RED METAL RESOURCES, LTD. - Quarter Report: 2014 April (Form 10-Q)

PART I-FINANCIAL INFORMATION

Item 1.  Financial Statements.

RED METAL RESOURCES LTD.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these unaudited interim consolidated financial statements

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RED METAL RESOURCES LTD.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

The accompanying notes are an integral part of these unaudited interim consolidated financial statements

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RED METAL RESOURCES LTD.

 (AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

FOR THE PERIOD FROM JANUARY 10, 2005 (INCEPTION) TO  APRIL 30, 2014

(unaudited)

The accompanying notes are an integral part of these unaudited interim consolidated financial statements

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RED METAL RESOURCES LTD.

 (AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

FOR THE PERIOD FROM JANUARY 10, 2005 (INCEPTION) TO  APRIL 30, 2014

(unaudited)

-continued-

The accompanying notes are an integral part of these unaudited interim consolidated financial statements

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RED METAL RESOURCES LTD.

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these unaudited interim consolidated financial statements

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RED METAL RESOURCES LTD.

(AN EXPLORATION STAGE COMPANY)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2014

(unaudited)

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

Nature of Operations

Red Metal Resources Ltd. (the “Company”) was incorporated on January 10, 2005, under the laws of the State of Nevada.  On August 21, 2007, the Company acquired a 99% interest in Minera Polymet Limitada (“Polymet”), a limited liability company formed on August 21, 2007, under the laws of the Republic of Chile. The Company is involved in acquiring and exploring mineral properties in Chile.  The Company has not determined whether its properties contain mineral reserves that are economically recoverable.  

Unaudited Interim Consolidated Financial Statements

The unaudited interim consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). They do not include all information and footnotes required by GAAP for complete financial statements. Except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended January 31, 2014, included in the Company’s Annual Report on Form 10-K, filed with the SEC. The interim unaudited financial statements should be read in conjunction with those financial statements included in Form 10-K. In the opinion of management, all adjustments considered necessary for fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three month period ended April 30, 2014 are not necessarily indicative of the results that may be expected for the year ending January 31, 2015.

Recent Accounting Pronouncements

The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. It does not expect the adoption of these pronouncements to have a material impact on its financial position, results of operations or cash flows.

NOTE 2 - RELATED-PARTY TRANSACTIONS

The following amounts were due to related parties as at:

(a) Amounts are unsecured, due on demand and bear no interest.

(b) Amounts are unsecured, due on demand and bear interest at 10%.

(c) Amounts are unsecured, due on demand and bear interest at 8%.

During the three months ended April 30, 2014, interest expense of $6,324 (2013 - $7,022) has been accrued.

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Transactions with Related Parties

During the three months ended April 30, 2014 and 2013, the Company incurred the following expenses with related parties:

These transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

NOTE 3 - UNPROVED MINERAL PROPERTIES

⁽¹⁾ The claim is subject to a 1.5% royalty on the net sales of minerals extracted from the property to a total of $600,000. The royalty payments are due monthly while the claim is being exploited, and are subject to minimum payments of $1,000 per month. The Company commenced exploitation of the claim on January 15, 2014 and as of April 30, 2014 paid $3,502 in royalty payments to the vendor.   

⁽²⁾ The claims are subject to a 1% royalty on the net sales of minerals extracted from the property to a total of $100,000. The royalty payments are due monthly once exploitation begins and are not subject to minimum payments. The Company has no obligation to pay the royalty if it does not commence exploitation.

⁽³⁾ See Perth Project discussion below.

Perth Project

On April 30, 2013, the Company granted Geoactiva SpA (“Geoactiva”) an option to purchase 100% of the Perth Property through the execution of a mining option purchase agreement (the “Option Agreement”).

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To maintain the option and acquire the properties, Geoactiva agreed to the following:

* As of the date of this Quarterly Report on Form 10-Q, Geoactiva has submitted the results of the exploration work conducted on the Farellon claim. The Company is evaluating these results to determine whether the scope of work resulted in the required $500,000 in exploration expenditures.

** The amount has been credited against the carrying value of the Perth property. The excess of $27,687 over the carrying value of the Perth property has been recorded as a gain on mineral property option payment in the consolidated statements of operations.

