RED METAL RESOURCES, LTD. - Quarter Report: 2020 October (Form 10-Q)

RED METAL RESOURCES LTD.

(EXPRESSED IN US DOLLARS)

(UNAUDITED)

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

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RED METAL RESOURCES LTD.

(EXPRESSED IN US DOLLARS)

(UNAUDITED)

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

F-2

RED METAL RESOURCES LTD.

(EXPRESSED IN US DOLLARS)

(UNAUDITED)

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

F-3

RED METAL RESOURCES LTD.

(EXPRESSED IN US DOLLARS)

(UNAUDITED)

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

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RED METAL RESOURCES LTD.

FINANCIAL STATEMENTS

OCTOBER 31, 2020

(UNAUDITED)

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

Nature of Operations

Red Metal Resources Ltd. (the “Company”) is involved in acquiring and exploring mineral properties in Chile through its wholly-owned subsidiary, Minera Polymet SpA (“Polymet”) organized under the laws of the Republic of Chile. The Company has not determined whether its properties contain mineral reserves that are economically recoverable.

Unaudited Interim Consolidated Financial Statements

The unaudited condensed 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, 2020, included in the Company’s Annual Report on Form 10-K, filed with the SEC. The unaudited condensed consolidated 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 a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three and nine months ended October 31, 2020, are not necessarily indicative of the results that may be expected for the year ending January 31, 2021.

Going Concern

These unaudited condensed consolidated financial statements have been prepared on a going-concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has not generated any significant revenues from mineral sales since inception, has never paid any dividends and is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future. The continuation of the Company as a going concern is dependent upon the continued financial support of its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations. The Company’s ability to achieve and maintain profitability and positive cash flows is dependent upon its ability to locate profitable mineral properties, generate revenues from mineral production and control production costs. Based upon its current plans, the Company expects to incur operating losses in future periods. The Company plans to mitigate these operating losses through controlling its operating costs. The Company plans to obtain sufficient working capital through additional debt or equity financing and private loans. At October 31, 2020, the Company had a working capital deficit of $48,179 and accumulated losses of $9,603,307 since inception. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. There is no assurance that the Company will be able to generate significant revenues in the future. These unaudited condensed consolidated financial statements do not give any effect to any adjustments that would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in these unaudited condensed consolidated financial statements.

Uncertainty due to Global Outbreak of COVID-19

In March of 2020, the World Health Organization declared an outbreak of COVID-19 Global pandemic. The COVID-19 has impacted vast array of businesses through the restrictions put in place by most governments internationally, including the USA, Canadian and Chilean governments, as well as provincial and municipal governments, regarding travel, business operations and isolation/quarantine orders. At this time, it is unknown to what extent the COVID-19 outbreak may impact the Company and its operations as this will depend on future developments that are highly uncertain and that cannot be predicted with confidence. These uncertainties arise from the inability to predict the ultimate geographic spread of the disease, and the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put, in place world-wide to fight the virus. While the extent of the impact is unknown, the COVID-19 outbreak may hinder the Company’s ability to raise financing for exploration or operating costs due to uncertain capital markets, supply chain disruptions, increased government regulations and other unanticipated factors, all of which may also negatively impact the Company’s business and financial condition.

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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)On July 29, 2020, Polymet entered into mining royalty agreements (the “NSR Agreements”) with the Company’s CEO, CFO, and the major shareholder to sell net smelter returns (the “NSR”) on its mineral concessions. NSR range from 0.3% to 1.25% depending on particular concession and the purchaser. The Company’s CEO agreed to acquire NSR for $1,500, CFO agreed to acquire the NSR for $1,000, and the major shareholder agreed to acquire his NSR for $2,500. 

The NSR will be paid quarterly once commercial exploitation begins and will be paid on gold, silver, copper and cobalt sales. If, within two years, the Company does not commence commercial exploitation of the mineral properties, an annual payment of $10,000 per purchaser will be paid.

