.
NOTE 4. MINERAL RIGHTS
Mineral rights consist of the following at June 30, 2012 and 2011:
| | June 30, 2012 | | | June 30, 2011 | |
Maricunga | | $ | 63,741,000 | | | $ | 63,741,000 | |
Noto | | | - | | | | 300,000 | |
| | $ | 63,741,000 | | | $ | 64,041,000 | |
Maricunga
On November 30 and December 1, 2010, the Company signed non-binding exclusive letters of intent with the shareholders (the “Maricunga Sellers”) of Sociedades Legales Mineras Litio 1 a 6 de la Sierra Hoyada de Maricunga, a group of six private companies (the “Maricunga Companies”), to acquire a percentage of the Maricunga Companies, which collectively own the Maricunga Project (“Maricunga”). During December 2010, the Company paid $250,000 to the Maricunga Sellers in connection with signing the non-binding letters of intent which provided the Company with additional time to perform its due diligence and prepare definitive purchase agreements. The Maricunga property is undeveloped and covers an area of approximately 3,553 acres (1,438 hectares), comprising six concessions, each held by a separate legal entity, and is located in the northeast section of the Salar de Maricunga in Region III of Atacama in northern Chile . Each concession grants the owner the right to explore for mineral deposits at the Maricunga property.
On May 20, 2011, the Company and the Maricunga Sellers signed the Framework Contract of Mining Project Development and Buying and Selling of Shares of Sociedades Legales Mineras Litio 1 a 6 de la Sierra Hoyada de Maricunga (the “Acquisition Agreement”), whereby the Company, through its Chilean subsidiary, Minera Li, acquired from the Maricunga Sellers a 60% interest in each of the Maricunga Companies. The purchase price, including amounts paid to agents, was $6,370,000 in cash and 127,500,000 restricted shares of common stock of the Company (the “Maricunga Purchase Price Shares”) which had a fair value of $31,875,000 based on the market price on the date of issuance. The $6,370,000 in cash includes 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 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.
The Company has 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 incurred exploration expenses for the development of the Maricunga property of $5,938,517 and $0 for the year ended June 30, 2012 and 2011, respectively. Future development expenditures are forecasted to be at least $200 million.
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 year ended June 30, 2012, of $5,938,517, were funded by the Company. The Company recorded 40% of the expenses incurred by the Maricunga Companies to the non-controlling interest, or $2,375,407 for the year ended June 30, 2012.
The Chilean Mining Code requires shareholders of legal mining companies (such as the Maricunga Companies) to contribute their pro rata portion of exploration and exploitation expenses that are established at a shareholders meeting (“Required Contributions”). The Chilean Mining Code permits any legal mining company to initiate an executive trial, the final resolution of which would state that shares held by shareholders who fail to make any Required Contribution must be sold at a public auction. The Chilean Mining Code establishes that the minimum bid in such auction shall be the amount of the Required Contribution that the defaulting shareholders failed to contribute (the “Default Amount”). The proceeds of such auction shall go first to the relevant legal mining company in the amount of the Default Amount, and any proceeds in excess thereof shall be paid to the defaulting shareholders. If the minimum bid is not achieved in the auction, then the defaulting shareholders’ shares in the legal mining company will be cancelled and each non-defaulting shareholder’s funding obligations will increase proportionally.
As the majority shareholder of each of the six Maricunga Companies, we have filed lawsuits distributed to four civil courts of Copiapo, third Region of Atacama, Chile against the minority shareholders. Certain minority shareholders have filed counterclaims against the Company to declare, among other things, the invalidation of the Shareholder Meeting on October 6, 2011 at which, required contributions were established that such minority shareholders failed to make. We are currently preparing our response. Our future plans are not dependent on the outcome of this matter with respect to the development of the Maricunga project
The Company has determined that neither the minority shareholders’ default nor the proposed auction is (or will be) a triggering event that would require the Company to test the long-lived assets for recoverability.
On September 24, 2012, the Ministry of Mining opened the bids and informed the Company that the Consortium’s bid was not the winning bid. However, on October 1, 2012, the Ministry of Mining informed the Company that the Chilean Government decided to invalidate the CEOL process and the results announced on September 24, 2012, due to an administrative error.
Currently the Company does not have the permit to exploit lithium from the Maricunga properties. Accordingly, the Company evaluated the recoverability of the investment in the Maricunga properties using the discounted cash flow approach both assuming the Company is able to obtain a permit to exploit its lithium resources and also assuming it is not able to exploit its lithium resources. The Company can exploit alternative minerals, like potassium, on its Maricunga properties that do not require special permits and are exploitable via regular mining concessions according to the Chilean Mining Code. Based on that assumption, the Company used the discounted cash flow approach and determined that the fair value of Maricunga properties exceeds its carrying value and, accordingly, no impairment loss was required.
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, entered into by and among Puna, Lacus Minerals S.A., and the shareholders of Noto Energy S.A. (“Noto Shareholders”), an Argentinian corporation.
On March 12, 2010, the Company entered into a Share Purchase Agreement with the Noto Shareholders (the “Share Purchase Agreement”) for the acquisition of one hundred percent (100%) of the issued and outstanding shares of Noto, which beneficially owns a one hundred percent (100%) undeveloped mineral interest in over 2,995 acres 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 ended 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 determined that the mineral rights related to the Noto Properties are not recoverable and the Company recorded impairment expense of $300,000 during the year ended June 30, 2012.
Alfredo
On August 3, 2010, the Company entered into a Stock Purchase Agreement (“Alfredo SPA”) with Pacific Road Capital A Pty. Limited, as trustee for several entities holding all of the shares of Alfredo Holdings, Ltd. (“Alfredo”), to acquire all of the outstanding shares of Alfredo. Alfredo beneficially holds an option to acquire 100% of six mining concessions with respect to approximately 6,669 acres of mining tenements near Pozo Almonte, Chile.
Pursuant to the Alfredo SPA, the Company issued an aggregate of 10,000,000 shares of common stock (the “Purchase Price Shares”) valued at $3,900,000 ($0.39 per share) to the Alfredo sellers and their designees. Pursuant to the Option to Purchase Agreement, the Company was required to make additional periodic payments aggregating $360,000 during 2010, of which the Company paid $80,000, in order to maintain its rights. In order to exercise the option and purchase the Alfredo property, the Company would have been required to pay the option exercise price of $4,860,000 by March 30, 2011 and contingent payments set forth in the Alfredo SPA. The Company did not make required payments in 2010 or the option exercise price payment of $4,860,000 on March 30, 2011. Under the terms of the option agreement, the option terminated and the Company recorded impairment expense for the amounts previously paid for the Alfredo property of $4,070,000 during the year ended June 30, 2011.
The Company allowed the option to expire because the Company determined that the project was not economically viable. Pursuant to an amendment to our agreement with the Alfredo sellers, if and when certain milestones are achieved with respect to any future Li3 Energy Chilean iodine nitrate project, we must make additional payments to the Alfredo sellers in an aggregate amount of up to $5,500,000.
Peru
On February 23, 2010, the Company acquired, through a new wholly-owned subsidiary, 100% of the assets of the Loriscota, Suches and Vizcachas Projects located in the Provinces of Puno, Tacna and Moquegua, Peru. The assets consist solely of undeveloped mineral rights and were recorded as an asset purchase. The aggregate purchase price for the assets was $50,000 which was paid in cash. During the year ended June 30, 2011, the Company determined that these mineral rights are not recoverable and the Company recorded impairment expense for the Peru property of $50,000 during the year ended June 30, 2011.
Puna Lithium 2010 Impairment
On March 12, 2010, the Company entered into an assignment agreement whereby the Company would purchase all of the Puna Lithium Corporation’s (“Puna”) interests in and rights of Puna, Lacus Minerals S.A. (“Lacus”), and the shareholders of Noto Energy S.A., and the Company entered into a certain Master Option Agreement with Lacus (the “Master Option Agreement”), for the acquisition of three options, to acquire up to an 85% interest in: (a) approximately 70,000 acres situated on prospective brine salars in Argentina.
In August 2010, the Company determined that this project was not economic viable. Lacus subsequently terminated the Master Option Agreement on August 24 2010. The Company expensed $742,178 of capitalized acquisition costs as impairment expense in the consolidated statement of operations during the year ended June 30, 2010.
On November 24, 2010, the Company entered into a termination, settlement and release agreement with Lacus in exchange for a $150,000 cash payment and 500,000 shares of common stock to settle potential Lacus claims. The 500,000 shares are recorded in the amount of $192,500, which was based on a fair value of $0.385 per share of common stock on the measurement date. As the Company had recorded $765,000 of accrued liabilities as of June 30, 2010 related to Lacus, the Company recorded a gain on settlement of $422,500 during the year ended June 30, 2011 as a result of the settlement. The Company paid the $150,000 cash payment to Lacus during January 2011, and issued the 500,000 shares in February 2011 in final satisfaction of all obligations.
During the year ended June 30, 2011, the Company reached a settlement agreement with Puna, pursuant to which the Company issued Puna 6,000,000 shares of common stock in full satisfaction of any and all obligations the Company may have to Puna. The Company recorded settlement expense of $1,920,000 determined based upon the fair value of the common stock on the issuance date.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
| | June 30, 2012 | | | June 30, 2011 | |
Leasehold improvement and office equipment | | $ | 72,015 | | | $ | 19,195 | |
Field equipment | | | 173,960 | | | | - | |
Less: Accumulated depreciation | | | (70,755 | ) | | | (19,195 | ) |
| | $ | 175,220 | | | $ | - | |
Depreciation expense for the years ended June 30, 2012 and 2011 was $51,560 and $3,946, respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
POSCAN
On August 24, 2011 and August 17, 2012, POSCO Canada Ltd. (“POSCAN”), a wholly owned subsidiary of POSCO (a Korean company), purchased a combined 100,595,238 shares of the Company’s common stock. See Notes 10 and 14.
MIZ Comercializadora, S de R.L.
The Company is party to a services agreement between MIZ Comercializadora, S de R.L. (“MIZ”) and the Company in which Tom Currin (a beneficial owner of MIZ) serves as Chief Operating Officer of the Company.
Pursuant to the Chief Operating Officer’s Employment Services Agreement, the Company granted to MIZ an award under the 2009 Plan pursuant to which the Company shall issue 2,500,000 restricted shares of its common stock (the “Restricted Stock”). The shares of Restricted Stock vest in installments of between 300,000 and 1,000,000 shares upon the achievement of certain milestones set forth in the Employment Services Agreement, subject to acceleration upon a change of control or a termination of Mr. Currin’s employment by the Company by MIZ for good reason (as defined in the Employment Services Agreement) or by the Company for any reason other than for cause (as defined in the Employment Services Agreement). If his employment is terminated by the Company for cause as defined in the Employment Services Agreement, or by Mr. Currin for any reason other than good reason, then all unvested Restricted Stock will immediately expire.
The grant date of the 2,500,000 restricted 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. In March 2012, the Company’s Board determined to accelerate the restricted stock as if the milestone regarding execution of a binding off-take agreement had been achieved, resulting in the vesting of 300,000 shares of common stock. As of June 30, 2012, all of these vested shares were issued. The remaining 1,700,000 restricted shares contain various vesting requirements that the Company estimates will be achieved between December 2012 and December 2013. During the years ended June 30, 2012 and 2011, the Company recorded $250,921 and $303,101, respectively, of compensation expense for these shares based on the estimated vesting dates.
In February 2011, the Company signed an Amendment to the Employment Services Agreement with MIZ, under which MIZ agreed to accept 500,000 shares of common stock in lieu of salaries payable. These shares were issued in February 2011. The Company recorded stock compensation expense of $192,500, which represents the fair value of the common stock on the performance grant date, or $0.385 per share. In addition, in February 2011, the Company issued 236,842 shares to MIZ which were previously granted in accordance with the Employment Services Agreement and an expense of $90,000 was recorded, which represents the fair value the common stock on the grant date, or $0.38 per share. MIZ was also paid $75,000 in cash for the year ended June 30, 2011. For the year ended June 30, 2012, MIZ’s compensation was $212,500, of which $20,830 was unpaid.
The Company also incurred $114,420 and $186,090 of stock-based compensation during the years ended June 30, 2012 and 2011, respectively, related to stock options granted to MIZ. See Note 10.
R&M Global Advisors
The Company is party to a services agreement (the “R&M Agreement”) between R&M Global Advisors, LLC. (“R&M Global Advisors”) and the Company. Eric Marin (a partial owner of R&M Global Advisors) served as interim Chief Financial Officer of the Company. R&M Global Advisors was paid $145,187 and $10,000 in cash for compensation during the years ended June 30, 2012 and 2011, respectively. As of June 30, 2012, R&M Global Advisors was owed $81,300.
On June 30, 2012, the Company entered into Amendment No. 1 to the R&M Agreement (the “R&M Amendment”) with R&M Global Advisors. Pursuant to the R&M Amendment, R&M Global Advisors and the Company mutually agreed to terminate Eric Marin’s services as our Interim Chief Financial Officer at the close of business on June 30, 2012.
Related party payable
In November 2009, Li3 Energy started utilizing the administrative personnel and office space of a company with an office located in Lima, Peru in which Li3 Energy’s Chief Executive Officer functions in the same capacities (the “Related Party Company”) for which the Company was obligated for reimbursement of administrative salaries, rent, utilities and maintenance expenses. On July 31, 2010, the Company assumed an assignment of the lease and its related expenses. As a result, for the years ended June 30, 2012 and 2011, this is no longer a related party. As of June 30, 2012 and 2011, the payable due to the Related Party Company is $11,400 and $10,986, respectively.
Legal Services
During the year ended June 30, 2011, one of the Company’s directors was a Partner in a law firm that the Company engaged to perform certain legal services. On October 25, 2010, the Partner resigned as a Director of the Company and as a result, these legal services are no longer considered related party in nature. The Company paid for such legal services at the standard rates that the firm charges its unrelated clients. During the year ended June 30, 2011, the total legal fees the Company incurred to such firm were approximately $69,000.
NOTE 7. NOTES PAYABLE
On March 23, 2012, the Company entered into a $300,000 unsecured promissory note with a third party. The promissory note bears interest at 15% per annum and a penalty rate of 2% per annum, and was originally due on April 30, 2012, at which time its maturity date was extended to May 31, 2012. The total interest and penalties accrued on this note at June 30, 2012 is $8,375. The maturity date of this Note was extended to November 2, 2012.
On April 2, 2012, the Company entered into a $100,000 unsecured promissory note with a third party. The promissory note bears interest at 15% per annum and a penalty rate of 2% per annum, and was originally due on April 30, 2012, at which time its maturity date was extended to May 31, 2012. The total interest and penalties accrued on this note at June 30, 2012 is $3,148. This note was repaid in September 2012.
On April 20, 2012, the Company entered into a $250,000 unsecured promissory note payable with a third party. The promissory note bears interest at 15% per annum and a penalty rate of 2% per annum, and was due on May 21, 2012. The total interest and penalties accrued on this note at June 30, 2012 was $7,842. A portion of this note amounting to $120,000 was paid in September 2012, and the maturity date of the remaining balance of $130,000 was extended to November 2, 2012.
On June 8, 2012, the Company entered into a $500,000 unsecured promissory note payable with a third party. The promissory note bears interest at 25% per annum, and was due on June 22, 2012. The total interest accrued on this note at June 30, 2012 is $2,778. On August 20, 2012, this loan was repaid.
On June 5, 2008, the Company issued a $50,000 unsecured promissory 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 June 30, 2012 and 2011 was $16,298 and $12,298, respectively. This note is in default as of June 30, 2012 and remains payable to Milestone. To date, no demand or communication has been made from Milestone.
On April 30, 2009, the Company issued an unsecured Convertible Promissory Note (the “Convertible Note”) to Milestone, bearing an interest rate of 8.25% per annum, in the amount of $45,000, due November 8, 2010. 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 June 30, 2012 and 2011 was $11,678 and $7,965, respectively. The Convertible Note is in default as of June 30, 2012 and remains payable to Milestone. To date, no demand or communication has been made from 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 are 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 was $1,677,438. The Company may prepay the notes at its option (together with accrued original issue discount), and must prepay them (together with accrued original issue discount) first out of the net proceeds of any future capital raising transactions by the Company.
The Company also agreed to issue to the lenders warrants to purchase an aggregate of 1,500,000 shares of common stock, exercisable for five years at an initial exercise price of $0.50 per share (the “Lender Warrants”). The Lender Warrants contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and these provisions could result in modification of the warrants exercise price based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair values of the Lender Warrants were recognized as derivative warrant instruments at issuance and are measured at fair value at each reporting period. The Company determined the fair value of the warrants was $1,132,000 at the issuance date. This amount was recorded as a debt discount and is amortized to interest expense over the term of the debentures.
The convertible debentures were analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $368,000. This amount was recorded as a debt discount and is amortized to interest expense over the term of the debentures.
The Company agreed to pay finder’s fees consisting of cash in the amount of 5% of the aggregate issue price of the notes, or $75,000 in total , and warrants to purchase an aggregate of 75,000 shares of common stock, exercisable for five years at an initial exercise price of $0.40 per share (the “Arranger Warrants”). The Arranger Warrants contain provisions that protect holders from future issuances of the Company’s common stock at prices below such warrants’ respective exercise prices and these provisions could result in modification of the warrants exercise price based on a variable that is not an input to the fair value of a “fixed-for-fixed” option as defined under FASB ASC Topic No. 815 - 40. The fair value of the Arranger Warrants 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 Arranger Warrants at the issuance date was $57,750, which was recorded as deferred financing costs. The deferred financing costs of $132,750 were amortized over the life of the debt on a straight-line basis which approximated the effective interest method. During the years ended June 30, 2012 and 2011, the Company recorded $103,250 and $29,500, respectively, of interest expense on deferred financing costs.