Upon exercise of the Option Agreement and once the commercial production begins, Geoactiva will pay the Company a Net Smelter Royalty (“NSR”) of 1.5% from the sale of gold, copper, and cobalt extracted from the Perth property. At any time after the exercise of the Option Agreement and Geoactiva’s fulfilment of the investment commitment of $3,500,000 in exploration expenditures, Geoactiva may purchase 100% of the NSR as follows:

Gold: paying $5 per inferred ounce of gold, according to the definition of Inferred Mineral Resource in the CIM Definition Standards on Mineral Resources and Mineral Reserves.

Copper: $0.005 per inferred ounce of copper, according to the definition of Inferred Mineral Resource in the CIM Definition Standards on Mineral Resources and Mineral Reserves.

Cobalt: If Geoactiva acquires the NSR with respect to gold, copper, or both, the NSR relating to cobalt will be terminated.

NOTE 4 - COMMON STOCK

During the three months ended April 30, 2014, the Company did not have any transactions that resulted in issuance of its common stock.

Warrants

The weighted average life and weighted average exercise price of the warrants at April 30, 2014 is 0.99 years and $0.10, respectively.

Options

On February 28, 2014, the Company granted 1,200,000 options to purchase shares of its common stock to certain officers, directors, consultants and employees. The Chief Executive Officer, Chief Financial Officer, and Vice President of Exploration were each granted options to purchase up to 300,000 shares of the Company’s common stock. The options are exercisable at $0.15 for a term of two years and vested upon grant.

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The Company recorded $146,901 as stock-based compensation, which was calculated using the following assumptions under the Black-Scholes option-pricing model:

NOTE 5 - SUBSEQUENT EVENT

On May 27, 2014, Polymet entered into a Memorandum of Understanding (the “MOU”) with an unrelated party to acquire an option to earn 100% interest in two mining claims contiguous to the Farellon Property. The MOU is subject to results of a due diligence process which Polymet must conclude by July 26, 2014. In order to acquire 100% of the mining concessions the Company will have to make annual payments totalling $300,000 in a combination of shares and cash over four years. The claims will be subject to a 1.5% royalty on net smelter returns which can be bought out by making a one-time payment totalling $1,500,000 any time after acquiring 100% of the property.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q filed by Red Metal Resources Ltd. contains forward-looking statements. These are statements regarding financial and operating performance and results and other statements that are not historical facts. The words “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,” “plan,” “forecast,” and similar expressions are intended to identify forward-looking statements. Certain important risks could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of these risks include, among other things:

We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this report. We are not obligated to update these statements or publicly release the results of any revisions to them to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. You should refer to, and carefully review, the information in future documents we file with the Securities and Exchange Commission.

General

You should read this discussion and analysis in conjunction with our interim unaudited consolidated financial statements and related notes included in this Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2014. The inclusion of supplementary analytical and related information may require us to make estimates and assumptions to enable us to fairly present, in all material respects, our analysis of trends and expectations with respect to our results of operations and financial position taken as a whole. Actual results may vary from the estimates and assumptions we make.

Overview

Red Metal Resources Ltd. (“Red Metal”, or “the Company”) is a mineral exploration company engaged in locating, and eventually developing, mineral resources in Chile. Our business strategy is to identify, acquire and explore prospective mineral claims with a view to either developing them ourselves or, more likely, finding a joint venture partner with the mining experience and financial means to undertake the development. All of our claims are in the Candelaria IOCG belt in the Chilean Coastal Cordillera.

Consistent with our historical practices, we continue to monitor our costs in Chile by reviewing our mineral claims to determine whether they possess the geological indicators to economically justify the capital to maintain or explore them. Currently our subsidiary, Minera Polymet Limitada, has two employees in Chile and engages part time assistants during our exploration programs. Most of our support - such as vehicles, office and equipment - is supplied under short-term contracts. The only long-term commitments that we have are for royalty payments on two of our mineral claims – Farellon and Che. These royalties are payable once exploitation begins. We also are required to pay property taxes that are due annually on all the claims that are included in our properties.

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The cost and timing of all planned exploration programs are subject to the availability of qualified mining personnel, such as consulting geologists and geo-technicians, and drillers and drilling equipment. Although Chile has a well-trained and qualified mining workforce from which to draw and few early-stage companies such as ours are competing for the available resources, if we are unable to find the personnel and equipment that we need when we need them and at the prices that we have estimated today, we might have to revise or postpone our plans.