Pursuant to Chilean law, the NSR agreements will come in force only when registered against the land title in Chile. Due to temporary safety restriction associated with COVID-19 pandemic, the registration of the NSR Agreements has been deferred, therefore the payments made by the CEO, CFO, and the major shareholder, have been recorded as advances on the books of the Company and will be applied towards the agreements, once they are fully legalized.

The following amounts were due under the notes payable the Company issued to related parties:

(c)The notes payable to related parties are based on Level 2 inputs in the ASC 820 fair value hierarchy. The notes payable to related parties accumulate interest at a rate of 8% per annum, are unsecured, and are  payable on or after August 31, 2022. 

During the three-month period ended October 31, 2020, the Company accrued $20,568 (October 31, 2019 - $16,393) in interest expense on the notes payable to related parties. During the nine-month period ended October 31, 2020, the Company accrued $56,457 (October 31, 2019 - $43,469) in interest expense on the notes payable to related parties.

Transactions with Related Parties

During the three and nine months ended October 31, 2020 and 2019, the Company incurred the following expenses with related parties:

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NOTE 3 - UNPROVED MINERAL PROPERTIES

Following is the schedule of the Company’s unproved mineral properties as at October 31, 2020 and January 31, 2020:

Mineral Claims at October 31, 2020

Mineral Claims at January 31, 2020

NOTE 4- COMMON STOCK

Warrants

During the nine-month period ended October 31, 2020, 2,500,000 warrants issued as part of the April 20, 2018, private placement expired unexercised. The Company has no warrants outstanding as at October 31, 2020 (January 31, 2020 - 2,500,000).

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NOTE 5- FORGIVENESS OF DEBT

During the nine-month period ended October 31, 2020, the Company entered into an agreement with its former legal representative in Chile (the “Debt Holder”) whereby the Debt Holder agreed to forgive the amounts the Company owed to him for unpaid salaries, being $127,277 (101,385,974 pesos), and a total of $25,487 (20,302,303 pesos) the Company owed under 8% notes payable, in exchange for $40,000, of which $25,000 the Company paid on August 10, 2020. The remaining $15,000 payable to the Debt Holder accumulates no interest and is payable at the discretion of the Company but no later than on October 29, 2021. The transaction resulted in $114,892 forgiveness of debt.

NOTE 6 - WITHHOLDING TAXES PAYABLE

During the nine-month period ended October 31, 2020, the Company reclassified $108,079 in Chilean withholding taxes payable from current- to long-term. As at October 31, 2020, the Company had a total of $109,076 in Chilean withholding taxes payable.

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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:

·general economic conditions, because they may affect our ability to raise money; 

·our ability to raise enough money to continue our operations; 

·changes in regulatory requirements that adversely affect our business; 

·changes in the prices for minerals that adversely affect our business; 

·political changes in Chile, which could affect our interests there; and/or 

·other uncertainties, all of which are difficult to predict and many of which are beyond our control. 

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 unaudited condensed 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, 2020. 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 the business of mineral exploration in Chile with the objective to explore and, if warranted, develop mineral properties. All of our mineral concessions are located in the III Region of Atacama, Chile. To date we have not determined whether the concessions that comprise our mineral properties contain mineral reserves that are economically recoverable and have not produced revenues from our principal business.

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 SpA (“Polymet”), has two employees in Chile and engages independent consultants on as needed basis. 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 four of our mineral concessions - Farellon Alto 1-8, Quina 1 - 56, Exeter 1 - 54, and Che. These royalties are payable once exploitation begins. We are also required to pay property taxes that are due annually on all the concessions that are included in our properties.

The cost and timing of all planned exploration programs are subject to the availability of qualified mining personnel, such as consulting geologists, 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.

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Results of Operations

SUMMARY OF FINANCIAL CONDITION

Table 1 summarizes and compares our financial condition at October 31, 2020, to the year ended January 31, 2020.