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 11), the zero-coupon bridge notes maturity date was extended to June 30, 2012, and the Company was 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 reduced 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.
In connection with the Waiver Agreement, the 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 will be amortized to interest expense over the term of the debentures. See detail summary below for carrying value of debt as of June 30, 2012.
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 | | | 198,989 | |
Amortization of debt discount | | | 330,019 | |
Carrying value at June 30, 2012 | | $ | 1,783,181 | |
Loss on Debt Extinguishment
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 during the year ended June 30, 2012, as summarized below.
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 | |
Second Amendment and Waiver Agreement
On September 28, 2012, the Company entered into a Second Amendment and Waiver Agreement with the holders of the zero-coupon convertible notes (the “Second Waiver Agreement”). Pursuant to the Second Waiver Agreement, the zero-coupon convertible notes maturity date was extended to September 28, 2013. The Waiver Agreement also reduced the conversion price of the $1.5 million zero-coupon bridge notes from $0.12 to $0.095 per share. In connection with the Waiver Agreement, the Company agreed to pay an arranger a cash fee of $37,600.
The Company applied ASC 470-50-40/55 (formerly APB 26) “Debtor’s Accounting for a Modification or Exchange of Debt Instrument” and concluded that the revised terms constituted a debt extinguishment rather than debt modification because the change in the fair value of the embedded conversion features immediately before and after the modification exceeded 10% of the original loan balance. Accordingly, the Company will record a total of $153,319 in September 2012 as gain on debt extinguishment.
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 (as defined below) the 2010 Unit Offerings (as defined below), the Incentive warrants (as defined below), the 2011 Unit Offering warrants (as defined below), the Lender Warrants, the Warrants issued for advisory services (as defined below) and the Arranger 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 (as defined below), the Incentive warrants (as defined below) and all warrants issued to agents under both the 2009 Unit Offering, and the 2010 Unit Offerings will be increased inversely proportional to any decrease in the exercise price, thus preserving the aggregate exercise price of the warrants both before and after any such adjustment.
The fair values of the warrants issued in the 2009 Unit Offering, the 2010 Unit Offerings, the Incentive warrants, the 2011 Unit Offering, the Lender Warrants, the Arranger warrants, the warrants issued for advisory services and the POSCAN Warrants were recognized as derivative warrant instruments at issuance or when they become issuable and are measured at fair value at each reporting period. The Company determined the fair values of these warrants using a modified lattice valuation model.
Activity for derivative warrant instruments during the year ended June 30, 2012, was as follows:
| | | | | Initial valuation | | | | | | | | | | |
| | | | | of derivative | | | Increase | | | | | | | |
| | | | | liabilities upon | | | (decrease) in | | | | | | | |
| | Balance at | | | issuance of new | | | fair value of | | | | | | Balance at | |
| | June 30, | | | warrants during | | | derivative | | | Exercise of | | | June 30, | |
| | 2011 | | | the period | | | Liability | | | warrants | | | 2012 | |
2009 Unit Offering warrants | | $ | 3,854,119 | | | $ | - | | | $ | (2,981,907 | ) | | $ | - | | | $ | 872,212 | |
First 2010 Unit Offering warrants | | | 2,911,244 | | | | - | | | | (1,270,600 | ) | | | - | | | | 1,640,644 | |
Second 2010 Unit Offering warrants | | | 1,800,265 | | | | - | | | | (972,377 | ) | | | (590,462 | ) | | | 237,426 | |
Third 2010 Unit Offering warrants | | | 1,156,744 | | | | - | | | | (644,403 | ) | | | - | | | | 512,341 | |
Incentive warrants | | | 1,072,441 | | | | - | | | | (492,681 | ) | | | - | | | | 579,760 | |
2011 Unit Offering warrants | | | 3,736,897 | | | | - | | | | (2,241,859 | ) | | | - | | | | 1,495,038 | |
Lender warrants | | | 523,234 | | | | - | | | | (248,848 | ) | | | - | | | | 274,386 | |
Warrants for advisory services | | | | | | | | | | | | | | | | | | | | |
and Arranger warrants | | | 189,810 | | | | - | | | | (106,600 | ) | | | - | | | | 83,210 | |
POSCAN warrants | | | - | | | | 3,779,978 | | | | (1,821,067 | ) | | | - | | | | 1,958,911 | |
| | $ | 15,244,754 | | | $ | 3,779,978 | | | $ | (10,780,342 | ) | | $ | (590,462 | ) | | $ | 7,653,928 | |
During the year ended June 30, 2012, 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.
Activity for derivative warrant instruments during the year ended June 30, 2011 was as follows:
| | | | | Initial valuation | | | | | | | | | | |
| | | | | of derivative | | | Increase | | | | | | | |
| | | | | liabilities upon | | | (decrease) in | | | | | | | |
| | Balance at | | | issuance of new | | | fair value of | | | | | | Balance at | |
| | June 30, | | | warrants during | | | derivative | | | Exercise of | | | June 30, | |
| | 2010 | | | the period | | | Liability | | | warrants | | | 2011 | |
2009 Unit Offering warrants | | $ | 6,313,769 | | | $ | - | | | $ | (2,459,650 | ) | | $ | - | | | $ | 3,854,119 | |
First 2010 Unit Offering warrants | | | 1,715,959 | | | | 236,937 | | | | 958,348 | | | | - | | | | 2,911,244 | |
Second 2010 Unit Offering warrants | | | - | | | | 151,360 | | | | 4,231,216 | | | | (2,582,311 | ) | | | 1,800,265 | |
Third 2010 Unit Offering warrants | | | - | | | | 757,772 | | | | 2,421,207 | | | | (2,022,235 | ) | | | 1,156,744 | |
Incentive warrants | | | - | | | | 1,068,320 | | | | 4,121 | | | | - | | | | 1,072,441 | |
2011 Unit Offering warrants | | | - | | | | 2,142,276 | | | | 1,594,621 | | | | - | | | | 3,736,897 | |
Lender warrants | | | - | | | | 1,132,000 | | | | (608,766 | ) | | | - | | | | 523,234 | |
Warrants for advisory services and Arranger warrants | | | - | | | | 214,760 | | | | (24,950 | ) | | | - | | | | 189,810 | |
| | $ | 8,029,728 | | | $ | 5,703,425 | | | $ | 6,116,147 | | | $ | (4,604,546 | ) | | $ | 15,244,754 | |
During the year ended June 30, 2011, the Company issued 800,000 warrants to a third party company for advisory services (“Warrants for advisory services”). The Warrants for advisory services 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 fair values of the Warrants for advisory services 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 $157,010 at the issuance date. This amount was recorded as general and administrative expenses for the year ending June 30, 2011.
During the year ended June 30, 2011, 14,023,336 warrants and Double Options, which are treated as warrants, were exercised for aggregate proceeds of $1,433,575. The Company reduced the derivative liability by $4,604,546 based on the fair value of the warrants on the date of exercise and increased additional paid-in capital by the same amount.
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 years ended June 30, 2012 and June 30, 2011, respectively, and as of June 30, 2012, and June 30, 2011, respectively:
| | Initial | | | Initial | | | | | | | |
| | Valuations - | | | Valuations - | | | | | | | |
| | June 30, | | | June 30, | | | June 30, | | | June 30, | |
| | 2012 | | | 2011 | | | 2012 | | | 2011 | |
Common stock issuable upon exercise of warrants | | | 38,095,300 | | | | 46,750,323 | | | | 89,284,712 | | | | 54,200,565 | |
Market value of common stock on measurement date (1) | | $ | 0.145 | | | $ | 0.12-$0.43 | | | $ | 0.09 | | | $ | 0.23 | |
Adjusted exercise price | | $ | 0.40 | | | $ | 0.05-$0.50 | | | $ | 0.05-$0.48 | | | $ | 0.05-$0.54 | |
Risk free interest rate (2) | | | 0.42 | % | | | 0.67%-2.20 | % | | | 0.33%-0.49 | % | | | 0.81%-1.76 | % |
Warrant lives in years | | | 3.0 | | | | 2.8-5.0 | | | | 1.8-3.8 | | | | 2.8-4.7 | |
Expected volatility (3) | | | 205 | % | | | 151%-197 | % | | | 132%-241 | % | | | 169%-197 | % |
Expected dividend yields (4) | | | None | | | | None | | | | None | | | | None | |
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%-31 | % | | | 10%-31 | % | | | 10%-31 | % |
Offering price range (8) | | $ | 0.21-$0.45 | | | $ | 0.25-$1.50 | | | $ | 0.15-$0.50 | | | $ | 0.25-$0.45 | |
| (1) | The market value of common stock is the stock price at the close of trading on the date of issuance or at period-end, as applicable. |
| (2) | The risk-free interest rate was determined by management using the 3 or 5 - year Treasury Bill as of the respective Offering or measurement date. |
| (3) | Because the Company does not have adequate trading history to determine its historical trading volatility, the volatility factor was estimated by management using the historical volatilities of comparable companies in the same industry and region. |
| (4) | Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future. |
| (5) | Management estimates the Company will have at least one stock offering in each of the next five 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. |
Subsequent to June 30, 2012, the exercise price of certain warrants and the number of shares issuable upon exercise of certain warrants were further adjusted. See Note 14.
NOTE 10. STOCKHOLDERS’ EQUITY
Sales of Common Stock
Common stock issued for cash during the years ended June 30, 2005 through June 30, 2010
The table below summarizes sales of common stock from June 24, 2005 (inception) through June 30, 2010, and includes the portion of proceeds received which was allocated to warrants issued in conjunction with these sales of common stock.
Fiscal Year | | Shares | | | Gross proceeds | | | Offering costs | | | Net proceeds | | | Relative fair value allocated to warrants | | | Amount allocated to common stock and paid-in capital | | | Per share price range | |
2005 (1) | | | 71,052,672 | | | $ | 7,500 | | | $ | - | | | $ | 7,500 | | | $ | - | | | $ | 7,500 | | | $ | 0.0001 | |
2006 | | | 47,368,454 | | | | 50,000 | | | | - | | | | 50,000 | | | | - | | | | 50,000 | | | | 0.0011 | |
2007 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
2008 | | | 2,631,595 | | | | 50,000 | | | | - | | | | 50,000 | | | | - | | | | 50,000 | | | | 0.019 | |
2009 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
2010 | | | 18,000,000 | | | | 4,500,000 | | | | 410,680 | | | | 4,089,320 | | | | 1,806,181 | | | | 2,283,139 | | | | 0.25 | |
2011 | | | 55,685,324 | | | | 10,381,739 | | | | 1,012,361 | | | | 9,369,378 | | | | 3,288,346 | | | | 6,081,032 | | | | 0.05 - 0.27 | |
2012 | | | 42,295,300 | | | | 8,210,013 | | | | 685,944 | | | | 7,524,069 | | | | 3,779,978 | | | | 3,744,091 | | | | 0.05 - 0.21 | |
(1) | On October 19, 2009, 71,052,626 shares of the Company’s common stock owned by the founding shareholder, were surrendered and cancelled in exchange for the Company’s interest in a wholly-owned subsidiary. The net assets of the Company’s wholly-owned subsidiary prior to the exchange were $0 as of October 19, 2009. Therefore, the share cancellation was valued at $0. |
2011 Activity:
First 2010 Unit Offering
In June 2010, the Board of Directors authorized the Company to offer up to a maximum of 20,000,000 units (the “First 2010 Unit Offering”) at a purchase price of $0.25 per unit (a “C Unit”). Each C Unit consisted of (i) one share of the Company’s common stock, and (ii) a warrant (a “C Warrant”) representing the right to purchase one share of common stock, exercisable for a period of two years at an exercise price of $0.50 per share.
Sales of C Units during the year ended June 30, 2011 pursuant to the First 2010 Unit Offering were as follows:
| | Shares | | | Gross proceeds | | | Offering costs | | | Net proceeds | | | Relative fair value allocated to C Warrants | | | Amount allocated to common stock and paid-in capital | |
July 2010 | | | 2,000,000 | | | $ | 500,000 | | | $ | 47,245 | | | $ | 452,755 | | | $ | 219,871 | | | $ | 232,884 | |
September 2010 | | | 160,000 | | | | 40,000 | | | | 4,757 | | | | 35,243 | | | | 17,066 | | | | 18,177 | |
| | | 2,160,000 | | | $ | 540,000 | | | $ | 52,002 | | | $ | 487,998 | | | $ | 236,937 | | | $ | 251,061 | |
In connection with the Second C Closing, the Company also became obligated to issue to a placement agent C Agent Warrants to purchase an aggregate of 140,000 shares of common stock at an exercise price of $0.25 per share, and incurred placement agent fees of $35,000, which is included in offering costs above.
Second 2010 Unit Offering
In November 2010, the Company held a private placement offering (the “Second 2010 Unit Offering”) of 4,000,000 units of its securities to investors for gross proceeds of $200,000, at an offering price of $0.05 per unit (a “D Unit”). The Second 2010 Unit Offering provides each investor with the right (the “Double Option”), subject to certain conditions, to purchase, at any time prior to one year from subscription, a number of additional D Units up to the number of D Units purchased at the closing of the Second 2010 Unit Offering (“Double Units”). Each “D Unit” consists of one share of the Company’s common stock and a warrant (a “D Warrant”) to purchase one share of common stock at an exercise price of $0.05 per share. The D Warrants will be exercisable from issuance until five years after the final closing of the Second 2010 Unit Offering.
The Company determined that, in substance, the Second 2010 Unit Offering involved the issuance of three separate derivative instruments, one being the D Warrants included in the D Units, and the other two being components of the Double Options, which consist of the right to purchase (the “Double Option Common Component“) the shares of common stock included in the Double Units for $0.05 until November 7, 2011, and the additional D Warrants (the “Double D Warrants”) that would be included in any Double Units issued upon exercise of the Double Option.
Sales of D Units during the year ended June 30, 2011 pursuant to the Second 2010 Unit Offering were as follows:
| | Shares | | | Gross proceeds | | | Offering costs | | | Net proceeds | | | Relative fair value allocated to D Warrants | | | Amount allocated to common stock and paid-in capital | |
November 2010 | | | 4,000,000 | | | $ | 200,000 | | | $ | - | | | $ | 200,000 | | | $ | 151,361 | | | $ | 48,639 | |
| | | 4,000,000 | | | $ | 200,000 | | | $ | - | | | $ | 200,000 | | | $ | 151,361 | | | $ | 48,639 | |
The subscription agreements provide the investors with certain “piggyback” registration rights covering the shares of Common Stock included in the D Units (including any Double Units) and the shares of Common Stock issuable upon exercise of the D Warrants (including D Warrants included in any Double Units).
Third 2010 Unit Offering
In December 2010, the Company held a private placement offering (the “Third 2010 Unit Offering”) of up to 13,333,334 units of its securities at a purchase price of $0.15 per unit (an “E Unit”). Each “E Unit” consisted of (i) one share of the Company’s common stock, and (ii) a warrant (“E Warrant”) representing the right to purchase one share of common stock, exercisable for a period of five years at an exercise price of $0.15 per share.
Sales of E Units during the year ended June 30, 2011 pursuant to the Third 2010 Unit Offering were as follows:
| | Shares | | | Gross proceeds | | | Offering costs | | | Net proceeds | | | Relative fair value allocated to E Warrants | | | Amount Allocated to common stock and paid-in capital | |
December 2010 | | | 9,483,330 | | | $ | 1,422,500 | | | $ | 165,585 | | | $ | 1,256,915 | | | $ | 601,752 | | | $ | 655,163 | |
January 2011 | | | 1,783,333 | | | | 267,500 | | | | 41,033 | | | | 226,467 | | | | 133,212 | | | | 93,255 | |
February 2011 | | | 400,000 | | | | 60,000 | | | | 16,470 | | | | 43,530 | | | | 22,808 | | | | 20,722 | |
| | | 11,666,663 | | | $ | 1,750,000 | | | $ | 223,088 | | | $ | 1,526,912 | | | $ | 757,772 | | | $ | 769,140 | |
2011 Offering
On March 22, 2011, the Company held a private placement offering (the “2011 Offering”) 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.
Sales of the G Units during the year ended June 30, 2011 pursuant to the 2011 Offering were as follows:
| | Shares | | | Gross proceeds | | | Offering costs | | | Net proceeds | | | Relative fair value allocated to G Warrants | | | Amount Allocated to common stock and paid-in capital | |
April 2011 | | | 23,920,071 | | | $ | 6,458,189 | | | $ | 737,271 | | | $ | 5,720,918 | | | $ | 2,142,276 | | | $ | 3,578,643 | |
| | | 23,920,071 | | | $ | 6,458,189 | | | $ | 737,271 | | | $ | 5,720,918 | | | $ | 2,142,276 | | | $ | 3,578,643 | |
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 (June 21, 2011) 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%). The Company did not file the registration statement with the Securities and Exchange Commission until July 1, 2011. The Company recorded an accrual for monetary penalties of $38,750 in accrued liabilities during the year ended June 30, 2011.