Recent corporate events

The following corporate developments have occurred during the first quarter ended April 30, 2014, and up to the date of the filing of this report:

Option with Geoactiva SpA

On April 30, 2013, Minera Polymet Limitada (“Polymet”), our Chilean subsidiary, granted Geoactiva SpA, a Chilean mining company (“Geoactiva”), an option to purchase 100% of our Perth property.  To maintain the option and acquire the property, Geoactiva agreed to pay Minera Polymet $1,000,000 and incur $3,500,000 in exploration expenses over 48 months. On April 30, 2014, we received a third installment payment pursuant to the option agreement, which resulted in a gain of $27,687. At the same time we also received a detailed report on exploration work conducted on the Perth property. We are evaluating these results to determine whether the scope of work resulted in the required exploration expenditures.  

Grant of options

On February 28, 2014, we granted options to purchase up to 1,200,000 shares of our common stock under the Red Metal Resources Ltd. 2011 Equity Incentive Plan. The options were granted to certain officers, directors, consultants and employees. Our Chief Executive Officer, Chief Financial Officer, and Vice President of Exploration were each granted options to purchase up to 300,000 shares of our common stock. The options are exercisable at $0.15 for a term of two years and vested upon grant.

Memorandum of Understanding

On May 27, 2014, Polymet entered into a Memorandum of Understanding (the “MOU”) with David Mitchell to acquire an option to earn 100% interest in two mining claims contiguous to the Farellon Property. The entry into an option agreement is subject to results of a due diligence process which Polymet must conclude by July 26, 2014. In order to acquire 100% interest in the mining claims we will be required to pay Mr. Mitchell $300,000 in a combination of shares of our common stock and cash over a four year period. The claims will be subject to a 1.5% royalty on net smelter returns which can be bought out by making a one-time payment totalling $1,500,000 any time after acquiring 100% interest in the claims.

Results of operations

SUMMARY OF FINANCIAL CONDITION

Table 1 summarizes and compares our financial condition at the three months ended April 30, 2014, to the year-ended January 31, 2014.

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Table 1: Comparison of financial condition

COMPARISON OF PRIOR QUARTERLY RESULTS

Table 2 and Table 3 present selected financial information for each of the past eight quarters.

Table 2: Summary of quarterly results (July 31, 2013 – April 30, 2014)

Table 3: Summary of quarterly results (July 31, 2012 – April 30, 2013)

During the quarters ended July 31, 2012 through April 30, 2013 we maintained our exploration and operating activities at moderate levels. Our net losses for these quarters were $296,729; $250,578; $155,453 and $147,484, respectively. The net losses during the quarters ended October 31, 2012 and April 30, 2013 included write downs of our unproved mineral claims totaling $76,233 and $6,000, respectively. During the quarter ended July 31, 2013, we filed an amendment to our registration statement that was originally filed in May of 2011, which resulted in an increase to our legal fees. During the same quarter we continued to maintain all other day-to-day operations at a minimum level, resulting in a net loss comparable to the net losses recorded for the quarters ended January 31, 2013 and April 30, 2013. During the quarter ended October 31, 2013, we reached an agreement with certain debt holders to pay $750,000 in debt owed to them with 15,000,000 shares of our common stock at $0.05 per share. The conversion was recorded at $0.04 per share, the market price of our common stock on the date of the transaction, which resulted in gain on settlement of debt of $150,000; this gain was partially offset by legal and regulatory fees associated with the registration statement on Form S-1 that we filed with Securities and Exchange Commission in order to register these shares. During the past two quarters ended January 31 and April 30, 2014 we kept our exploration and operating activities at low levels. The higher net loss during the quarter ended April 30, 2014, resulted from $146,901 in stock based compensation we recorded on issuance of options to purchase up to 1,200,000 shares of our common stock to our executives, consultants and employees. This increase was partially offset by the gain we recorded on the option payment we received from Geoactiva pursuant to our option agreement with the company.

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Selected Financial Results

THREE MONTHS ENDED APRIL 30, 2014 AND 2013

Our operating results for the three months ended April 30, 2014 and 2013, and the changes in the operating results between those periods are summarized in Table 4.

Table 4: Summary of operating results

Revenue. Our revenue for the three months ended April 30, 2014 was $3,002; this revenue was generated from the royalty payments we received from Minera Farellon. We did not have any revenue during the three months ended April 30, 2013. Due to the exploration rather than the production nature of our business, we do not expect to have significant operating revenue within the next year.

Table 5: Changes in operating expenses

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Operating expenses. Our operating expenses increased by $98,469 or 66.8%, from $147,484 for the three months ended April 30, 2013, to $245,953 for the three months ended April 30, 2014.