Table 1: Comparison of financial condition

Selected Financial Results

THREE AND NINE MONTHS ENDED OCTOBER 31, 2020 AND 2019

Our operating results for the three and nine months ended October 31, 2020 and 2019, and the changes in the operating results between those periods are summarized in Table 2:

Table 2: Summary of operating results

Revenue. We did not generate any revenue during the three and nine months ended October 31, 2020 and 2019. Due to the exploration rather than the production nature of our business, we do not expect to have significant operating revenue in the foreseeable future.

Operating expenses. Our operating expenses for the three and nine months ended October 31, 2020 and 2019, and the changes between those periods are summarized in Table 3.

Table 3: Detailed changes in operating expenses

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Our operating expenses for the three-month period ended October 31, 2020 were $86,672, as compared to $56,937 we incurred for the three-month period ended October 31, 2019. The $29,735, or 52.2% increase in operating expenses during the three-month period ended October 31, 2020, was associated mainly with a $32,194 increase in our professional fees, which increased from $10,311 we incurred during the three-month period ended October 31, 2019, to $42,505 we incurred during the three-month period ended October 31, 2020, and with $22,526 we incurred in consulting fees, the expense we did not incur during the comparative period in our fiscal 2019-20 year. Our rent fees of $2,253, regulatory fees of $2,508, and amortization expense of $1,580 we incurred during the three-month period ended October 31, 2020, were also slightly higher as compared to $Nil, $750, and $78, respectively, we recorded during the three-month period ended October 31, 2019.

The above increases were in part offset by a $16,370 decrease in general and administrative fees, which  we were able to reduce from $22,621 we incurred during the three-month period ended October 31, 2019, to $6,251 we incurred during the three-month period ended October 31, 2020; by an $8,899 decrease in salaries, wages and benefits expense, and by a $5,229 decrease in mineral exploration expenses.

The most significant year-to-date changes in our operating expenses were as follows:

·Our professional fees increased by $28,318, or 80.6%, from $35,151 we incurred during the nine-month period ended October 31, 2019, to $63,469 we incurred during the nine-month period ended October 31, 2020. This increase was mainly associated with legal fees required to prepare our Registration Statement on Form S-4, which we filed on December 4, 2020. 

·During the nine-month period ended October 31, 2020, we incurred $22,526 in consulting fees to our CEO, CFO, and Da Costa Management Corp, the company controlled by our CFO. 

·Our regulatory fees increased by $8,251, or 157.8%, from $5,228 we incurred during the nine-month period ended October 31, 2019, to $13,479 we incurred during the nine-month period ended October 31, 2020. This increase was in part associated with the Company’s decision to switch its transfer agent, and in part with extra fees associated with regulatory filings. 

·Our salaries paid to the staff employed through our Chilean subsidiary decreased by $29,101, or 58.5% to $20,678 from $49,779 we incurred during the nine-month period ended October 31, 2019. The decrease resulted from an extended leave without pay of one of our Chilean employees, who resigned on July 31, 2020, and only a part-time employment of new support staff. 

·Our general and administrative expenses decreased by 56%, or $26,782 to $21,010 during the nine-month period ended October 31, 2020, as compared to $47,792 we incurred in general and administrative expenses during the comparative period ended October 31, 2019. The decrease was associated mostly with decreased office and administrative expenses, which amounted to $3,303 and $12,686, respectively (2020 - $15,238, and $21,558), travel and entertainment fees of $275 (2020 - $2,318), and absence of advertising and promotion activities (2020 - $2,845). 

·Our mineral and exploration expenses decreased by $8,237, or 66%; from $12,487 we incurred during the nine-month period ended October 31, 2019, to $4,250 we incurred during the nine-month period ended October 31, 2020. The higher mineral exploration expenses during the comparative nine-month period ended October 31, 2019, were associated with the payment of 2019/20 property taxes. During the nine-month period ended October 31, 2020, the Company paid property taxes on Farellon 1-8 claim; the property taxes payable for all other concessions remained unpaid at October 31, 2020. 