Warrants exercises
Issuances of common stock for cash upon exercise of warrants were as follows:
| | Shares | | | Gross proceeds | | | Offering costs | | | Net proceeds | | | Amount Allocated to common stock and paid-in capital | |
D Warrants - February 2011 | | | 3,800,000 | | | $ | 190,000 | | | $ | - | | | $ | 190,000 | | | $ | 190,000 | |
D Warrants - May 2011 | | | 2,000,000 | | | | 100,000 | | | | - | | | | 100,000 | | | | 100,000 | |
D Warrants (cashless) - June 2011 | | | 515,254 | | | | - | | | | - | | | | - | | | | - | |
E Warrants | | | 7,623,336 | | | | 1,143,550 | | | | - | | | | 1,143,550 | | | | 1,143,550 | |
| | | 13,938,590 | | | $ | 1,433,550 | | | $ | - | | | $ | 1,433,550 | | | $ | 1,433,550 | |
During February 2011, 3,800,000 Double Options were exercised for gross proceeds of $190,000 to purchase 3,800,000 Double Units. Also, during the year ended June 30, 2011, 2,000,000 D Warrants were exercised for gross proceeds of $100,000, and 600,000 warrants were exercised in a cashless exercise resulting in the issuance of 515,254 shares of common stock.
On March 2, 2011, as an incentive to each holder of the E warrants (each “E Warrantholder”), of which there were 12,389,996 warrants outstanding prior to this incentive, the Company offered each of the E Warrantholders an additional ½ warrant (“F Warrant”, or “Incentive Warrant”) with a $0.50 exercise price exercisable until February 22, 2016 for each E warrant exercised prior to March 23, 2011, and then subsequently extended to May 31, 2011. A total of 7,623,336 E warrants were exercised during the year ended June 30, 2011, in connection with this warrant inducement, resulting in gross proceeds of $1,143,550. As a result, the Company issued 3,811,671 F Warrants. The Company recorded the value of the Incentive Warrants as a $1,068,320 warrant modification expense in the consolidated income statement during the year ended June 30, 2011.
2012 Activity:
POSCAN
On August 24, 2011, the Company 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. Each unit consisted 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. The Company incurred finders’ fees equal to 7% of the gross proceeds received from the SPA. At June 30, 2012, the Company has paid $493,000 of the fees and has $67,000 of finders’ fees payable recorded in accounts payable in the consolidated balance sheet.
Sales of the “Units” during the year ended June 30, 2012 pursuant to the SPA were as follows:
| | Shares | | | Gross proceeds | | | Offering costs | | | Net proceeds | | | Relative fair value allocated to POSCAN Warrants | | | Amount Allocated to common stock and paid-in capital | |
August 2011 | | | 38,095,300 | | | $ | 8,000,013 | | | $ | 685,944 | | | $ | 7,314,069 | | | $ | 3,779,978 | | | $ | 3,534,081 | |
| | | 38,095,300 | | | $ | 8,000,013 | | | $ | 685,944 | | | $ | 7,314,069 | | | $ | 3,779,978 | | | $ | 3,534,081 | |
POSCAN 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 the Company is 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 the Company 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, the Company 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 are 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, the Company has 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. The Company’s 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, the Company 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 the Company does not meet these deadlines, the Company 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. To date, POSCAN has not required the Company to register the shares.
The IRA provides that the Company 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), the Company shall not issue any new securities to any person unless the Company has 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, the Company 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 the Company’s assets; incurring indebtedness in excess of $1,000,000 (subject to certain exceptions); create or take any action that results in our the Company’s 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 the Company’s business; or amend or waive any non-competition or non-solicitation provision applicable to the Company’s 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.
Warrants exercises
During the year ended June 30, 2012, 4,200,000 D Warrants were exercised for gross proceeds of $210,000.
Common Stock issued for acquisition of mineral rights
On August 3, 2010, the Company issued 10,000,000 shares of its common stock valued at $3,900,000 as part of its acquisition of mineral rights in connection with the Alfredo acquisition (See Note 4). Management determined the fair value of the stock issued to be $0.39 per share based on the last sale price of the common stock on the OTC Bulletin Board on that date.
On June 2, 2011, the Company issued of 127,500,000 shares of its common stock valued at $31,875,000 as part of its acquisition of mineral rights in connection with the Maricunga acquisition (See Note 4). Management determined the fair value of the stock issued to be $0.25 per share based on the last sale price of the common stock on the OTC Bulletin Board on that date.
Common Stock issued for services
Common stock issued for services during the years ended June 30, 2005 through June 30, 2010
The table below summarizes sales of common stock from June 24, 2005 (inception) through June 30, 2012, and includes the portion of proceeds received which was allocated to warrants issued in conjunction with these sales of common stock.
Fiscal Year | | Shares | | | Fair value of shares issued | | | Amount allocated to common stock par value | | | Amount allocated to paid-in capital | | | Per share price range | |
2005 | | | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 0.00 | |
2006 | | | - | | | | - | | | | - | | | | - | | | | 0.00 | |
2007 | | | - | | | | - | | | | - | | | | - | | | | 0.00 | |
2008 | | | - | | | | - | | | | - | | | | - | | | | 0.00 | |
2009 | | | - | | | | - | | | | - | | | | - | | | | 0.00 | |
2010 | | | 2,625,000 | | | | 811,050 | | | | 2,625 | | | | 808,425 | | | | 0.003 - 0.93 | |
2011 | | | 5,603,501 | | | | 1,697,567 | | | | 5,603 | | | | 1,691,964 | | | | 0.235 - 0.385 | |
2012 | | | 1,573,333 | | | | 135,200 | | | | 1,574 | | | | 133,626 | | | | 0.106 | |
2011 Activity:
On November 24, 2010, the Company entered into an agreement (the “Compensation Modification Agreement”) with LW Securities, Ltd. (the “Finder”) in connection with private placement offerings which closed at various times between June 9, 2010, and September 13, 2010. The Compensation Modification Agreement provides, among other things, that in lieu of $105,000 of cash fees, the Company would issue the Finder 1,000,000 shares of common stock. In February 2011, the Company issued the Finder 1,000,000 shares in accordance with the Compensation Modification Agreement. The Company valued the shares issued pursuant to the Compensation Modification Agreement at $385,000, which is equal to 1,000,000 shares of common stock issued at the measurement date at a closing price of $0.385 per share. The Company recorded the difference of $280,000 as general and administrative expenses.
On December 30, 2010, the Company reached an agreement with its legal counsel (the “Firm”), pursuant to which the Company issued in February 2011, 608,310 shares of common stock to the Firm for outstanding legal fees and expenses. The value of the shares was determined based on the $0.385 closing price of the common stock on the measurement date, and totaled $234,199. The Company recorded the amount to general and administrative expenses.
On December 30, 2010, the Company reached an agreement (the “Settlement Agreement”) with an individual the Company had been considering hiring as an executive officer (the “Candidate”) to settle certain potential claims relating to the Company’s proposed employment of the Candidate. Pursuant to the Settlement Agreement, the Company issued in February 2011, 1,000,000 shares of common stock to the Candidate. The Company valued the 1,000,000 shares of common stock at $385,000 based on the $0.385 closing price of the common stock on the measurement date. The Company recorded general and administrative expenses of $385,000 in connection with this agreement.
On June 27, 2011, the Company issued 120,000 shares of common stock for services to a vendor. The value of the issuable shares was determined based on the $0.22 closing price of the common stock on the measurement date, and totaled $26,400. The Company recorded the amount to general and administrative expenses.
Investment Agreement
The Company entered into an Investment Agreement (the “Investment Agreement”) with Centurion Private Equity, LLC (the “Investor”), dated December 2, 2010, pursuant to which, subject to certain conditions, the Company may sell newly issued shares of common stock (the “Put Shares”) to the Investor from time to time during the commitment period (each such sale, a “Put”) subject to certain dollar and share volume limitations for each Put. Provided that the relevant conditions are met, the Company may make Puts under the Investment Agreement from time to time until 24 months from the date the Registration Statement (as defined below) is declared effective or until all Puts under the Investment Agreement have reached an aggregate gross sales price of $10 million, if sooner.
In connection with the Investment Agreement, the Company issued 87,096 shares of common stock to the Investor on August 27, 2010 and recorded general and administrative expense of $26,129 based on the $0.30 per share market price of common stock on that date. As consideration for entering into the Investment Agreement, the Company also issued 1,551,253 shares to the Investor on December 2, 2010 and recorded general and administrative expense of $358,339 based on the $0.231 per share market price of the common stock on that date.
On September 14, 2011, the Company delivered a Notice of Termination to the Investor, terminating the Company’s right to make any Puts under the Investment Agreement.
2012 Activity:
On March 6, 2012, the Board of Directors approved an agreement with a third party consultant to issue 500,000 shares of common stock for services, of which 250,000 were issued in March 2012 and 250,000 shares were issued in May 2012. The value of the shares was determined based on the $0.13 per share closing price of the common stock on the measurement date, and totaled $65,000, all of which was expensed during the year ended June 30, 2012.
On March 6, 2012, the Board of Directors approved the issuance of 540,000 shares of common stock to various third party consultants for services, all of which were issued during March 2012. The value of the shares was determined based on the $0.13 per share closing price of the common stock on the measurement date, and totaled $70,200, which was expensed during the year ended June 30, 2012.
Common Stock issued in connection with Settlement Agreements
During the year ended June 30, 2011, the Company reached a settlement agreement with Puna, pursuant to which the Company issued Puna 6,000,000 shares of common stock in full satisfaction of any and all obligations the Company may have to Puna. The Company recorded settlement expense of $1,920,000 ($0.32 per share) determined based upon the fair value of the common stock on the issuance date.
On November 24, 2010, the Company entered into a termination, settlement and release agreement with Lacus in exchange for a $150,000 cash payment and 500,000 shares of common stock to settle potential Lacus claims related to the Puna Lithium transaction. The 500,000 shares are recorded in the amount of $192,500, which was based on a fair value of $0.385 per share of common stock on the measurement date. As the Company had recorded $765,000 of accrued liabilities as of June 30, 2010 related to Lacus, the Company recorded a gain on settlement of $422,500 during the year ended June 30, 2011 as a result of the settlement.
2009 Equity Incentive Plan
On October 19, 2009, stockholders representing approximately fifty-nine percent (59%) of the Company’s issued and outstanding capital stock executed a written consent in lieu of a meeting and approved the creation of the 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan provides for the issuance of both non-statutory and incentive stock options and other awards to acquire, in the aggregate, up to 5,000,000 shares of the Company’s common stock.
On May 2, 2012, the Company’s Board of Directors amended the 2009 Plan to increase the maximum number of shares of common stock of the Company available for issuance pursuant to awards granted under the 2009 Plan (the “Plan Limit”) from 5,000,000 shares to 30,000,000 shares (the "Plan Expansion Amendment"). After further review, and pursuant to the recommendation of its Compensation Committee, on June 17, 2012, the Board amended the 2009 Plan to decrease the Plan Limit from 30,000,000 shares to 5,000,000 shares, effectively rescinding the Plan Expansion Amendment.
In May 2012, the Company committed to grant Restricted Stock Units with respect to an aggregate of 900,000 shares to members of its Board of Directors. Such restricted stock units of these restricted stock units shall vest over a period over three years starting from later of July 1, 2011 and the initial date of the applicable director’s substantial involvement with the Board’s activities,. However, the Company does not currently have enough shares authorized for issuance under our 2009 Plan to satisfy all of these obligations. The Company recorded compensation expense of $19,327 during the year ended June 30, 2012.
On May 2, 2012, the Board of Directors amended the 2009 Plan to increase the maximum number of shares of common stock of the Company available for issuance pursuant to awards granted under the 2009 Plan from 5,000,000 shares to 30,000,000 shares. However, on June 17, 2012, the Board amended the 2009 Plan to decrease the Plan Limit from 30,000,000 shares to 5,000,000 shares, effectively rescinding the May 2, 2012 amendment.
Restricted Stock Units
On June 27, 2011, the Company granted its Chief Executive Officer an award of 700,000 restricted stock units 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 year ended June 30, 2012, the Company recorded $103,830 of stock compensation in connection with this agreement. 233,333 shares of common stock have been issued during the year ended June 30, 2012.
During December 2011, the Company entered into a one-year employment agreement with a new Vice President of Finance (the “VP of Finance”) which originally was to begin on January 1, 2012 (amended to March 1, 2012). Pursuant to the agreement, the VP of Finance was granted 250,000 restricted stock units under its 2009 Plan which will vest over 3 years. The value of the issuable shares was determined based on the $0.13 closing price of the common stock on the measurement date, and totaled $34,500. The Company will record stock compensation expense for these restricted stock units over the 3 year service period which begins on March 1, 2012, of which the Company recorded expense of $11,500 during the year ended June 30, 2012.
Stock Option Awards
On December 9, 2009, the Company granted non-statutory options to purchase (i) 500,000 shares of its common stock to a newly appointed director and (i) 50,000 shares of its common stock to each of two newly appointed directors. These were granted with an exercise price equal to $0.25 per share, which was the price at which the Company was selling 2009 Units in the contemporaneous 2009 Unit Offering. The stock price on the grant date was $0.46 per share. As a result, the intrinsic value for these options on the grant date was $126,000. These options vest in three equal installments on each of the first, second and third anniversaries of the date of grant and expire after ten years.
A director resigned on February 18, 2010, and in connection with this termination, 50,000 stock options were forfeited. The resigning director entered into a consulting arrangement with the Company at such time, and subsequently received a separate option under the 2009 Plan to purchase 50,000 shares of common stock with a two-year term and an exercise price equal to $1.00 per share that immediately vested. The fair value of the options of $37,091 was immediately expensed and the options had no intrinsic value on the date of issuance.
On April 22, 2010, the Company’s Board of Directors granted options under the 2009 Plan to purchase 200,000 shares of its common stock to a consultant. These options vested immediately and have a 5-year term. They were granted with an exercise price equal to $0.32 per share. The stock price on the grant date was $0.67 per share. As a result, the intrinsic value and fair value for these options on the grant date was $70,000 and $114,783, respectively. The fair value of $114,783 was immediately expensed.
On August 26, 2010, the Company granted 1,000,000 options to purchase shares of its common stock to MIZ in connection with the Company’s hiring of an affiliate of MIZ as its Chief Operating Officer. These options were granted with an exercise price of $0.38 per share, which was also the stock price on the grant date. As a result, the intrinsic value and estimated fair value for these options on the grant date was $0 and $343,310, respectively. These options vest in three equal installments on each of the first, second and third anniversaries of the date of grant and expire after ten years.
A summary of stock option activity is presented in the table below:
| | | | | | | | Weighted-average | | | | |
| | | | | Weighted-average | | | Remaining | | | Aggregate | |
| | Number of | | | Exercise | | | Contractual | | | Intrinsic | |
| | Shares | | | Price | | | Term (years) | | | Value | |
Outstanding at June 30, 2010 | | | 800,000 | | | $ | 0.31 | | | | 7.73 | | | $ | - | |
Granted | | | 1,000,000 | | | | 0.38 | | | | 10.00 | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Expired/Forfeited | | | - | | | | - | | | | - | | | | - | |
Outstanding at June 30, 2011 | | | 1,800,000 | | | | 0.35 | | | | 8.06 | | | | - | |
Granted | | | 250,000 | | | | 0.40 | | | | 5.00 | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Expired/Forfeited | | | (600,000 | ) | | | 0.31 | | | | 6.82 | | | | - | |
Outstanding at June 30, 2012 | | | 1,450,000 | | | $ | 0.38 | | | | 6.79 | | | $ | - | |
Exercisable at June 30, 2012 | | | 533,333 | | | $ | 0.36 | | | | 6.13 | | | $ | - | |
During the year ended June 30, 2012, the 250,000 options that were granted had a weighted average grant-date fair value of $0.13 per share. During the year ended June 30, 2011, the 1,000,000 options that were granted had a weighted average grant-date fair value of $0.34 per share. During the years ended June 30, 2012, and 2011, the Company recognized stock-based compensation expense of $121,210 and $283,759, respectively related to stock options, of which $121,210 and $186,090, respectively, was attributable to a related party. As of June 30, 2012, there was approximately $77,670 of total unrecognized compensation cost related to non-vested stock options which is expected to be recognized over a weighted-average period of approximately 1.54 years.