The following are our most significant year-to-date changes:

Other items. During the three months ended April 30, 2014, we recorded a gain on mineral property option payments in the amount of $27,687 when we received a third option payment from Geoactiva. The gain represents the excess over the carrying value of the Perth property at the date of the payment.

 Comprehensive loss. Our comprehensive loss for the three months ended April 30, 2014 was $222,894 as compared to comprehensive loss of $138,829 that we recorded for the thee months ended April 30, 2013. The $84,065 increase in comprehensive loss was mainly associated with the stock based compensation we recorded on issuance of options to purchase our common stock, which was partially offset by the decreases in professional fees, wages and salaries as well as interest accrued on current debt.  

Liquidity

GOING CONCERN

The consolidated financial statements included in this Quarterly Report have been prepared on a going concern basis, which implies that we will continue to realize our assets and discharge our liabilities in the normal course of business. We have not generated any significant revenues from mineral sales since inception, have never paid any dividends and are unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. Our continuation as a going concern depends upon the continued financial support of our shareholders, our ability to obtain necessary debt or equity financing to continue operations, and the attainment of profitable operations. Our ability to achieve and maintain profitability and positive cash flow depends upon our ability to locate profitable mineral claims, generate revenue from mineral production and control our production costs. Based upon our current plans, we expect to incur operating losses in future periods, which we plan to mitigate by controlling our operating costs and by sharing mineral exploration expenses through joint venture agreements, if possible.  At April 30, 2014, we had a working capital deficit of $1,748,091 and accumulated losses of $7,696,385 since inception. These factors raise substantial doubt about our ability to continue as a going concern. We cannot assure you that we will be able to generate significant revenues in the future. Our consolidated interim financial statements do not give effect to any adjustments that would be necessary should we be unable to continue as a going concern and therefore be required to realize our assets and discharge our liabilities in other than the normal course of business and at amounts different from those reflected in our financial statements.

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INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY

To date we have funded our operations by selling our securities and borrowing funds, and, to a minor extent, from mining royalties, geological services and option payments.

Sources and uses of cash

THREE MONTHS ENDED APRIL 30, 2014 AND 2013

Table 6 summarizes our sources and uses of cash for the three months ended April 30, 2014 and 2013.

Table 6:  Summary of sources and uses of cash

Net cash provided by financing activities. During the three months ended April 30, 2014, we borrowed $18,000 from a significant shareholder.

During the three months ended April 30, 2013, we borrowed CAD $30,000 (approximately $29,772) from our CEO.

Net cash used in operating activities. During the three months ended April 30, 2014, we used net cash of $2,129 in operating activities. We used $215,264 to cover operating costs and increase our prepaid expenses by $453. These uses of cash were offset by increases in our accounts payable of $7,748. Our accrued liabilities increased by $24,461; this increase was associated with property taxes that became payable on our mineral claims. We also increased our accounts payable to related parties by $52,921 and recorded $6,324 in accrued interest on notes payable to related parties.

During the three months ended April 30, 2013, we generated net cash of $8,993 from operating activities. We used $147,484 to cover operating costs and increase our prepaid expenses by $1,851. These uses of cash were offset by increases in our accounts payable and accrued interest on notes payable to related parties of $15,207 and $7,022, respectively. Our accrued liabilities increased by $38,256 mainly due to the recognition of property taxes that became payable on our mineral claims. We also increased our accounts payable to related parties by $70,949.

Certain non-cash changes in operating assets and liabilities. During the three months ended April 30, 2014, we recorded $146,901 as stock based compensation on the grant of options to purchase up to 1,200,000 shares of our common stock to certain officers, directors, consultants and employees.

Net cash used in investing activities. During the three months ended April 30, 2014, we spent $18,921 acquiring mineral claims. During the same period we received $50,000 from Geoactiva pursuant to the Property Option Agreement, of which $27,687 represented gain on mineral property options in excess over the carrying value of the Perth property.

During the three months ended April 30, 2013, we spent $39,321 acquiring mineral claims and paying property taxes associated with our mineral claims. During the same period we received $37,500 from Geoactiva pursuant to our Property Option Agreement.

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Since inception through April 30, 2014, we have invested $1,447,561 acquiring our mineral claims and $19,820 for acquisition of other capital assets. During the same period we received $160,000 in option payments pursuant to our property option agreements.

Unproved mineral properties

Active properties