Other items. To continue our operations, we were required to incur additional debt with our debt holders. Our notes payable carry 8% annual interest, which resulted in $20,586 in interest we accrued during the three-month period ended October 31, 2020, representing a $3,663 increase as compared to $16,923 in interest we accrued during the three-month period ended October 31, 2019. On a year-to-date basis our interest on current debt was $57,446 representing a $12,374 increase as compared to $45,072 in interest we accrued during the nine-month period ended October 31, 2019.

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During the first quarter of our fiscal 2021 year we reversed an old debt which exceeded the statute of limitations as promulgated under Chilean Laws; the amount reversed was $74,336 and was recorded as forgiveness of debt for the three-month period ended April 30, 2020. During the three-month period ended October 31, 2020, we entered into an agreement with our former legal representative in Chile (the “Debt Holder”) whereby the Debt Holder agreed to forgive the amounts we owed him for unpaid salaries, being $127,277 (101,385,974 pesos), and $25,487 (20,302,303 pesos) we owed under 8% note payable, in exchange for $40,000, of which $25,000 we paid on August 10, 2020. The remaining $15,000 payable to the Debt Holder accumulates no interest and is payable at the discretion of the Company but no later than on October 29, 2021. The transaction resulted in $114,892 forgiveness of debt. We did not have similar transactions during the nine-month period ended October 31, 2019.

During the three-month period ended October 31, 2020, we recorded $909 loss on foreign exchange fluctuations (October 31, 2019- $17 gain). For the nine-month period ended October 31, 2020, foreign exchange fluctuations resulted in $840 loss (October 31, 2019- $110 gain).

Comprehensive loss. Our comprehensive loss for the three-month period ended October 31, 2020, was $2,882 as compared to $91,662 we recorded for the three-month period ended October 31, 2019. During the three-month period ended October 31, 2020, the comprehensive loss included $9,607 loss associated with the foreign exchange translation of the carried balances denominated in other than our functional currencies. During the comparative three-month period ended October 31, 2019, the comprehensive loss included $17,819 loss associated with the foreign exchange translation of the carried balances denominated in other than our functional currencies.

On a year-to-date basis our comprehensive loss was $1,190 as compared to $238,856 we recorded for the nine-month period ended October 31, 2019. During the nine-month period ended October 31, 2020, the comprehensive loss included $17,225 gain associated with the foreign exchange translation of the carried balances denominated in other than our functional currencies. During the comparative nine-month period ended October 31, 2019, the comprehensive loss included $43,195 loss associated with the foreign exchange translation of the carried balances denominated in other than our functional currencies.

Liquidity and Capital Resources

Table 4: Working capital

As of October 31, 2020, we had a cash balance of $100,583, our working capital was represented by a deficit of $48,179 and cash used in operations totaled $116,799 for the period then ended.

We did not generate cash flows from our operating activities to satisfy our cash requirements for the three- and nine-month periods ended October 31, 2020. The amount of cash that we have generated from our operations to date is significantly less than our current debt obligations, including our debt obligations under our notes and advances payable. There is no assurance that we will be able to generate sufficient cash from our operations to repay the amounts owing under these notes and advances payable, or to service our other debt obligations. If we are unable to generate sufficient cash flow from our operations to repay the amounts owing when due, we may be required to raise additional financing from other sources.

Cash Flow

Table 5 summarizes our sources and uses of cash for the six months ended October 31, 2020 and 2019.