The fair value of the options granted during the years ended June 30, 2012 and 2011 were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
| | June 30, 2012 | | | June 30, 2011 | |
Market value of common stock on grant date | | $ | 0.14 | | | $ | 0.38 | |
Risk free interest rate (1) | | | 0.83 | % | | | 2.08 | % |
Dividend yield | | | None | | | | None | |
Volatility factor | | | 230 | % | | | 150 | % |
Weighted average expected life in years (2) | | | 3.3 | | | | 6.0 | |
Expected forfeiture rate | | | 5 | % | | | 5 | % |
(1) | The risk-free interest rate was determined by management using the U.S. Treasury zero-coupon yield over the contractual term of the option on date of grant. |
(2) | Due to a lack of stock option exercise history, the Company uses the simplified method under SAB 107 to estimate expected term. |
Warrants
Summary information regarding common stock warrants outstanding is as follows:
| | | | | Weighted-average | |
| | Number of | | | Exercise | |
| | Warrants | | | Price | |
Outstanding at June 30, 2010 | | | 18,493,150 | | | $ | 0.66 | |
Issued | | | 46,750,323 | | | | 0.25 | |
Warrants issued pursuant to anti-dilution provisions | | | 2,980,428 | | | | 0.34 | |
Exercised | | | (14,023,336 | ) | | | 0.10 | |
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 June 30, 2012 | | | 89,284,712 | | | | 0.37 | |
Warrants outstanding as of June 30, 2012 are as follows:
| | | | | Outstanding | | | | | | Exercisable | |
| | Exercise | | | number | | | Remaining | | | number | |
Issuance Date | | price | | | of shares | | | life | | | of shares | |
November 10, 2009 - December 23, 2009 | | $ | 0.31 | | | | 7,162,305 | | | | 2.4 - 2.5 years | | | | 7,162,305 | |
November 10, 2009 - December 23, 2009 | | $ | 0.48 | | | | 7,211,339 | | | | 2.4 - 2.5 years | | | | 7,211,339 | |
June 9, 2010 - September 13, 2010 | | $ | 0.32 | | | | 9,575,516 | | | | 2.9 - 3.2 years | | | | 9,575,516 | |
June 9, 2010 - July 13, 2010 | | $ | 0.20 | | | | 527,891 | | | | 2.9 - 3.0 years | | | | 527,891 | |
November 8-15, 2010 | | $ | 0.05 | | | | 1,400,000 | | | | 3.4 years | | | | 1,400,000 | |
December 9, 2010 - March 24, 2011 | | $ | 0.15 | | | | 4,806,878 | | | | 3.4 - 3.6 years | | | | 4,806,878 | |
March 24, 2011 | | $ | 0.45 | | | | 4,256,827 | | | | 3.7 years | | | | 4,256,827 | |
April 7, 2011 | | $ | 0.37 | | | | 11,960,050 | | | | 1.9 years | | | | 11,960,050 | |
April 7, 2011 | | $ | 0.26 | | | | 1,913,606 | | | | 1.9 years | | | | 1,913,606 | |
May 2, 2011 | | $ | 0.43 | | | | 1,500,000 | | | | 3.8 years | | | | 1,500,000 | |
May 2, 2011 | | $ | 0.36 | | | | 75,000 | | | | 3.8 years | | | | 75,000 | |
June 27, 2011 | | $ | 0.37 | | | | 800,000 | | | | 1.8 years | | | | 800,000 | |
September 14, 2011 | | $ | 0.40 | | | | 38,095,300 | | | | 2.2 years | | | | 38,095,300 | |
| | | | | | | 89,284,712 | | | | | | | | 89,284,712 | |
The intrinsic value of warrants outstanding at June 30, 2012 was $70,000.
NOTE 11. FAIR VALUE MEASUREMENTS
As defined in FASB ASC Topic No. 820 - 10, fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic No. 820 - 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The Company’s valuation models are primarily industry standard models. Level 3 instruments include derivative warrant instruments. The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.
As required by FASB ASC Topic No. 820 - 10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of the derivative warrant instruments was calculated using a modified lattice valuation model (See Note 9).
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 June 30, 2012:
| | Quoted Prices | | | | | | | | | |
| | In Active | | Significant | | | | | | Total | |
| | Markets for | | Other | | | Significant | | | Carrying | |
| | Identical | | Observable | | | Unobservable | | | Value as of | |
| | Assets | | Inputs | | | Inputs | | | June 30, | |
Description | | (Level 1) | | (Level 2) | | | (Level 3) | | | 2012 | |
Derivative liabilities - warrant instruments | | $ | - | | $ | - | | | $ | 7,653,928 | | | $ | 7,653,928 | |
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:
| | Quoted Prices | | | | | | | | | | |
| | In Active | | | Significant | | | | | | Total | |
| | Markets for | | | Other | | | Significant | | | Carrying | |
| | Identical | | | Observable | | | Unobservable | | | Value as of | |
| | Assets | | | Inputs | | | Inputs | | | June 30, | |
Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | 2011 | |
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 liabilities classified as level 3 in the fair value hierarchy:
| | Significant Unobservable Inputs (Level 3) | |
| | Years Ended June 30, | |
| | 2012 | | | 2011 | |
Beginning balance | | $ | (15,244,754 | ) | | $ | (8,029,728 | ) |
Change in fair value | | | 10,780,342 | | | | (6,116,147 | ) |
Additions | | | (3,779,978 | ) | | | (4,635,105 | ) |
Warrant modification | | | - | | | | (1,068,320 | ) |
Exercise of warrants | | | 590,462 | | | | 4,604,546 | |
Ending balance | | $ | (7,653,928 | ) | | $ | (15,244,754 | ) |
| | | | | | | | |
Change in unrealized gains (losses) included in earnings for the year ended June 30, 2012 and 2011 | | $ | 10,780,342 | | | $ | (6,116,147 | ) |
During the years ended June 30, 2012 and 2011, the Company recorded a realized loss of $590,462 and $4,069,165, respectively, on the settlement of a portion of the warrant derivative liability due to the exercise of certain warrants, which is included in the change in the fair value of warrant derivative liability in the consolidated income statements.
NOTE 12. INCOME TAXES
The Company files a U.S. federal income tax return. The Company’s foreign subsidiaries file income tax returns in their jurisdictions.
The components of the consolidated taxable net loss are as follows as of the years ended June 30, 2012:
| | 2012 | | | 2011 | |
U.S. | | $ | (5,224,954 | ) | | $ | (4,481,089 | ) |
Foreign | | | (7,601,114 | ) | | | (679,850 | ) |
Total | | $ | (12,826,068 | ) | | $ | (5,160,939 | ) |
The components of the Company’s deferred tax assets at June 30, 2012 and 2011 are as follows:
| | 2012 | | | 2011 | |
Deferred tax assets: | | | | | | | | |
Net operating loss carry-forwards | | $ | 6,654,049 | | | $ | 3,421,876 | |
Stock-based compensation | | | 1,391,211 | | | | 1,294,879 | |
Impairment of mineral rights | | | 3,098,687 | | | | 2,996,687 | |
Accrued expenses | | | 255,085 | | | | - | |
Loss contingency | | | 167,108 | | | | | |
Valuation allowance | | | (11,441,020 | ) | | | (7,611,366 | ) |
Total deferred tax assets | | | 125,120 | | | | 102,076 | |
Deferred tax liability: | | | | | | | | |
Beneficial conversion feature and other | | | (125,120 | ) | | | (102,076 | ) |
Net deferred tax assets | | $ | - | | | $ | - | |
The following table provides reconciliation between income taxes computed at the federal statutory rate and our provision for income taxes at June 30, 2012:
| | 2012 | | | 2011 | |
Federal income taxes at 34% | | $ | (466,035 | ) | | $ | (6,490,627 | ) |
Change in fair value of derivative liability - warrant instruments | | | (3,665,316 | ) | | | 2,079,490 | |
Warrant modification expense | | | - | | | | 363,229 | |
Amortization of beneficial conversion feature | | | 175,042 | | | | 126,740 | |
Meals and entertainment | | | 14,617 | | | | | |
Restricted stock units | | | 124,525 | | | | | |
Change in valuation allowance | | | 3,814,448 | | | | 3,874,974 | |
Other | | | 2,719 | | | | 46,194 | |
Provision for income taxes | | $ | - | | | $ | - | |
Unless previously utilized, $9,899,863 of federal tax loss carry-forwards will begin to expire in 2029 and $8,280,964 foreign loss can be carried forward indefinitely. Federal tax laws limit the time during which the net operating loss carry-forwards may be applied against future taxes, and if the Company fails to generate taxable income prior to the expiration dates it may not be able to fully utilize the net operating loss carry-forwards to reduce future income taxes. As the Company has had cumulative losses and there is no assurance of future taxable income, valuation allowances have been recorded to fully offset the deferred tax asset at June 30, 2012 and 2011.
NOTE 13. 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 the Company 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 the Company’s properties at economically viable costs.
In Chile, lithium is not exploitable via traditional 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.
The Chilean Government’s Ministry of Mining established its first ever auction for the award of a lithium production quotas and licenses (Special Lithium Operations Contracts, or CEOLs) which would permit the exploitation of an aggregate of 100,000 tons of lithium metal (approximately 530,000 tons of lithium carbonate equivalent) over a 20 year period, subject to a seven percent royalty. In September 2012, the Company formed a consortium consisting of the Company, POSCO, Daewoo International Corp, and Mitsui & Co. (the “Consortium”) for the purpose of participating in such CEOL auction. As required under the rules established by the Ministry of Mining, on September 14th, 2012, the Consortium submitted its bid for the CEOLs.
On September 24, 2012, the Ministry of Mining opened the bids and informed the Company that the Consortium’s bid was not the winning bid.
On October 1, 2012, the Ministry of Mining informed the Company that the Chilean Government decided to invalidate the CEOL process and the results announced on September 24, 2012 due to an administrative error.
The Company is currently in the process of pursuing the Chilean Government to reconsider its decision to invalidate the CEOL process. The Company requested that the Chilean Government should award the CEOL to the second highest bidder, the Consortium´s offer. The Company put together a “Request for Reconsideration” (RFR). This is deemed to be a friendly recourse which anybody can request an authority to change their decision.
If such action is turned down, a fast track Court Action called “Protection Recourse” might take place. Under that circumstance, Courts would determine on rule whether or not the Government is abusing by its action. If they rule in the Company´s favor, the Government would be forced to complete the process and grant the CEOL to the Consortium.
Pending the outcome of the permitting process, the Company is exploring other strategies that could enable the Company to obtain rights to exploit lithium in Chile, whether from our Maricunga project or otherwise. Additionally, the Company is evaluating the Maricunga project as a potential producer of potassium nitrate. However, there can be no assurances that the Company will be able to do so in the near future or at all.
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 will not 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.
The Company believes that it is in compliance with all material laws and regulations that currently apply to its activities, but there can be no assurance that the Company can continue to remain in compliance. Current laws and regulations could be amended and the Company might not be able to comply with them, as amended. Further, there can be no assurance that the Company will be able to obtain or maintain all permits necessary for our future operations, or that the Company will be able to obtain them on reasonable terms. To the extent such approvals are required and are not obtained, the Company may be delayed or prohibited from proceeding with planned exploration or development of its mineral properties.
Non-Binding Agreement - New World Resource Corp.
On January 19, 2012, the Company entered into a non-binding agreement 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 agreement contemplated a purchase price for the New World Options and other assets consisting of equity representing 22.5% of the Company after completion of such transaction.
The Company advanced $150,000 to fund a required payment under the New World Options that was due in February 2012. The Company then elected to not pursue this transaction and expensed this $150,000 payment during the year ended June 30, 2012.
Non-Binding Agreement - Claritas, Lithium and Bongo Mining Properties
On November 30, 2011, the Company entered into a non-binding agreement with three companies consisting of SLM Claritas, SLM Bongo and SLM Lithium (collectively, the “SLM Sellers”) with mining concessions with respect to an aggregate of 3,721 acres (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 “SLM Deposit”) of $250,000 on January 5, 2012. The SLM Deposit provided the Company with 60 days to perform due diligence procedures to determine whether or not to proceed with negotiating definitive agreements with the SLM Sellers regarding the Chilean Prospect. The Company elected to not proceed on negotiations related to the definitive agreements and has written off the SLM Deposit during the year ended June 30, 2012.
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, the Company 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 its best efforts to cause such registration statement to become effective within 150 days after the filing date, all at the Company’s own expense. Pursuant to the registration rights agreement, in the event the Company does not meet these deadlines, the Company has 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 June 31, 2012. The Company was required to cause the registration statement to become effective by November 28, 2011, however the registration statement was not effective until March 19, 2012, and the Company increased the monetary penalties accrual to $530,243 (which includes accrued interest of $41,438 and is calculated at 18% per annum for registration rights penalties considered past due), and the penalty has not yet been paid as of June 30, 2012. 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.
R3 Fusion
R3 Fusion, Inc. (“R3”) is a technology company that has developed, patented, demonstrated and is currently commercializing its Short Path Condensate Recovery (SPaCeR) technology, which utilizes waste process heat and engineering designed to achieve a highly cost effective means of environmentally friendly fluid processing.
The Company believes 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. Not only do we believe R3’s SPaCeR technology can aid in the recovery of lithium, but we believe it will allow brine mining operations to use smaller facilities, reducing their footprint by as much as 1,000-fold.
On January 13, 2012, Li3 Energy entered into an agreement with R3 (the “R3 Agreement”) to apply R3’s 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. Upon installation of the facilities Li3 Energy 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 Li3 Energy elects to keep the equipment on site thereafter, $12,500 per month for up to an additional 36 months.
The R3 Agreement also provides that Li3 Energy will be given the exclusive license, subject to final negotiations, to exploit R3’s SPaCeR technology throughout the world for the processing of lithium-containing brine for so long as Li3 Energy is using such systems in the processing of brine at our facilities in South America.
Nevada
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. 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 June 30, 2011. At June 30, 2012 and 2011, the Company has recorded $189,600 in accrued liabilities related to this agreement.
Employment Agreement
The Company has entered into an Employment Services Agreement with our Chief Executive Officer, Mr. Luis Saenz, effective as of August 24, 2011. Under the Employment Services Agreement, the Company will pay Mr. Saenz such base salary as may be determined by its Board of Directors. The Employment Services Agreement has an initial term of one year and is automatically renewed for successive one-year terms unless either party delivers timely notice of its intention not to renew. The Company may also pay Mr. Saenz an annual bonus at such time and in such amount as may be determined by its Board of Directors in its sole discretion.
Mr. Saenz’s employment by the Company remains “at-will” and terminable at any time for any reason or for no reason. If Mr. Saenz’s employment is terminated by the Company without Cause, the Company must continue to pay him any base salary at the rate then in effect for a period of 18 months. If Mr. Saenz terminates the Employment Services Agreement for Good Reason, or in the event of a termination of employment due to a permanent disability, the Company will continue to pay him any base salary at the rate then in effect for a period of 18 months.
For the duration of the employment period and, unless the Company terminates Mr. Saenz’s employment without Cause, for a period of 18 months thereafter, Mr. Saenz has agreed not to directly or indirectly compete with any business engaged in by us or proposed to be engaged in by us during the period of his employment anywhere within the countries in which the Company is then operating.
Gain contingency
As at June 30, 2012, the Company did not capitalize any Chilean value-added taxes (“VAT”) amounting to $770,153 arising from various purchases of goods and services in Chile . The Company expensed these amounts during the year ended June 30, 2012 due to the uncertainty of recoverability and is included in exploration expenses on the consolidated statement of operations. Under Chilean regulation, this VAT is recoverable from future VAT payable.
Operating leases
Rental expense for office operating leases was $87,769 and $43,662 during the years ended June 30, 2012 and 2011, respectively. Future minimum rental commitments under long-term non-cancellable facilities operating leases in place as of June 30, 2012 are as follows:
Years ending June 30 | | Amount | |
2013 | | $ | 93,308 | |
2014 | | | 100,041 | |
2015 | | | 42,304 | |
2016 | | | - | |
2017 | | | - | |
Thereafter | | | - | |
Total minimum lease payments | | $ | 235,653 | |
NOTE 14. SUBSEQUENT EVENTS
POSCO
On August 17, 2012, the Company closed on POSCAN’s second tranche of investment under the SPA (the “Second Closing”), selling 62,499,938 units to POSCAN for $9,999,990, with each unit consisting of one share of common stock and a three-year warrant to purchase one share of common stock for $0.21 per share.
On the same date, the Company entered into an Additional Agreement to Stock Purchase Agreement (the “Additional Agreement”) with POSCAN which, among other things, modifies certain provisions of the SPA. The Additional Agreement reduced POSCAN’s purchase price per unit for the Second Closing from $0.21 per share to $0.16 per share, and reduced the exercise price of all of the warrants sold under the SPA from $0.40 per share to $0.21 per share. The Company revalued the modified warrants before and after the modification date and the increase in fair value is estimated to be $219,322 which will be recorded as a modification expense.
Pursuant to the Additional Agreement, the Company also agreed to issue to POSCAN a two-year warrant to purchase 5,000,000 shares of our common stock at an exercise price of $0.15 per share. Furthermore, the Additional Agreement provides that, subject to certain exceptions, the Company must issue additional shares of our common stock to POSCAN in the event that the Company issues or sells any such shares to third parties for a price of less than $0.16 per share at any time during the 18 months immediately following the Second Closing.
The Additional Agreement provides restrictions on our use of the proceeds from the Second Closing, and includes the Company’s agreement to use its best efforts to obtain a Chilean lithium production concession and to take certain steps towards commercialization of its flagship Maricunga property.
Stock Settlement Agreements
In September 2012, the Company entered into several stock settlement agreements with certain parties to whom the Company was obligated as of June 30, 2012 (“Receivable Holders”). The Company has entered into settlement agreements with respect to an aggregate of $390,326 of obligations, and has issued an aggregate of 5,825,761 shares of the Company’s common stock pursuant thereto. Each settlement agreement that the Company has entered into to date has provided for the Company to issue one share of the Company’s common stock for every $0.067 of obligations released by the Receivable Holder.
The majority of the settlement agreements above were for obligations to directors and officers of the Company as of June 30, 2012.
Second Waiver Agreement
In September 2012, the Company obtained the Second Waiver Agreement from the holders of the zero-coupon convertible notes. See Note 8.
Mining Permit
In September 2012, the Company received update on its permit request for the exploitation right of Lithium from the Government of Chile. See Note 13.