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Table 5: Summary of sources and uses of cash

Net cash used in operating activities

During the nine months ended October 31, 2019, we used net cash of $123,764 in operating activities. We used $150,327 to cover our cash operating costs, and $24,818 to prepay our future expenses and increase our GST receivable. These uses of cash were offset by $33,897 and $5,448 increases to our accounts payable and amounts due to related parties, respectively, and by $12,036 increase in our accrued liabilities, which were mainly associated with an accrual of estimated penalty that we expected to be assessed by the Canada Revenue Agency for late filing of the Canadian tax returns.

Certain non-cash changes included in the net loss for the period

During the nine-month period ended October 31, 2020, our outstanding notes payable to related parties resulted in the accrual of $56,457 in interest, and our notes payable to non-related party accumulated $989 in interest. The accrued interest was in part reduced by $3,993 cash payment we made to our former legal representative in Chile under the debt settlement agreement. In addition, we recorded $1,692 in amortization of our work trucks used for Chilean operations. During the nine-month period ended October 31, 2020, we recorded $74,336 forgiveness of debt on reversal of old debt which exceeded the statute of limitation promulgated under Chilean Law, and $114,892 on forgiveness of debt which resulted from our debt settlement agreement with our former legal representative in Chile.

During the nine-month period ended October 31, 2019, our outstanding notes payable to related parties resulted in the accrual of $43,469 in interest, and our notes payable to non-related party accumulated $1,603 in interest. In addition, we recorded $262 in amortization of our work truck used for Chilean operations.

Net cash used in investing activities

During the nine months ended October 31, 2020, we used $27,725 to acquire a new vehicle which will be used in our field operations.

During the nine months ended October 31, 2019, we spent $11,799 paying 2019/20 mineral property taxes on exploration claims comprising our Perth and Farellon Properties. In addition, we used $50,000 to make the fifth and final option payment pursuant to our option agreement to acquire the Exeter claim.

Net cash provided by financing activities

During the nine months ended October 31, 2020, we borrowed $224,728 (CAD$300,000) and $23,000 from Mr. Richard Jeffs, our major shareholder. In addition, our CEO advanced us $15,228 (CAD$20,000) and $1,454 as part of vendor payments she made on our behalf. The loans are unsecured, bear interest at 8% per annum, compounded monthly, and are payable on or after August 31, 2022 (as renegotiated with the note holders). In addition, during the nine months ended October 31, 2020, we paid a total of $25,000 to our former legal representative in Chile pursuant to our debt settlement agreement with him. We applied $21,067 to the principal under the notes payable we issued to him and $3,933 to interest accrued on these notes.

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During the nine months ended October 31, 2019, we borrowed $54,277 (CAD$72,095) and $52,935 from our CEO. During the same period we borrowed $75,000 from Mr. Richard Jeffs, our major shareholder. The loans are unsecured, bear interest at 8% per annum, compounded monthly, and are payable on or after August 31, 2022, as renegotiated in Fiscal 2021 year.

Going Concern

The condensed 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 October 31, 2020, we had a working capital deficit of $48,179 and accumulated losses of $9,603,307. 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.

Uncertainty due to Global Outbreak of COVID-19

In March of 2020, the World Health Organization declared an outbreak of COVID-19 Global pandemic. The COVID-19 has impacted vast array of businesses through the restrictions put in place by most governments internationally, including the USA, Canadian and Chilean governments, as well as provincial and municipal governments, regarding travel, business operations and isolation/quarantine orders. At this time, it is unknown to what extent the impact of the COVID-19 outbreak may have on the Company as this will depend on future developments that are highly uncertain and that cannot be predicted with confidence. These uncertainties arise from the inability to predict the ultimate geographic spread of the disease, and the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put, in place world-wide to fight the virus. While the extent of the impact is unknown, the COVID-19 outbreak may hinder the Company’s ability to raise financing for exploration or operating costs due to uncertain capital markets, supply chain disruptions, increased government regulations and other unanticipated factors, all of which may also negatively impact the Company’s business and financial condition.

Unproved Mineral Properties

Table 6: Active properties

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Table 6: Active properties (continued)

(a)Certain claims overlap other claims. The net area is the total of the hectares we have in each property (i.e. net of overlapped claims). 

Capital Resources

Our ability to acquire and explore our Chilean claims is subject to our ability to obtain the necessary funding. We expect to raise funds through any combination of debt financing and/or sale of our securities. We have no committed sources of capital. If we are unable to raise funds as and when we need them, we may be required to curtail, or even to cease, our operations.

Contingencies and Commitments

We had no contingencies at October 31, 2020.

As of the date of the filing this Quarterly Report, we have the following long-term contractual obligations and commitments, notwithstanding $1,033,957 we owe to our related parties under notes payable that are due on or after August 31, 2022, and $109,076 in Chilean withholding taxes payable:

·Farellon royalty. We are committed to paying the vendor a royalty equal to 1.5% on the net sales of minerals extracted from the Farellon Alto 1 - 8 claim up to a total of $600,000. The royalty payments are due monthly once exploitation begins and are subject to minimum payments of $1,000 per month. 

·Quina royalty. We are committed to paying a royalty equal to 1.5% on the net sales of minerals extracted from the Quina claim. The royalty payments are due semi-annually once commercial production begins and are not subject to minimum payments. 

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·Exeter royalty. We are committed to paying a royalty equal to 1.5% on the net sales of minerals extracted from the Exeter claim. The royalty payments are due semi-annually once commercial production begins and are not subject to minimum payments. 

·Che royalty. We are committed to paying a royalty equal to 1% of the net sales of minerals extracted from the claims to a maximum of $100,000 to the former owner. The royalty payments are due monthly once exploitation begins and are not subject to minimum payments. 

·Mineral property taxes. To keep our mineral claims in good standing, we are required to pay mineral property taxes of approximately $35,000 per annum. 

Equity Financing

During the period covered by this Quarterly Report on Form 10-Q, we did not engage in the financing of our operations through the issuance of our equity securities and relied solely on the debt financing.

Based on our operating plan, we anticipate incurring operating losses in the foreseeable future and may require additional equity capital to support our operations and develop our business plan.  If we succeed in completing future equity financings, the issuance of additional shares will result in dilution to our existing shareholders.

Debt Financing

During the nine-month period ended October 31, 2020, and up to the date of the filing of this Quarterly Report on Form 10-Q, we borrowed a total of $224,728 (CAD$300,000) and $23,000 from Mr. Jeffs and $15,228 (CAD$20,000) and $1,454 from our CEO.  The loans are unsecured, due on or after August 31, 2022 (as renegotiated with the note holders), with interest payable at a rate of 8% per annum, compounded monthly.

Challenges and Risks

We do not anticipate generating any revenue over the next twelve months, therefore, we plan to fund our operations through any combination of equity or debt financing from the sale of our securities, private loans, joint ventures or through the sale of part interest in our mineral properties. Although we have succeeded in raising funds as we needed them, we cannot assure you that this will continue in the future.  Many things, including, but not limited to, a downturn in the state of the economy or a significant decrease in the price of minerals, could affect the willingness of potential investors to invest in risky ventures such as ours. We may consider entering into additional joint venture partnerships with other resource companies to complete mineral exploration programs on our properties in Chile. If we enter into a joint venture arrangement, we would likely have to assign a percentage of our interest in our mineral claims to our joint venture partner in exchange for the funding.

As at October 31, 2020, we owed $1,033,957 to related parties under long-term notes payable, which will become payable on or after August 31, 2022 and $109,076 in withholding taxes that will become payable to Chilean tax authorities only when Polymet is in position to start paying the administrative fees it owes us. In addition to the long-term debt, we had $163,090 in current liabilities, which are payable on demand. We do not have the funds to pay all our current liabilities, and as such, we may decide to offer some vendors to convert the amounts we owe them into shares of our common stock. Because of the low price of our common stock, the issuance of the shares to pay the debt will likely result in dilution to the percentage of outstanding shares of our common stock held by our existing shareholders.