LI3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Balance Sheets
(Unaudited)
| | March 31, 2013 | | | June 30, 2012 | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 2,349,834 | | | $ | 27,689 | |
Prepaid expenses and advances | | | 99,931 | | | | 8,841 | |
Total current assets | | | 2,449,765 | | | | 36,530 | |
Mineral rights | | | 63,741,000 | | | | 63,741,000 | |
Property and equipment, net | | | 137,551 | | | | 175,220 | |
Other assets | | | 11,183 | | | | 10,650 | |
Total non-current assets | | | 63,889,734 | | | | 63,926,870 | |
Total assets | | $ | 66,339,499 | | | $ | 63,963,400 | |
| | | | | | | | |
Liabilities and Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 246,104 | | | $ | 2,331,722 | |
Accounts payable - related parties | | | 6,329 | | | | 104,326 | |
Accrued expenses | | | 555,102 | | | | 994,827 | |
Accrued registration rights penalties | | | 518,243 | | | | 518,243 | |
Common stock payable | | | 489,631 | | | | - | |
Zero-coupon convertible debt, net of discount of $100,629 and $-0-, respectively | | | 1,779,371 | | | | 1,783,181 | |
Notes payable | | | 50,000 | | | | 1,200,000 | |
Convertible notes payable | | | 45,000 | | | | 45,000 | |
Total current liabilities | | | 3,689,780 | | | | 6,977,299 | |
Derivative liabilities - warrant instruments | | | 5,849,223 | | | | 7,653,928 | |
Total liabilities | | | 9,539,003 | | | | 14,631,227 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
Common stock subject to rescission | | | 3,041 | | | | - | |
| | | | | | | | |
Equity: | | | | | | | | |
Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding | | | - | | | | - | |
Common stock, $0.001 par value, 990,000,000 shares authorized; 394,041,586 and 323,782,553 shares issued and outstanding as of March 31, 2013 and June 30, 2012, respectively | | | 394,042 | | | | 323,783 | |
Additional paid-in capital | | | 69,253,081 | | | | 63,578,079 | |
Other comprehensive income | | | - | | | | 83,563 | |
Deficit accumulated during exploration stage | | | (35,782,363 | ) | | | (37,773,845 | ) |
Total stockholders' equity of Li3 Energy, Inc. | | | 33,864,760 | | | | 26,211,580 | |
Non-controlling interests | | | 22,932,695 | | | | 23,120,593 | |
Total equity | | | 56,797,455 | | | | 49,332,173 | |
Total liabilities and equity | | $ | 66,339,499 | | | $ | 63,963,400 | |
See accompanying notes to unaudited consolidated financial statements.
LI3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
| | | | | | | | | | | | | | June 24, 2005 | |
| | | | | | | | | | | | | | (inception) | |
| | Three Months Ended March 31, | | | Nine Months Ended March 31, | | | through March 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | | | 2013 | |
| | | | | | | | | | | | | | | |
Revenues | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 2,278 | |
Cost of goods sold | | | - | | | | - | | | | - | | | | - | | | | (1,182 | ) |
Gross profit | | | - | | | | - | | | | - | | | | - | | | | 1,096 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Exploration expenses | | | (79,336 | ) | | | (2,156,317 | ) | | | (456,945 | ) | | | (5,608,579 | ) | | | (9,546,332 | ) |
Mineral rights impairment expense | | | - | | | | - | | | | - | | | | - | | | | (9,138,785 | ) |
Loss on settlements, net | | | - | | | | - | | | | (5,816 | ) | | | - | | | | (1,503,316 | ) |
General and administrative expenses | | | (1,291,630 | ) | | | (2,188,072 | ) | | | (3,700,329 | ) | | | (4,988,436 | ) | | | (19,097,121 | ) |
Total operating expenses | | | (1,370,966 | ) | | | (4,344,389 | ) | | | (4,163,090 | ) | | | (10,597,015 | ) | | | (39,285,554 | ) |
Other income (expense): | | | | | | | | | | | | | | | | | | | | |
Loss on debt extinguishment | | | - | | | | - | | | | (37,235 | ) | | | (841,752 | ) | | | (878,987 | ) |
Change in fair value of derivative liability - warrant instruments | | | 213,163 | | | | (3,765,995 | ) | | | 6,453,869 | | | | 7,837,564 | | | | 4,894,517 | |
Warrant modification expense | | | - | | | | - | | | | (171,150 | ) | | | - | | | | (1,239,470 | ) |
Gain (loss) on foreign currency transactions | | | (426 | ) | | | 74,258 | | | | 19,723 | | | | 33,395 | | | | 30,088 | |
Interest expense | | | (57,274 | ) | | | (182,048 | ) | | | (298,533 | ) | | | (880,332 | ) | | | (1,867,358 | ) |
Total other income (expense) | | | 155,463 | | | | (3,873,785 | ) | | | 5,966,674 | | | | 6,148,875 | | | | 938,790 | |
Net income (loss) | | $ | (1,215,503 | ) | | $ | (8,218,174 | ) | | $ | 1,803,584 | | | $ | (4,448,140 | ) | | $ | (38,345,668 | ) |
Net loss attributable to non-controlling interests | | | 31,734 | | | | 773,206 | | | | 187,898 | | | | 2,043,413 | | | | 2,563,305 | |
Net income (loss) attributable to Li3 Energy, Inc. | | $ | (1,183,769 | ) | | $ | (7,444,968 | ) | | $ | 1,991,482 | | | $ | (2,404,727 | ) | | $ | (35,782,363 | ) |
Earnings (loss) per common share - basic | | $ | (0.00 | ) | | $ | (0.02 | ) | | $ | 0.01 | | | $ | (0.01 | ) | | | | |
Earnings (loss) per common share - diluted | | $ | (0.00 | ) | | $ | (0.02 | ) | | $ | 0.01 | | | $ | (0.01 | ) | | | | |
Weighted average number of common shares outstanding | | | | | | | | | | | | | | | | | | | | |
Basic | | | 394,002,697 | | | | 322,583,762 | | | | 380,373,535 | | | | 310,810,095 | | | | | |
Diluted | | | 394,002,697 | | | | 322,583,762 | | | | 395,841,166 | | | | 310,810,095 | | | | | |
Comprehensive income (loss) | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (1,215,503 | ) | | $ | (8,218,174 | ) | | $ | 1,803,584 | | | $ | (4,448,140 | ) | | $ | (38,345,668 | ) |
Foreign currency translation adjustments | | | - | | | | - | | | | (83,563 | ) | | | - | | | | - | |
Total comprehensive income (loss) | | $ | (1,215,503 | ) | | $ | (8,218,174 | ) | | | 1,720,021 | | | $ | (4,448,140 | ) | | $ | (38,345,668 | ) |
Comprehensive loss attributable to non-controlling interests | | | 31,734 | | | | 773,206 | | | | 187,898 | | | | 2,043,413 | | | | 2,563,305 | |
Comprehensive income (loss) attributable to Li3 Energy, Inc. shareholders | | $ | (1,183,769 | ) | | $ | (7,444,968 | ) | | $ | 1,907,919 | | | $ | (2,404,727 | ) | | $ | (35,782,363 | ) |
See accompanying notes to unaudited consolidated financial statements.
LI3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statements of Changes in Equity (Deficit)
From June 24, 2005 (Inception) through March 31, 2013
(Unaudited)
| | | | | | | | | | | | | | Deficit | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | Additional | | | Other | | | During the | | | Non- | | | Total | |
| | Common Stock | | | Paid-in | | | Comprehensive | | | Exploration | | | Controlling | | | Equity | |
| | Shares | | | Par Value | | | Capital | | | Loss | | | Stage | | | Interest | | | (Deficit) | |
| | | | | | | | | | | | | | | | | | | | | |
Balance at June 24, 2005 (inception) | | | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash, June 2005 | | | 71,052,672 | | | | 71,052 | | | | (63,552 | ) | | | - | | | | - | | | | - | | | | 7,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2005 | | | 71,052,672 | | | | 71,052 | | | | (63,552 | ) | | | - | | | | - | | | | - | | | | 7,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash, March 2006 | | | 47,368,454 | | | | 47,368 | | | | 2,632 | | | | - | | | | - | | | | - | | | | 50,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (14,068 | ) | | | - | | | | (14,068 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2006 | | | 118,421,126 | | | | 118,420 | | | | (60,920 | ) | | | - | | | | (14,068 | ) | | | - | | | | 43,432 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (16,081 | ) | | | - | | | | (16,081 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2007 | | | 118,421,126 | | | | 118,420 | | | | (60,920 | ) | | | - | | | | (30,149 | ) | | | - | | | | 27,351 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash, February 2008 | | | 2,631,595 | | | | 2,632 | | | | 47,368 | | | | - | | | | - | | | | - | | | | 50,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (95,656 | ) | | | - | | | | (95,656 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2008 | | | 121,052,721 | | | | 121,052 | | | | (13,552 | ) | | | - | | | | (125,805 | ) | | | - | | | | (18,305 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (67,905 | ) | | | - | | | | (67,905 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2009 | | | 121,052,721 | | | | 121,052 | | | | (13,552 | ) | | | - | | | | (193,710 | ) | | | - | | | | (86,210 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cancellation of shares in connection with merger | | | (71,052,626 | ) | | | (71,052 | ) | | | 71,052 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash | | | 18,000,000 | | | | 18,000 | | | | 2,265,139 | | | | - | | | | - | | | | - | | | | 2,283,139 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock based compensation | | | 2,625,0002 | | | | 2,625 | | | | 1,137,322 | | | | - | | | | - | | | | - | | | | 1,139,947 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for property acquisition | | | 4,000,000 | | | | 4,000 | | | | 3,636,000 | | | | - | | | | - | | | | - | | | | 3,640,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (16,048,682 | ) | | | - | | | | (16,048,682 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2010 | | | 74,625,095 | | | | 74,625 | | | | 7,095,961 | | | | - | | | | (16,242,392 | ) | | | - | | | | (9,071,806 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash | | | 55,685,324 | | | | 55,686 | | | | 6,025,862 | | | | - | | | | - | | | | - | | | | 6,081,548 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | | 5,603,501 | | | | 5,603 | | | | 2,469,927 | | | | - | | | | - | | | | - | | | | 2,475,530 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued to settle liabilities | | | 6.500.000 | | | | 6.500 | | | | 2.106.000 | | | | - | | | | - | | | | - | | | | 2.112.500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity impact of derivative liability warrants and debt | | | - | | | | - | | | | 4,972,546 | | | | - | | | | - | | | | - | | | | 4,972,546 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for property acquisitions | | | 137,500,000 | | | | 137,500 | | | | 35,637,500 | | | | - | | | | - | | | | - | | | | 35,775,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidation of Maricunga, non-controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | 25,496,000 | | | | 25,496,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock and warrants offered to POSCO, less offering costs of $685,944 | | | 38,095,300 | | | | 38,095 | | | | 3,495,996 | | | | - | | | | - | | | | - | | | | 3,534,091 | |
Exercise of $0.05 per share D Warrants for cash | | | 4,200,000 | | | | 4,200 | | | | 205,800 | | | | - | | | | - | | | | - | | | | 210,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity impact of derivative liability warrants and debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of D warrants reclassified from derivative liability to equity upon exercise | | | - | | | | - | | | | 590,462 | | | | - | | | | - | | | | - | | | | 590,462 | |
Beneficial conversion of convertible debt waiver agreement | | | - | | | | - | | | | 330,019 | | | | - | | | | - | | | | - | | | | 330,019 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of stock-based compensation | | | - | | | | - | | | | 514,380 | | | | - | | | | - | | | | - | | | | 514,380 | |
Stock issued to MIZ, a related party, pursuant to vesting of restricted stock units | | | 300,000 | | | | 300 | | | | (300 | ) | | | - | | | | - | | | | - | | | | - | |
Stock issued for services | | | 1,273,333 | | | | 1,274 | | | | 133,926 | | | | - | | | | - | | | | - | | | | 135,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | 83,563 | | | | - | | | | - | | | | 83,563 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (2,312,071 | ) | | | (2,375,407 | ) | | | (4,687,478 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2012 | | | 323,782,553 | | | | 323,783 | | | | 63,578,079 | | | | 83,563 | | | | (37,773,845 | ) | | | 23,120,593 | | | | 49,332,173 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued for cash: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock and warrants issued to POSCAN, less offering costs totaling $500,000 | | | 62,499,938 | | | | 62,500 | | | | 4,959,476 | | | | - | | | | - | | | | - | | | | 5,021,976 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortization of stock-based compensation | | | - | | | | - | | | | 311,427 | | | | - | | | | - | | | | - | | | | 311,427 | |
Modification of stock options and stock issued for services | | | 2,336,319 | | | | 2,336 | | | | 43,814 | | | | - | | | | - | | | | - | | | | 46,150 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued to settle liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock issued to settle accrued director's fees and salaries and bonus | | | 5,422,776 | | | | 5,423 | | | | 363,326 | | | | - | | | | - | | | | - | | | | 368,749 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common stock subject to rescission | | | - | | | | - | | | | (3,041 | ) | | | - | | | | - | | | | - | | | | (3,041 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | (83,563 | ) | | | - | | | | - | | | | (83,563 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | - | | | | - | | | | - | | | | - | | | | 1,991,482 | | | | (187,898 | ) | | | 1,803,584 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2013 | | | 394,041,586 | | | $ | 394,042 | | | $ | 69,253,081 | | | $ | - | | | $ | (35,782,363 | ) | | $ | 22,932,695 | | | $ | 56,797,455 | |
See accompanying notes to unaudited consolidated financial statements.
LI3 ENERGY, INC.
(An Exploration Stage Company)
Consolidated Statements of Cash Flow
(Unaudited)
| | | | | | | | June 24, 2005 | |
| | Nine Months | | | Nine Months | | | (Inception) | |
| | Ended | | | Ended | | | through | |
| | March 31, | | | March 31, | | | March 31, | |
| | 2013 | | | 2012 | | | 2013 | |
Cash flows from operating activities | | | | | | | | | | | | |
Net income (loss) | | $ | 1,803,584 | | | $ | (4,448,140 | ) | | $ | (38,345,668 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 31,113 | | | | 15,579 | | | | 102,173 | |
Loss on write off of fixed assets | | | 6,556 | | | | - | | | | 6,556 | |
Mineral rights impairment expense | | | - | | | | - | | | | 9,138,785 | |
Loss on settlements, net | | | 5,816 | | | | - | | | | 1,503,316 | |
Stock-based compensation | | | 867,908 | | | | 497,437 | | | | 5,325,955 | |
Loss on debt extinguishment | | | 37,235 | | | | 841,752 | | | | 878,987 | |
Change in fair value of derivative liabilities - warrants | | | (6,453,869 | ) | | | (7,837,564 | ) | | | (4,894,517 | ) |
Warrant modification expense | | | 171,150 | | | | - | | | | 1,239,470 | |
Zero coupon interest accretion and amortization of debt | | | | | | | | | | | | |
discount on convertible notes | | | 102.297 | | | | 827,226 | | | | 1,470,120 | |
Amortization of deferred financing costs | | | - | | | | 36,875 | | | | 66,375 | |
Gain on foreign currency transactions | | | (19,723 | ) | | | (33,395 | ) | | | (30,088 | ) |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Increase (decrease) in prepaid expenses and advances | | | (91,088 | ) | | | 34,000 | | | | (99,602 | ) |
Increase in other assets | | | (533 | ) | | | (10,873 | ) | | | (11,183 | ) |
Increase (decrease) in accounts payable | | | (2,071,726 | ) | | | 1,202,814 | | | | 268,712 | |
Increase (decrease) in accounts payable - related parties | | | (97,913 | ) | | | (52,227 | ) | | | 6,827 | |
Increase (decrease) in accrued expenses | | | (197,489 | ) | | | 682,819 | | | | 1,377,756 | |
Increase in accrued registration rights penalties | | | - | | | | - | | | | 518,243 | |
Net cash used in operating activities | | | (5,906,682 | ) | | | (8,243,697 | ) | | | (21,477,783 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities | | | | | | | | | | | | |
Acquisition of mineral rights | | | - | | | | - | | | | (7,968,785 | ) |
Deposit on mineral properties | | | - | | | | (250,000 | ) | | | - | |
Acquisition of equipment | | | - | | | | (214,097 | ) | | | (236,280 | ) |
Payments for leasehold improvements | | | - | | | | - | | | | (10,000 | ) |
Net cash used in investing activities | | | - | | | | (464,097 | ) | | | (8,215,065 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities | | | | | | | | | | | | |
Proceeds from zero coupon convertible debt offering | | | - | | | | - | | | | 1,500,000 | |
Payment of deferred financing costs | | | - | | | | - | | | | (75,000 | ) |
Payment of arranger fee for convertible debt | | | (37,600 | ) | | | (30,000 | ) | | | (67,600 | ) |
Proceeds from notes payable | | | - | | | | 300,000 | | | | 1,245,000 | |
Payments on notes payable | | | (1,150,000 | ) | | | - | | | | (1,150,000 | ) |
Proceeds from issuance of common stock, net | | | 9,499,990 | | | | 7,314,069 | | | | 28,946,707 | |
Proceeds from exercise of warrants | | | - | | | | 210,000 | | | | 1,643,575 | |
Net cash provided by financing activities | | | 8,312,390 | | | | 7,794,069 | | | | 32,042,682 | |
| | | | | | | | | | | | |
Effect of exchange rate changes on cash | | | (83,563 | ) | | | - | | | | - | |
| | | | | | | | | | | | |
Net increase (decrease) in cash | | | 2,322,145 | | | | (913,725 | ) | | | 2,349,834 | |
| | | | | | | | | | | | |
Cash at beginning of the period | | | 27,689 | | | | 952,401 | | | | - | |
| | | | | | | | | | | | |
Cash at end of the period | | $ | 2,349,834 | | | $ | 38,676 | | | $ | 2,349,834 | |
| | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid during the period for: | | | | | | | | | | | | |
Income taxes | | $ | - | | | $ | - | | | $ | - | |
Interest | | $ | 280,953 | | | $ | - | | | $ | 286,745 | |
Non-cash financing transactions: | | | | | | | | | | | | |
Fair value of derivative warrant instruments issued in private offerings | | $ | 4,478,014 | | | $ | 3,779,978 | | | $ | 13,352,518 | |
Reclassification of warrant liabilities to additional paid-in capital for warrant exercises | | $ | - | | | $ | 590,462 | | | $ | 5,195,008 | |
Warrants issued for services | | $ | - | | | $ | - | | | $ | 157,010 | |
Warrants issued for offering costs | | $ | 162,350 | | | $ | - | | | $ | 220,100 | |
Debt discount due to beneficial conversion feature | | $ | - | | | $ | 330,019 | | | $ | 698,019 | |
Debt discount due to warrant derivative liabilities issued with convertible debt | | $ | - | | | $ | - | | | $ | 1,132,000 | |
Settlement of accrued interest through modification of debt | | $ | 105,742 | | | $ | - | | | $ | 105,742 | |
Settlement of accrued liabilities through issuance of stock | | $ | 368,749 | | | $ | - | | | $ | 368,749 | |
Issuance of common stock for acquisition of mineral rights | | $ | - | | | $ | - | | | $ | 39,415,000 | |
Consolidation of non-controlling interest of the Maricunga Companies | | $ | - | | | $ | - | | | $ | 25,496,000 | |
Common stock cancelled | | $ | - | | | $ | - | | | $ | 71,052 | |
Common stock subject to rescission | | $ | 3,041 | | | $ | - | | | $ | 3,041 | |
See accompanying notes to unaudited consolidated financial statements.