Investments in and Expenditures on Mineral Interests

Realization of our investments in mineral properties depends upon our maintaining legal ownership, producing from the properties or gainfully disposing of them.

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Title to mineral claims involves risks inherent in the difficulties of determining the validity of claims as well as the potential for problems arising from the ambiguous conveyancing history characteristic of many mineral claims. Our contracts and deeds have been notarized, recorded in the registry of mines and published in the mining bulletin. We review the mining bulletin regularly to discover whether other parties have staked claims over our ground. We have discovered no such claims. To the best of our knowledge, we have taken the steps necessary to ensure that we have good title to our mineral claims.

Foreign Exchange

We are subject to foreign exchange risk associated with transactions denominated in foreign currencies. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the United States dollar.  We do not believe that we have any material risk due to foreign currency exchange.

Trends, Events or Uncertainties that May Impact Results of Operations or Liquidity

Since we rely on sales of our securities and loans to continue our operations, any uncertainty in the equity markets can have a detrimental impact on our operations. Current trends in the industry and uncertainty that exists in equity markets have resulted in less capital available to us and less appetite for risk by investors. Furthermore, we have found that locating other mineral exploration companies with available funds who are willing to engage in risky ventures such as the exploration of our properties has become very difficult. If we are unable to raise additional capital, we may not be able to develop our properties or continue our operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements and no non-consolidated, special-purpose entities.

Related-Party Transactions

During the nine-month period ended October 31, 2020, and up to the date of the filing of this Quarterly Report on Form 10-Q we have entered into the following transactions with the directors, executive officers, or holders of more than 5% of our common stock, or members of their immediate families:

Transactions with Caitlin L. Jeffs

During the nine-month period ended October 31, 2020, we borrowed $15,228 (CAD$20,000) and $1,454 from Ms. Jeffs, our CEO, and accrued $30,269 in interest on notes payable we issued to Ms. Jeffs for a total owed under the USD$ notes payable of $4,102 and $542,729 (CAD$722,833) owed on account of CAD$ notes payable, which were outstanding as at October 31, 2020. The notes payable accumulate interest at 8% per annum compounded monthly, are unsecured and repayable on or after August 31, 2022, as renegotiated with Ms. Jeffs. In addition to the amounts due under the notes payable, the Company incurred $11,263 (CAD$15,000) in consulting fees with Ms. Jeffs.

Transactions with Fladgate Exploration Consulting Corporation

During the nine-month period ended October 31, 2020, we accrued $6,622 on a total of $96,932 (CAD$129,093) in notes payable we issued to Fladgate. As at October 31, 2020 we owed Fladgate a total of $116,017 (CAD$154,511) under the outstanding notes payable, which accumulate interest at 8% per annum compounded monthly, are unsecured and repayable on or after August 31, 2022, as renegotiated with Fladgate. In addition to the amounts due under the notes payable, we incurred $2,253 (CAD$3,000) in office rent fees due to Fladgate under a month-to-month verbal agreement. As at October 31, 2020, we owed Fladgate a total of $9,671 for services and reimbursable expenses.

Transactions with John da Costa

During the nine-month period ended October 31, 2020, we accrued $591 on $8,500 note payable we issued to Mr. da Costa, which was outstanding as at October 31, 2020. At October 31, 2020, the total owed under the note payable we issued to Mr. da Costa was $10,174. The note payable accumulates interest at 8% per annum compounded monthly, is unsecured and repayable on or after August 31, 2022, as renegotiated with Mr. da Costa. In addition to the amounts due under the note payable, the Company incurred $3,379 (CAD$4,500) in consulting fees with Mr. da Costa.

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Transactions with Da Costa Management Corp.

During the nine-month period ended October 31, 2020, we incurred $7,884 (CAD$10,500) in consulting fees with Da Costa Management Corp. As at October 31, 2020, we owed Da Costa Management a total of $8,485 for services and reimbursable expenses.

Loans from Richard N. Jeffs

During the nine-month period ended October 31, 2020, Mr. Jeffs advanced us $224,728 (CAD$300,000) and $23,000 at 8% annual interest compounded monthly and repayable on or after August 31, 2022. During the nine-month period ended October 31, 2020, we accrued $6,241 in interest due on a total of $113,000 in notes payable we issued to Mr. Jeffs, and $12,517 interest on the CAD$300,000 notes payable. All notes payable issued to Mr. Jeffs accumulate interest at 8% per annum compounded monthly, are unsecured, and repayable on or after August 31, 2022, as renegotiated with Mr. Jeffs.

NSR Agreements with Ms. Jeffs, Mr. da Costa, and Mr. Jeffs

On July 29, 2020, Polymet entered into mining royalty agreements (the “NSR Agreements”) with Ms. Jeffs, Mr. da Costa, and Mr. Jeffs to sell net smelter returns (the “NSR”) on its mineral concessions. NSR range from 0.3% to 1.25% depending on particular concession and the purchaser. Ms. Jeffs agreed to acquire the NSR for $1,500, Mr. da Costa agreed to acquire the NSR for $1,000, and Mr. Jeffs agreed to acquire his NSR for $2,500.

The NSR will be paid quarterly once commercial exploitation begins and will be paid on gold, silver, copper and cobalt sales. If, within two years of legalizing the NSR Agreements, the Company does not commence commercial exploitation of the mineral concessions, an annual payment of $10,000 per purchaser will be paid.

Pursuant to Chilean law, the NSR Agreements will come in force only when registered against the land title in Chile. Due to temporary safety restriction associated with COVID-19 pandemic, the registration of the NSR Agreements has been deferred.

Critical Accounting Estimates

Preparing financial statements in conformity with the U.S. Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect certain of the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these financial statements relate to carrying values of unproved mineral properties.

Financial Instruments

Our financial instruments include cash, prepaids and other receivables, accounts payable, accrued liabilities, amounts due to related parties and notes payable. The fair value of these financial instruments approximates their carrying values due to their short maturities.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

As a smaller reporting company, we are not required to provide this disclosure.

(a) Disclosure Controls and Procedures

Caitlin Jeffs, our Chief Executive Officer and President, and John da Costa, our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as the term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934) as of the end of the quarter covered by this report (the “Evaluation Date”). Based on their assessment, as of the Evaluation Date, our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms due to lack of segregation of duties.

(b) Changes in Internal Control over Financial Reporting

During the quarter covered by this report, there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are not a party to any pending legal proceedings and, to the best of our knowledge; none of our properties or assets is the subject of any pending legal proceedings.

We incorporate by reference the Risk Factors included as Item 1A of our Annual Report on Form 10-K we filed with the Securities and Exchange Commission on April 30, 2020.

None

None

Not applicable.

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Item 6. Exhibits.

The following table sets forth the exhibits either filed herewith or incorporated by reference.

(1)Incorporated by reference from the registrant’s registration statement on Form SB-2 filed with the Securities and Exchange Commission on May 22, 2006 as file number 333-134363. 

(2)Incorporated by reference from the registrant’s Quarterly report on Form 10-Q for the period ended October 31, 2010 and filed with the Securities and Exchange Commission on December 13, 2010. 

(3)Incorporated by reference from the registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 4, 2014. 

(4)Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 19, 2014. 

(5)Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 18, 2015. 

(6)Incorporated by reference from the registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 2, 2016. 

(7)Incorporated by reference from the registrant’s registration statement on Form S-8 filed with the Securities and Exchange Commission on September 23, 2011. 

(8)Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 31, 2020. 

(9)Incorporated by reference from the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2020. 

(10)Personal information included in the Agreement has been redacted. 

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

Dated: December 14, 2020

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