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. In 2009, the Company established 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.
Part of our strategic plan is to explore and develop our existing projects as well as to identify other synergistic opportunities with new projects with production potential that could also be advanced in an accelerated manner, with the goal of becoming a company with valuable lithium, potassium, nitrates and other industrial minerals properties.
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 ended June 30, 2012, as reported in Form 10-K, have been omitted.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, Li3 Peru, Alfredo, PRMC, Noto, and Minera Li, which holds the six majority owned subsidiaries consisting of the Maricunga Companies. All intercompany amounts have been eliminated in consolidation.
b. 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.
c. 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.
d. 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 no cash equivalents at March 31, 2013 and June 30, 2012, respectively. The Company has not experienced any losses on its deposits of cash and cash equivalents.
e. 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. During the nine months ended March 31, 2013 and 2012, no impairment charges were recorded by the Company.
f. Impairment of Long-lived Assets
Long-lived assets, including mineral rights, are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable. We account for asset impairment in accordance with ASC 360, Property Plant and Equipment . Long-lived assets such as property, plant and equipment, mineral properties and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is considered to exist if the total estimated future cash flow on an undiscounted basis is less than the carrying amount of the related assets. An impairment loss is measured and recorded based on the discounted estimated future cash flows.
g. Foreign Currency
The Company has determined that the functional currency of the parent company and each of its foreign subsidiaries is U.S. Dollars.
Foreign currency transaction gains and losses are included in the statement of operations as other income (expense).
h. 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.
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.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any uncertain income tax positions or accrued interest or penalties included in our consolidated balance sheets at March 31, 2013 or June 30, 2012, and did not recognize any interest and/or penalties in its consolidated statements of operations during the nine months ended March 31, 2013 or 2012.
i. Non-Controlling Interests
The Company is required to report its non-controlling interests as a separate component of stockholders’ equity. The Company is also required to present the consolidated net income and the portion of the consolidated net income allocable to the non-controlling interests and to the stockholders of the Company separately in its consolidated statements of operations. Losses applicable to the non-controlling interests are allocated to the non-controlling interests even when those losses are in excess of the non-controlling interests’ investment basis. During the nine months ended March 31, 2013 and 2012, the Company recorded a net loss allocable to non-controlling interests of $187,898 and $2,043,413, respectively.
j. Earnings per Share
Basic net earnings per share amounts are computed by dividing the net income available to Li3 Energy, Inc. shareholders 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 of diluted earnings per share as the effect would be anti-dilutive.
k. Subsequent Events
The Company evaluated all material subsequent events from March 31, 2013 through the date of the issuance of these consolidated financial statements for disclosure consideration.
l. 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.
m. Reclassifications
Certain reclassifications have been made to the prior period financial statements to conform with the current period presentation.
NOTE 3. GOING CONCERN
As of March 31, 2013, the Company had no source of current revenue, a cash balance on hand of $2,349,834, negative working capital of $1,240,015 and cumulative negative cash flows from operations of $21,477,783 during the period from June 24, 2005 (inception) through March 31, 2013. The Company had negative cash flows from operations of $5,906,682 during the nine months ended March 31, 2013. On August 17, 2012, the Company received $9,499,990 in net funding from POSCO Canada Ltd. (“POSCAN”). On April 16, 2013, the Company made a $2,000,000 initial cash payment to acquire additional property in the Maricunga Salar. After such payment, the Company´s cash balance was approximately $100,000.
The Company does not believe its cash on hand is sufficient to maintain its basic operations, which do not include future exploration and acquisition activities, for 12 months. The Company requires immediate cash flow for which it is seeking interim funding.
In the course of its exploration 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 future 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. Further, the development and exploitation of the properties in which the Company has mineral interests requires permits, our efforts to obtain which are at various stages. Lithium resources in our principal project, Maricunga, are designated as a national resource and cannot be mined and sold unless the government of Chile issues a special permit, which may not occur or could require payments in excess of the Company’s available funds, or could be subject to competitive bidding. In September 2012, the Company was an unsuccessful bidder for a lithium mining permit in Chile. In November 2012, the Chilean Government invalidated the auction process and the lithium mining permit was not awarded. The Company cannot predict if and when it might be able to obtain a permit for lithium exploitation. The Company has alternative mineral exploitation opportunities for its Maricunga properties and is currently pursuing a business plan to exploit minerals that do not require special mining permits including the acquisition of an additional property located in the Maricunga Salar which does not require a special permit for the production of lithium.
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 these uncertainties.
NOTE 4. MINERAL RIGHTS
Mineral rights as of March 31, 2013 and June 30, 2012 consist of the Maricunga property.
The Maricunga property consists solely of undeveloped mineral rights. On May 20, 2011, the Company acquired 60% of the Maricunga Companies, which in the aggregate, held the mineral rights to the Maricunga property for a 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 also recorded an additional $25,496,000 to reflect the non-controlling interest for the 40% of the Maricunga Companies that were not acquired.
Matters Related to Non-controlling Interests
The Company 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.
On December 27, 2012 the Company filed a registration statement with the SEC requesting to register a total of 127,500,000 shares. On January 24, 2013, such registration statement was declared effective by the SEC. The total of 127,500,000 shares are registered.
The Company has incurred exploration expenses with respect to the Maricunga property of $6,408,263 to date. Future development expenditures are forecasted to be at least $100 - $200 million. The minority shareholders have not made payments to the Company for their respective shares of the exploration expenses incurred to date. As a result, all the expenses incurred by the Maricunga Companies during the nine months ended March 31, 2013 were funded by the Company. The Company recorded 40% of the expenses incurred by the Maricunga Companies to the non-controlling interest, or $187,898 and $2,043,413 respectively for the nine months ended March 31, 2013 and 2012. The total exploration expenses recorded to non-controlling interest since May 2011 is $2,563,305.
As the majority shareholder, we have filed lawsuits distributed to four civil courts of Copiapo, third Region of Atacama, Chile, against the minority shareholders seeking either payment of their pro rata portion of costs or an auction of their share of the properties. The minority shareholders have not paid their required contributions to the costs of conservation and exploration , which were agreed upon at the shareholders’ meeting on October 6, 2011. In December 2012, we received a favorable decision from one of the civil courts to auction approximately 4% of the shares once the judgment is executed. This is being opposed by the shareholders, and we are awaiting the court’s decision after which the second court of Copiapo should set a date and time for the auction. Evidence is currently being presented in the lawsuits in the other civil courts, after which a final decision should be issued.
Certain minority shareholders have filed counter claims against us, in two civil courts of Santiago, to declare, among other things, the invalidation of such shareholders’ meeting at which required contributions were established that such minority shareholders failed to make. In one of the courts, the process is on hold because the minority shareholders have not filed a new claim, as requested by the court. In the other court, we have filed our defense claiming that the lawsuits should be dismissed on the basis that the decision made in the shareholders´meeting on October 6, 2011 was made in accordance with Chilean law, and that the amounts are necessary for the conservation and exploration of the mining property. This lawsuit is still in the discovery stage.
The Company has determined that neither the minority shareholders’ default nor the proposed auction are (or will be) triggering events that would require the Company to test the long-lived assets for recoverability.
Matters Related to Exploitation Permits
In 2012, the Chilean Government’s Ministry of Mining established its first ever auction for the award of lithium production quotas and licenses (Special Lithium Operations Contracts, or CEOLs), which would permit the exploitation of an aggregate of 100,000 tons of lithium metal (approximately 530,000 tons of lithium carbonate equivalent) over a 20 year period, subject to a 7% royalty.
In September 2012, the Company formed a consortium consisting of the Company, POSCO, Daewoo International Corp. and Mitsui & Co. (the “Consortium”) for the purpose of participating in such CEOL auction. As required under the rules established by the Ministry of Mining, the Consortium submitted its bid for the CEOLs, and in September, 2012, the Company was informed that the Consortium’s bid was not the winning bid.
The Chilean government has since decided to invalidate the CEOL process due to an administrative error, as well as rescinding the CEOL Basis, which defined the regulations of the CEOL process. The Company submitted two appeals to the Chilean government requesting it to reconsider the invalidation and award the CEOL to the second highest bidder - the Consortium. The appeals have been rejected by the Chilean government.
On January 16, 2013, we submitted a letter to the Chilean Comptroller requesting to review the CEOL process. The Company is waiting for an answer.
Currently, the Company does not have a permit to exploit lithium from the Maricunga properties. Accordingly, the Company evaluated the recoverability of the investment in the Maricunga properties in accordance with ASC 360, Property Plant and Equipment assuming it is not able to exploit its lithium resources. The Company can exploit alternative minerals, like potassium, on its Maricunga properties that do not require special permits and are exploitable via regular mining concessions according to the Chilean Mining Code. Based on that assumption, the Company determined that the total estimated future cash flows on an undiscounted basis of the Maricunga properties exceeds its carrying value and, accordingly, no impairment loss was required.
We are exploring other strategies that could enable us to obtain rights to exploit lithium in Chile, whether from our flagship Maricunga project or otherwise. Additionally, we are evaluating the Maricunga project as a potential producer of potash, which combined with a nitrate resource, could be processed to produce potassium nitrate. However, there can be no assurances that we will be able to do so in the near future, on favorable terms, or at all.The majority of the past and current technical work performed on the project is applicable to the production of lithium and/or potassium.
In March 2013, the Company obtained approval of the Environmental Impact Declaration for its Maricunga project from the Chilean Environmental Authority. The Company is currently in discussions with consultants regarding the next steps to be taken in order to allow on-site work to continue in October 2013, after the winter season.
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.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
| | March 31, 2013 | | | June 30, 2012 | |
Leasehold improvement and office equipment | | $ | 56,675 | | | $ | 73,761 | |
Field equipment | | | 168,277 | | | | 168,277 | |
Less: Accumulated depreciation | | | (87,401 | ) | | | (66,818 | ) |
Net property and equipment | | $ | 137,551 | | | $ | 175,220 | |
Depreciation expense for the nine months ended March 31, 2013 and 2012 was $31,113, and $15,579, respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
POSCAN
On September 14, 2011 and August 17, 2012, POSCAN, a greater than 5% shareholder and a wholly owned subsidiary of POSCO (a Korean company), purchased a combined 100,595,238 shares of the Company’s common stock. See Note 10.
MIZ Comercializadora, S de R.L.
The Company was party to a services agreement (“Services Agreement”) between MIZ Comercializadora, S de R.L. (“MIZ”) and the Company in which Tom Currin (a beneficial owner of MIZ) served as Chief Operating Officer of the Company. Pursuant to the Services Agreement, the Company granted to MIZ an award under the 2009 Plan pursuant to which the Company shall issue 2,500,000 restricted shares of its common stock (the “Restricted Stock”) upon the achievement of certain milestones. Additionally, pursuant to the Services Agreement, the Company granted 1,000,000 stock options to MIZ which were to vest over three years.
On December 5, 2012, MIZ and the Company terminated its Services Agreement. In connection with the termination of the Services Agreement, all of the Restricted Stock was deemed fully vested and issued to MIZ (of which 1,700,000 shares were previously held in escrow, and 800,000 shares had previously been issued to MIZ). The Company recorded stock based compensation expense of $183,360 and $208,071 in connection with the Restricted Stock during the nine months ended March 31, 2013 and 2012, respectively.
On November 30, 2012, the Company reduced the exercise prices of 333,333 options from $0.38 to $0.13 per share and the exercise price of 666,667 options were reduced from $0.38 to $0.21 per share. On February 15, 2013, the Company further modified the exercise price of the total 1,000,000 stock options granted to MIZ to $0.16 per share. The Company recorded $18,747 of stock compensation expense in connection with the modifications of exercise price as the incremental difference between the fair value of the stock options immediately before and after each modification, consisting of $16,682 in relation to the November modification and $2,065 in relation to the February modification.
In February 2013, the Company entered into a stock settlement agreement with MIZ with respect to $20,700 of obligations that were outstanding at December 31, 2012, and agreed to issue 306,667 shares of the Company´s common stock for $20,547 pursuant thereto, with the balance of $153 to be settled in cash. An accrual of $20,547 has been recorded in stock compensation expense during the nine months ended March 31, 2013 in connection with this agreement. These shares have not been issued as of March 31, 2013, and are reflected as common stock payable on the accompanying balance sheet at March 31, 2013.
The Company incurred $67,670 (including $18,747 of stock option modification expense) and $84,456 of stock-based compensation during the nine months ended March 31, 2013 and 2012, respectively, related to stock options granted to MIZ. See Note 10. As of March 31, 2013, all of the stock options granted to MIZ are fully vested and exercisable.
On December 5, 2012, the Company entered into a Consulting Services Agreement with MIZ in which Mr. Currin is to provide consulting services to the Company. Pursuant to the agreement, the Company pays MIZ $5,000 per month for up to four days of work with additional fees of $2,000 per day to be paid for additional days worked. The agreement will terminate on December 5, 2013 or in the event either party causes a material breach of the agreement.
MIZ was paid $188,750 and $266,667 for cash compensation during the nine months ended March 31, 2013 and March 31, 2012. MIZ was owed $0 and $20,234 as of March 31, 2013 and June 30, 2012, respectively, for cash compensation. MIZ was owed $20,547 for common stock payable at March 31, 2013.
R&M Global Advisors
The Company was party to a services agreement (the “R&M 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) served as interim Chief Financial Officer of the Company. On June 30, 2012, R&M Global Advisors and the Company mutually agreed to terminate Eric Marin’s services as the Company’s Interim Chief Financial Officer at the close of business on June 30, 2012.
R&M Global Advisors was paid $85,359 for the nine months ended March 31, 2013, of which $81,300 was included in accounts payable as of June 30, 2012, and $118,159 in cash for compensation during the nine months ended March 31, 2012. No amounts were due to R&M Global Advisors as of March 31, 2013.
NOTE 7. NOTES PAYABLE
On March 23, 2012, the Company entered into a $300,000 unsecured promissory note with a third party. On September 28, 2012, this note was amended and the maturity date was extended to November 2, 2012. On November 5, 2012, the Company paid 15%, (or $45,000), of the outstanding principal balance along with accrued interest totaling $49,925 and the note was amended with the maturity date extended to December 5, 2012. The promissory note bore interest at 15% per annum and a penalty rate of 2% per annum. During December 2012, the note and related accrued interest were paid in full.
On April 2, 2012, the Company entered into a $100,000 unsecured promissory note with a third party. The promissory note bore interest at 15% per annum and a penalty rate of 2% per annum, and was originally due on April 30, 2012, at which time its maturity date was extended to May 31, 2012. During September 2012, the note and related accrued interest were paid in full.
On April 20, 2012, the Company entered into a $250,000 unsecured promissory note payable with a third party. A portion of this note amounting to $120,000 was paid in September 2012. On September 28, 2012, the note for the remaining amount due was amended and the maturity date was extended to November 2, 2012. On November 5, 2012, the Company paid 15%, (or $19,500), of the outstanding principal balance along with accrued interest totaling $21,634 and the note was amended with the maturity date extended to December 5, 2012. The promissory note bore interest at 15% per annum and a penalty rate of 2% per annum. During December 2012, the note and related accrued interest were paid in full.
On June 8, 2012, the Company entered into a $500,000 unsecured promissory note payable with a third party. The promissory note bore interest at 25% per annum after the maturity date, and was due on June 22, 2012. During August 2012, the note and related accrued interest were paid in full.
On June 5, 2008, the Company issued a $50,000 unsecured promissory 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 at any time without penalty. The interest rate is 8% per annum and the maturity date was June 5, 2010. The total interest accrued as of March 31, 2013 and June 30, 2012 was $19,290 and $16,298, respectively. This note is in default as of March 31, 2013 and remains payable to Milestone. To date, no demand or communication has been received from Milestone.
On April 30, 2009, the Company issued an unsecured Convertible Promissory Note (the “Convertible Note”) to Milestone, bearing an interest rate of 8.25% per annum, in the amount of $45,000, due November 8, 2010. 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 March 31, 2013 and June 30, 2012 was $14,454 and $11,678, respectively. The Convertible Note is in default as of March 31, 2013 and remains payable to Milestone. To date, no demand or communication has been received from 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 are 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 was $1,677,438. The Company may prepay the notes at its option (together with accrued original issue discount), and must 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.
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”). 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 reduced the conversion price of the 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 (“arranger fee”) of $30,000.
On September 28, 2012, the Company entered into a Second Amendment and Waiver Agreement with the holders of the zero-coupon convertible notes (the “Second Waiver Agreement”). Pursuant to the Second Waiver Agreement, the zero-coupon convertible notes’ maturity date was extended to September 28, 2013, and the aggregate principal amount thereof was increased to $1,880,000, which includes an Original Issue Discount of 12.1%. The Waiver Agreement also reduced the conversion price of the zero-coupon bridge notes from $0.12 to $0.095 per share. In connection with the Waiver Agreement, the Company agreed to pay an arranger a cash fee (“arranger fee”) of $37,600.
In connection with the Second Waiver Agreement, the convertible debentures were analyzed for a beneficial conversion feature after the debt modification at which time it was concluded that no beneficial conversion feature existed. See detail summary below for carrying value of debt as of March 31, 2013.
Post-Modification Debt: | | | | |
Estimated fair value of debt after modification | | $ | 1,880,000 | |
Less: Original issue discount | | | (202,926 | ) |
Carrying value at September 28, 2012 (date of modification) | | | 1,677,074 | |
Amortization of debt discount | | | 102,297 | |
Carrying value at March 31, 2013 | | $ | 1,779,371 | |
Second Amendment and Waiver Agreement
The Company applied ASC 470-50-40/55 “Debtor’s Accounting for a Modification or Exchange of Debt Instrument” and concluded that the Second Amendment and Waiver Agreement dated September 28, 2012 constituted a debt extinguishment rather than debt modification because the change in the fair value of the embedded conversion features immediately before and after the modification exceeded 10% of the original loan balance. As a result, the Company recorded a loss on debt extinguishment of $37,235 during the nine months ended March 31, 2013, as summarized below:
Loss on Extinguishment: | | | | |
Estimated fair value of debt after modification | | $ | 1,880,000 | |
Arranger fee | | | 37,600 | |
Less: Original issue discount | | | (202,926 | ) |
Fair value of assets given | | | 1,714,674 | |
Less: Carrying value of pre-modification debt | | | (1,677,439 | ) |
Unamortized deferred financing costs | | | - | |
Loss on debt extinguishment | | $ | 37,235 | |
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 and the Arranger 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.
In conjunction with the closing of POSCAN’s second tranche of investment on August 17, 2012, the Company adjusted the exercise price of the warrants previously issued to POSCAN from $0.40 to $0.21 per share. The incremental value of the warrants before and after the modification was $171,150 and was reported as warrant modification expense.
On August 17, 2012, the Company closed on POSCAN’s second tranche of investment under the SPA (the “Second Closing”), selling 62,499,938 units to POSCAN for gross proceeds of $9,999,990, with each unit consisting of one share of common stock and a three-year warrant to purchase one share of common stock for $0.21 per share. Furthermore, the Additional Agreement provides that, subject to certain exceptions, the Company must issue additional shares of our common stock to POSCAN in the event that the Company issues or sells any such shares to third parties for a price of less than $0.16 per share at any time during the 18 months immediately following the Second Closing.
The Company has determined that these 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’ respective exercise prices 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 were recognized as derivative warrant instruments at issuance or when they become issuable and are measured at fair value at each reporting period. The Company determined the fair values of these warrants using a modified lattice valuation model.
Activity for derivative warrant instruments during the nine months ended March 31, 2013 was as follows:
| | | | | Initial valuation | | | | | | | | | | | | | |
| | | | | of derivative | | | | | | Increase | | | | | | | |
| | | | | liabilities upon | | | | | | (decrease) in | | | | | | | |
| | Balance at | | | issuance of new | | | | | | fair value of | | | Exercise | | | Balance at | |
| | June 30, | | | warrants during | | | Modification | | | derivative | | | of | | | March 31, | |
| | 2012 | | | the period | | | expense | | | liabilities | | | warrants | | | 2013 | |
2009 Unit Offering warrants | | $ | 872,212 | | | $ | - | | | $ | - | | | $ | (283,868 | ) | | $ | - | | | $ | 588,344 | |
First 2010 Unit Offering warrants | | | 1,640,644 | | | | - | | | | - | | | | (1,109,454 | ) | | | - | | | | 531,190 | |
Second 2010 Unit Offering warrants | | | 237,426 | | | | - | | | | - | | | | (144,920 | ) | | | - | | | | 92,506 | |
Third 2010 Unit Offering warrants | | | 512,341 | | | | - | | | | - | | | | (312,306 | ) | | | - | | | | 200,035 | |
Incentive warrants | | | 579,760 | | | | - | | | | - | | | | (364,660 | ) | | | - | | | | 215,100 | |
2011 Unit Offering warrants | | | 1,495,038 | | | | - | | | | - | | | | (1,170,908 | ) | | | - | | | | 324,130 | |
Lender warrants | | | 274,386 | | | | - | | | | - | | | | (194,373 | ) | | | - | | | | 80,013 | |
Warrants for advisory services and Arranger warrants | | | 83,210 | | | | - | | | | - | | | | (64,536 | ) | | | - | | | | 18,674 | |
POSCAN warrants | | | 1,958,911 | | | | 4,478,014 | | | | 171,150 | | | | (2,808,844 | ) | | | - | | | | 3,799,231 | |
| | $ | 7,653,928 | | | $ | 4,478,014 | | | $ | 171,150 | | | $ | (6,453,869 | ) | | $ | - | | | $ | 5,849,223 | |
Warrant Modification Expense
On August 17, 2012, the Company measured the modified warrants using a modified lattice valuation model. Below is the summary of the valuation:
Fair value of warrant on August 17, 2012 with exercise price $0.40 and stock price $0.069 | | $ | 1,091,513 | |
Fair value of warrant on August 18, 2012 with exercise price $0.21 and stock price $0.067 | | | 1,262,663 | |
Modification expense | | $ | 171,150 | |
Activity for derivative warrant instruments during the nine months ended March 31, 2012 was as follows:
| | | | | Initial valuation | | | | | | | | | | |
| | | | | of derivative | | | Increase | | | | | | | |
| | | | | liabilities upon | | | (decrease) in | | | | | | | |
| | Balance at | | | issuance of new | | | fair value of | | | | | | Balance at | |
| | June 30, | | | warrants during | | | derivative | | | Exercise of | | | March 31, | |
| | 2011 | | | the period | | | liabilities | | | Warrants | | | 2012 | |
2009 Unit Offering warrants | | $ | 3,854,119 | | | $ | - | | | $ | (1,886,141 | ) | | $ | - | | | $ | 1,967,978 | |
First 2010 Unit Offering warrants | | | 2,911,244 | | | | - | | | | (1,232,660 | ) | | | - | | | | 1,678,584 | |
Second 2010 Unit Offering warrants | | | 1,800,265 | | | | - | | | | (1,010,243 | ) | | | (590,462 | ) | | | 199,560 | |
Third 2010 Unit Offering warrants | | | 1,156,744 | | | | - | | | | (668,389 | ) | | | - | | | | 488,355 | |
Incentive warrants | | | 1,072,441 | | | | - | | | | (514,774 | ) | | | - | | | | 557,667 | |
2011 Unit Offering warrants | | | 3,736,897 | | | | - | | | | (1,914,928 | ) | | | - | | | | 1,821,969 | |
Lender warrants | | | 523,234 | | | | - | | | | (303,049 | ) | | | - | | | | 220,185 | |
Warrants for advisory services and Arranger warrants | | | 189,810 | | | | - | | | | (110,213 | ) | | | - | | | | 79,597 | |
POSCAN warrants | | | - | | | | 3,779,978 | | | | (197,167 | ) | | | - | | | | 3,582,811 | |
| | $ | 15,244,754 | | | $ | 3,779,978 | | | $ | (7,837,564 | ) | | $ | (590,462 | ) | | $ | 10,596,706 | |
During the nine months ended March 31, 2012, 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.
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 nine months ended March 31, 2013 and 2012, respectively, and as of March 31, 2013 and 2012, respectively:
| | Initial | | | Initial | | | | | | | |
| | Valuations - | | | Valuations - | | | Valuation as of | | | Valuation as of | |
| | March 31, | | | March 31, | | | March 31, | | | March 31, | |
| | 2013 | | | 2012 | | | 2013 | | | 2012 | |
Common stock issuable upon exercise of warrants | | | 62,499,938 | | | | 38,095,300 | | | | 155,395,482 | | | | 89,484,712 | |
Market value of common stock on measurement date (1) | | $ | 0.07 | | | $ | 0.145 | | | $ | 0.058 | | | $ | 0.100 | |
Adjusted exercise price | | $ | 0.21 | | | $ | 0.40 | | | $ | 0.05-$0.38 | | | $ | 0.05-$0.48 | |
Risk free interest rate (2) | | | 0.31 | % | | | 0.42 | % | | | 0.14%-0.36 | % | | | 0.36%-0.83 | % |
Warrant lives in years | | | 3.0 | | | | 3.0 | | | | 1.02-3.09 | | | | 2.1-4.0 | |
Expected volatility (3) | | | 182 | % | | | 205 | % | | | 139%-152 | % | | | 202%-230 | % |
Expected dividend yields (4) | | | None | | | | None | | | | None | | | | None | |
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) | | | 15%-31 | % | | | 10%-31 | % | | | 8%-24 | % | | | 10%-31 | % |
Offering price range (8) | | $ | 0.21-$0.45 | | | $ | 0.21-$0.45 | | | $ | 0.15-$0.45 | | | $ | 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 1, 2, 3 or 5 - year Treasury Bill as of the respective Offering or measurement date. |
| (3) | The historical trading volatility was determined by the Company’s trading history. |
| (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 five 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 8% 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
In September 2012, the Company entered into several stock settlement agreements with certain parties to whom the Company was obligated as of June 30, 2012 (“Receivable Holders”). The Company has entered into settlement agreements with respect to an aggregate of $390,336 of obligations (including $363,336 to officers, directors, and employees), and has issued an aggregate of 5,825,761 shares of the Company’s common stock pursuant thereto. Each settlement agreement that the Company has entered into to date has provided for the Company to issue one share of the Company’s common stock for every $0.067 of obligations released by the Receivable Holder. The stock price on the grant date of these shares was $0.068 therefore a loss on settlement of $5,816 was recorded in relation to these settlement agreements for the nine months ended March 31, 2013.
Common Stock Sales
July 1, 2012 through March 31, 2013
On August 17, 2012, the Company closed on POSCAN’s second tranche of investment (the “Second Closing”) under the Securities Purchase Agreement between the Company and POSCAN, dated as of August 24, 2011 (the “POSCAN SPA”), selling 62,499,938 units to POSCAN for gross proceeds of $9,999,990, with each unit consisting of one share of common stock and a three-year warrant to purchase one share of common stock for $0.21 per share (the “Additional Agreement”). Further, the Company also agreed to issue to POSCAN a two-year warrant to purchase 5,000,000 shares of our common stock at an exercise price of $0.15 per share, valued at $192,500. The Company analyzed the instruments for derivative accounting consideration and determined that derivative accounting does not apply to these warrants. The Company determined the fair value of these warrants on the grant date using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.07 per share, term of 2 years, expected volatility of 141%, and a discount rate of 0.29%.
The Company recorded proceeds from the common stock, the three-year warrants and the two-year warrants on a relative fair values basis. The fair values were allocated as follows:
Common stock | | $ | 4,829,476 | |
3-year warrant derivative liability | | | 4,478,014 | |
2-year warrant | | | 192,500 | |
| | $ | 9,499,990 | |
Furthermore, the Additional Agreement provides that, subject to certain exceptions, the Company must issue additional shares of our common stock to POSCAN in the event that the Company issues or sells any such shares to third parties for a price of less than $0.16 per share at any time during the 18 months immediately following the Second Closing (see Note 9).
During the nine months ended March 31, 2013, the Company entered into certain agreements and issued shares which may have triggered this provision. The Company is seeking clarification of this provision and, if necessary, a waiver of this provision for the following transactions:
| · | During September 2012, the Company entered into settlement agreements providing for the Company to issue one share of the Company’s common stock for every $0.067 of obligations released by the Receivable Holder. In the event the provision applies, and a waiver is not granted, the Company estimates it would be required to issue an additional 3,386,161 shares. As a result, the Company recorded stock-based compensation expense estimated at $230,259 during the nine months ended March 31, 2013. |
| · | On September 28, 2012, the Company entered into a Second Amendment and Waiver Agreement with the holders of the zero-coupon convertible notes (the “Second Waiver Agreement”), under which the conversion price of the zero-coupon bridge notes was modified from $0.12 to $0.095 per share. In the event the provision applies, and a waiver is not granted, the Company estimates it would be required to issue an additional 2,905,412 shares. As a result, the Company recorded stock-based compensation expense estimated at $232,433 during the nine months ended March 31, 2013. |
| · | In February 2013, the Company entered into a settlement agreement with MIZ providing for the Company to issue 306,667 shares of the Company´s common stock in settlement of $20,547 of obligations. In the event the provision applies, and a waiver is not granted, the Company estimates it would be required to issue an additional 178,250 shares. As a result, the Company recorded stock-based compensation expense estimated at $6,239 during the nine months ended March 31, 2013. |
On January 11, 2011, the Company engaged a consultant to provide advisory services to facilitate equity or debt fund raising for the Company. In connection with the closing of POSCAN’s second tranche of investment on August 17, 2012, the Company paid 5% of the gross proceeds of $9,999,990, or $500,000, which has been recorded as offering costs for the nine months ended March 31, 2013.
In addition, the Company has agreed to provide the consultant a five-year warrant to purchase 2,380,950 shares of our common stock at an exercise price of $0.21 per share. The Company analyzed the instruments for derivative accounting consideration and determined that derivative accounting does not apply to these warrants. The Company determined the fair value of these warrants on the grant date using the Black-Scholes option pricing model with the following assumptions: stock price on the measurement date of $0.07 per share, term of 5 years, expected volatility of 216%, and a discount rate of 0.81%.
The net proceeds from the closing of POSCAN’s second tranche of funding of $9,499,990 were allocated $5,021,976 to common stock and additional paid-in capital and $4,478,014 to derivative liabilities related to the warrants.
2009 Equity Incentive Plan
On October 19, 2009, stockholders holding shares representing approximately fifty-nine percent (59%) of the Company’s issued and outstanding common stock executed a written consent in lieu of a meeting and approved the creation of the 2009 Equity Incentive Plan (the “2009 Plan”). The 2009 Plan provides for the issuance of both non-statutory and incentive stock options and other awards to acquire, in the aggregate, up to 5,000,000 shares of the Company’s common stock.
Common Stock Subject to Rescission
Purchasers of 65,000 shares of common stock between January 20, 2013 and February 1, 2013 in open market transactions pursuant to a prospectus that was no longer effective may have rescission rights or claims for damages, depending on whether or not they still own such shares. Shares that are subject to rescission or redemption requirements that are outside of the control of the Company are classified outside of permanent equity until they are no longer subject to rescission or redemption. Accordingly, the Company has reclassified $3,041 as common stock subject to rescission.
Restricted Stock Units
On June 27, 2011, the Company granted its Chief Executive Officer an award of 700,000 restricted stock units 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 nine months ended March 31, 2013 and 2012, the Company recorded $32,897 and $92,046 of stock compensation in connection with this agreement. As of March 31, 2013, 466,667 shares of common stock have been issued in relation to the restricted stock units which vested on January 15, 2012 and January 15, 2013.
During December 2011, the Company entered into a one-year employment agreement with its new Vice President of Finance (now called the Chief Financial Officer, the “CFO”) which originally was to begin on January 1, 2012 (amended to March 1, 2012). Pursuant to the agreement, the CFO was granted 250,000 restricted stock units under its 2009 Plan which will vest over 3 years. The value of the issuable shares was determined based on the $0.13 closing price of the common stock on the measurement date, and totaled $34,500. The Company will record stock compensation expense for these restricted stock units over the 3 year service period which begins on March 1, 2012, of which the Company recorded expense of $10,456 and $965 during the nine months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, no shares of common stock have been issued in relation to the 83,334 restricted stock units which vested on March 1, 2013.
In May 2012, the Company committed to grant Restricted Stock Units with respect to an aggregate of 900,000 shares to members of its Board of Directors. Such restricted stock units shall vest over a period of three years starting from the later of July 1, 2011 and the initial date of the applicable director’s substantial involvement with the Board’s activities. However, the Company does not currently have enough shares authorized for issuance under the 2009 Plan to satisfy all of these obligations. The Company is analyzing the required steps to increase the number of shares under the plan. The Company recorded compensation expense related to these units of $15,560 during the nine months ended March 31, 2013.
On December 19, 2012, the Company committed to grant 100,000 restricted stock units to a new member of the Board of Directors. The restricted stock shall vest over a period of three years beginning on the director’s start date. The value of the issuable shares was determined based on the $0.05 closing price of the common stock on the measurement date, and totaled $5,000. The Company recorded compensation expense related to these units of $466 during the nine months ended March 31, 2013.
Stock Option Awards
Summary of stock option activity is presented in the table below:
| | | | | | | | Weighted-average | | | | |
| | | | | Weighted-average | | | Remaining | | | Aggregate | |
| | Number of | | | Exercise | | | Contractual | | | Intrinsic | |
| | Shares | | | Price | | | Term (years) | | | Value | |
Outstanding at June 30, 2012 | | | 1,450,000 | | | $ | 0.38 | | | | 6.79 | | | $ | - | |
Granted | | | - | | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | | | | - | |
Expired/Forfeited | | | - | | | | - | | | | - | | | | - | |
Outstanding at March 31, 2013 | | | 1,450,000 | | | $ | 0.22 | | | | 3.28 | | | $ | - | |
Exercisable at March 31, 2013 | | | 1,200,000 | | | $ | 0.19 | | | | 3.15 | | | $ | - | |
During the nine months ended March 31, 2013 and 2012, the Company recognized stock-based compensation expense of $68,687 and $93,655, respectively, related to stock options (of which $48,923 and $84,456 was related party for the nine months ended March 31, 2013 and 2012, respectively - See Note 6). As of March 31, 2013, there was approximately $8,984 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 0.42 years.
Warrants
Summary information regarding common stock warrants issued and outstanding at March 31, 2013, is as follows:
| | | | | Weighted-average | |
| | Exercise of | | | Exercise | |
| | Warrants | | | Price | |
Outstanding at June 30, 2012 | | | 89,284,712 | | | | 0.25 | |
Issued | | | 69,880,888 | | | | 0.20 | |
| | | | | | | | |
Additional shares issuable upon exercise of warrants as a result of adjustments pursuant to anti-dilution provisions | | | 3,610,832 | | | | n/a | |
Exercised | | | - | | | | - | |
Outstanding at March 31, 2013 | | | 162,776,432 | | | | 0.23 | |
Warrants outstanding as of March 31, 2013
| | | | | Outstanding | | | | | | Exercisable | |
| | Exercise | | | number | | | Remaining | | | number | |
Issuance Date | | price | | | of shares | | | life | | | of shares | |
November 10, 2009 - December 23, 2009 | | $ | 0.26 | | | | 7,198,584 | | | | 1.61 - 1.73 years | | | | 7,198,584 | |
November 10, 2009 - December 23, 2009 | | $ | 0.38 | | | | 7,269,374 | | | | 2.4 - 2.5 years | | | | 7,269,374 | |
June 9, 2010 - September 13, 2010 | | $ | 0.26 | | | | 11,729,615 | | | | 2.19 - 2.45 years | | | | 11,729,615 | |
June 9, 2010 - July 13, 2010 | | $ | 0.17 | | | | 646,645 | | | | 2.19 - 2.28 years | | | | 646,645 | |
November 8-15, 2010 | | $ | 0.05 | | | | 1,400,000 | | | | 2.61 years | | | | 1,400,000 | |
December 9, 2010 - March 24, 2011 | | $ | 0.15 | | | | 4,890,418 | | | | 2.69 - 2.90 years | | | | 4,890,418 | |
March 24, 2011 | | $ | 0.35 | | | | 5,416,953 | | | | 2.98 years | | | | 5,416,953 | |
April 7, 2011 | | $ | 0.29 | | | | 11,960,049 | | | | 1.14 years | | | | 11,960,049 | |
April 7, 2011 | | $ | 0.22 | | | | 1,913,606 | | | | 1.14 years | | | | 1,913,606 | |
May 2, 2011 | | $ | 0.43 | | | | 1,500,000 | | | | 3.09 years | | | | 1,500,000 | |
May 2, 2011 | | $ | 0.29 | | | | 75,000 | | | | 3.09 years | | | | 75,000 | |
June 27, 2011 | | $ | 0.29 | | | | 800,000 | | | | 1.02 years | | | | 800,000 | |
September 14, 2011 | | $ | 0.20 | | | | 38,095,300 | | | | 1.46 years | | | | 38,095,300 | |
August 17, 2012 | | $ | 0.20 | | | | 62,499,938 | | | | 2.38 years | | | | 62,499,938 | |
August 17, 2012 | | $ | 0.15 | | | | 5,000,000 | | | | 1.38 years | | | | 5,000,000 | |
August 17, 2012 | | $ | 0.21 | | | | 2,380,950 | | | | 4.38 years | | | | 2,380,950 | |
| | | | | | | 162,776,432 | | | | | | | | 162,776,432 | |
The intrinsic value of warrants outstanding at March 31, 2013 was $11,200.
NOTE 11. FAIR VALUE MEASUREMENTS
As defined in FASB ASC Topic No. 820 - 10, fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic No. 820 - 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The Company’s valuation models are primarily industry standard models. Level 3 instruments include derivative warrant instruments. The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.
As required by FASB ASC Topic No. 820 - 10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of the derivative warrant instruments was calculated using a modified lattice valuation model (See Note 9).
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 March 31, 2013:
| | Quoted Prices | | | | | | | | | | |
| | In Active | | | Significant | | | | | | Total | |
| | Markets for | | | Other | | | Significant | | | Carrying | |
| | Identical | | | Observable | | | Unobservable | | | Value as of | |
| | Assets | | | Inputs | | | Inputs | | | March 31, | |
Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | 2013 | |
| | | | | | | | | | | | | | | | |
Derivative liabilities - warrant instruments | | $ | - | | | $ | - | | | $ | 5,849,223 | | | $ | 5,849,223 | |
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, 2012:
| | Quoted prices | | | | | | | | | | |
| | in Active | | | Significant | | | | | | Total | |
| | Markets for | | | Other | | | Significant | | | Carrying | |
| | Identical | | | Observable | | | Unobservable | | | Value as of | |
| | Assets | | | Inputs | | | Inputs | | | June 30, | |
Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | 2012 | |
| | | | | | | | | | | | | | | | |
Derivative liabilities - warrant instruments | | $ | - | | | $ | - | | | $ | 7,653,928 | | | $ | 7,653,928 | |
The following table sets forth a reconciliation of changes in the fair value of financial liabilities classified as Level 3 in the fair value hierarchy:
| | Significant Unobservable Inputs (Level 3) | |
| | Nine months ended March 31, | |
| | 2013 | | | 2012 | |
Beginning balance as of June 30, | | $ | (7,653,928 | ) | | $ | (15,244,754 | ) |
Change in fair value | | | 243,205 | | | | 6,948,644 | |
Additions | | | (4,478,014 | ) | | | (3,779,978 | ) |
Warrant modification | | | (171,150 | ) | | | - | |
Exercise of warrants | | | - | | | | 561,965 | |
Ending balance as of September 30, | | $ | (12,059,887 | ) | | $ | (11,514,123 | ) |
Change in fair value | | | 5,997,501 | | | | 4,654,915 | |
Exercise of warrants | | | - | | | | 28,497 | |
Ending balance as of December 31, | | $ | (6,062,386 | ) | | $ | (6,830,711 | ) |
Change in fair value | | | 213,163 | | | | (3,765,995 | ) |
Additions | | | - | | | | - | |
Warrant modification | | | - | | | | - | |
Exercise of warrants | | | - | | | | - | |
Ending balance as of March 31, | | $ | (5,849,223 | ) | | $ | (10,596,706 | ) |
| | | | | | | | |
Change in unrealized gains (loss) included in earnings for the three months ended March 31, 2013 and 2012 | | | 213,163 | | | | (3,765,995 | ) |
Change in unrealized gains included in earnings for the nine months ended March 31, 2013 and 2012 | | $ | 6,453,869 | | | $ | 7,837,564 | |
During the nine months ended March 31, 2013 and 2012, the Company recorded a realized loss of $-0- and $590,462, respectively, on the settlement of a portion of the warrant derivative liability due to the exercise of certain warrants, which is included in the change in the fair value of warrant derivative liability in the consolidated income statements.
NOTE 12. EARNINGS PER SHARE
Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS for the three months and nine months ended March 31, 2013 and 2012:
| | Three months ended March 31, 2013 | | | Three months ended March 31, 2012 | |
| | Net | | | | | | Per Share | | | Net | | | | | | Per Share | |
| | Loss | | | Shares | | | Amount | | | Loss | | | Shares | | | Amount | |
Basic EPS | | $ | (1,183,769 | ) | | | 394,002,697 | | | $ | (0.00 | ) | | $ | (7,444,968 | ) | | | 322,583,762 | | | $ | (0.02 | ) |
Dilutive effect of convertible debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Dilutive effect of warrants calculated using the treasury stock method | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Dilutive effect of restricted stock and restricted stock units | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Diluted EPS | | $ | (1,183,769 | ) | | | 394,002,697 | | | $ | (0.00 | ) | | $ | (7,444,968 | ) | | | 322,583,762 | | | $ | (0.02 | ) |
| | Nine months ended March 31, 2013 | | | Nine months ended March 31, 2012 | |
| | Net | | | | | | Per Share | | | Net | | | | | | Per Share | |
| | Income | | | Shares | | | Amount | | | Loss | | | Shares | | | Amount | |
Basic EPS | | $ | 1,991,482 | | | | 380,373,535 | | | $ | 0.01 | | | $ | (2,404,727 | ) | | | 310,810,095 | | | $ | (0.01 | ) |
Dilutive effect of convertible debt | | | 100,001 | | | | 14,859,842 | | | | - | | | | - | | | | - | | | | - | |
Dilutive effect of warrants calculated using the treasury stock method | | | (21,201 | ) | | | 204,814 | | | | - | | | | - | | | | - | | | | - | |
Dilutive effect of restricted stock and restricted stock units | | | - | | | | 402,975 | | | | - | | | | - | | | | - | | | | - | |
Diluted EPS | | $ | 2,070,282 | | | | 395,841,166 | | | $ | 0.01 | | | $ | (2,404,727 | ) | | | 310,810,095 | | | $ | (0.01 | ) |
The following table sets forth the schedule of anti-dilutive securities excluded from the computation of diluted income per share:
| | Three months ended | |
| | March 31, 2013 | | | March 31, 2012 | |
Stock options | | | 1,450,000 | | | | 600,000 | |
Stock warrants | | | 162,776,432 | | | | 89,284,712 | |
Convertible debt | | | - | | | | 13,461,233 | |
| | Nine months ended | |
| | March 31, 2013 | | | March 31, 2012 | |
Stock options | | | 1,450,000 | | | | 600,000 | |
Stock warrants | | | 161,376,432 | | | | 89,284,712 | |
Convertible debt | | | - | | | | 13,461,233 | |
NOTE 13. 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 the Company 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 the Company’s properties at economically viable costs.
In Chile, lithium is not exploitable via traditional 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.
The Chilean Government’s Ministry of Mining established its first ever auction for the award of a lithium production quotas and licenses (Special Lithium Operations Contracts, or CEOLs) which would permit the exploitation of an aggregate of 100,000 tons of lithium metal (approximately 530,000 tons of lithium carbonate equivalent) over a 20 year period, subject to a seven percent royalty. In September 2012, the Company formed a consortium consisting of the Company, POSCO, Daewoo International Corp, and Mitsui & Co. (the “Consortium”) for the purpose of participating in such CEOL auction. As required under the rules established by the Ministry of Mining, the Consortium submitted its bid for the CEOLs, and in September, 2012, the Company was informed that the Consortium’s bid was not the winning bid.
The Chilean government has since decided to invalidate the CEOL process due to an administrative error, as well as rescinding the CEOL Basis, which defined the regulations of the CEOL process. The Company submitted two appeals to the Chilean government requesting it to reconsider the invalidation and award the CEOL to the second highest bidder - the Consortium. The appeals have been rejected by the Chilean government.
On January 16, 2013, we submitted a letter to the Chilean Comptroller requesting to review the CEOL process. The Company is waiting for an answer.
The Company is exploring other strategies that could enable the Company to obtain rights to exploit lithium in Chile, whether from our Maricunga project or otherwise. Additionally, the Company is evaluating the Maricunga project as a potential producer of potash and potassium nitrate. The majority of the past and current technical work performed on the project is applicable to the production of lithium and/or potassium. Potassium exploitation does not require special permits and is exploitable via regular mining concessions, according to the Chilean Mining Code. However, there can be no assurances that the Company will be able to do so in the near future, on favorable terms, or at all.
The Company believes that it is in compliance with all material laws and regulations that currently apply to its activities, but there can be no assurance that the Company can continue to remain in compliance. Current laws and regulations could be amended and the Company might not be able to comply with them, as amended. Further, there can be no assurance that the Company will be able to obtain or maintain all permits necessary for our future operations, or that the Company will be able to obtain them on reasonable terms. To the extent such approvals are required and are not obtained, the Company may be delayed or prohibited from proceeding with planned exploration or development of its mineral properties.
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, the Company 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 its best efforts to cause such registration statement to become effective within 150 days after the filing date, all at the Company’s own expense. Pursuant to the registration rights agreement, in the event the Company does not meet these deadlines, the Company has 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 March 31, 2013. The Company was required to cause the registration statement to become effective by November 28, 2011, however the registration statement was not effective until March 19, 2012, and the Company increased the monetary penalties accrual to $518,243, (plus accrued interest of $111,401, included in accrued expenses, which is calculated at 18% per annum for registration rights penalties considered past due), and the penalty has not yet been paid as of March 31, 2013. 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. No demands have been made with respect to the registration rights penalties.
Gain Contingency
As of March 31, 2013, the Company did not capitalize any Chilean value-added taxes (“VAT”) amounting to $784,360 arising from various purchases of goods and services in Chile. The Company expensed $14,207 during the nine months ended March 31, 2013 due to uncertainty of recoverability and these amounts are included in general and administrative expenses on the consolidated statement of operations. Under Chilean regulation, this VAT is recoverable from future VAT payable.
Operating Leases
Rental expense for office operating leases was $71,179 and $97,540 during the nine months ended March 31, 2013 and 2012, respectively. Future minimum rental commitments under long-term non-cancellable facilities operating leases in place as of March 31, 2013 are as follows:
Period ending March 31, | | Amount | |
2014 | | | 47,200 | |
2015 | | | 7,200 | |
Total minimum lease payments | | $ | 54,400 | |
In January 2013, the Company cancelled its lease on office space in Lima, Peru which was due to expire in February, 2015, and commenced a one-year lease on reduced office space.
NOTE 14. SUBSEQUENT EVENTS
On April 16, 2013, the Company entered into a purchase agreement (the “Purchase Agreement”) with Jose Resk Nara and Carlos Alfonso Iribarren (the “Sellers”) to purchase all of the outstanding shares of SLM Cocina Diecinueve de la Hoyada de Maricunga, a Chilean based company (“SLM”), which will become a wholly owned subsidiary of the Company. SLM owns the group of mining concessions “Cocina 19 through 27” (the “Properties”). Pursuant to the Purchase Agreement, the Company paid the Sellers $7.3 million, of which $2.0 million was paid on the Closing Date, $2.0 million to be paid 90 days following the Closing Date, $1.8 million to be paid 180 days after the Closing Date and $100,000 to be paid annually on the anniversary of the Closing Date for fifteen years beginning in 2014.
The Properties are located within the northern section of Salar de Maricunga in Region III of Atacama in northern Chile. They are comprised of 450 hectares, increasing Li3’s land holdings within Maricunga to 1,888 hectares. The Properties adjoin the company´s existing Litio 1-6 properties and were constituted prior to the 1979 Lithium Exploitation Restrictions, meaning that there is no need to apply for a special permit in order to exploit the lithium on those concessions. The exploitation of these properties are not subject to obtaining a CEOL permit for the exploitation of lithium in Chile; however, the Acquisition does not provide the necessary permits to exploit lithium from the Company’s existing Maricunga property.
During April and May 2013, the Company issued the following common stock:
| · | 1,372,533 shares for the settlement of $91,960 relating to certain outstanding liabilities at March 31, 2013 |
| · | 83,334 shares with respect to the restricted stock units granted to the CFO which vested on March 1, 2013. |
IF YOU WOULD LIKE ADDITIONAL COPIES OF THIS OFFER TO PURCHASE OR IF YOU HAVE QUESTIONS ABOUT THE TRANSACTION, YOU SHOULD CONTACT BLUE WOLF BY TELEPHONE OR IN WRITING AT THE FOLLOWING ADDRESS:
Blue Wolf Mongolia Holdings Corp.
Suite 409, Central Tower
2 Sukhbaatar Square, Sukhbaatar District 8
Ulaanbaatar 14200, Mongolia
Tel: 976-7010-0248
The Depositary for the Offer is:
Continental Stock Transfer & Trust Company
Attn: Reorganization Dept.
17 Battery Place, 8th Floor
New York, NY 10004
By Facsimile (for Eligible Institutions only) (212) 616-7610 | | Confirm Receipt of Facsimile by Telephone: (917) 262-2378 |
Questions and requests for assistance regarding the Offer may be directed to Morrow & Co., LLC, our Information Agent for the Offer at the telephone numbers set forth below. You may also request additional copies of this Offer to Purchase, the Letter of Transmittal, and the other Offer documents from the Information Agent at the telephone numbers set forth below. You may also contact your broker, dealer, commercial bank, trust company or nominee for copies of these documents.
The Information Agent for the Offer is:
Morrow & Co., LLC
470 West Avenue, 3rd Floor
Stamford, CT 06902
Telephone: (800) 662-5200
Banks and brokerage firms: (203) 658-9400
mngl.info@morrowco.com
Offer to Purchase
May 21, 2013