UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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


For the
quarterly period ended March 31, 2010




OR




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


For the
transition period from __________ to __________





Commission
File Number 333-127703





LI3
ENERGY, INC.


(Exact
name of registrant as specified in its charter)





Nevada
            20-3061907(State
      or other jurisdiction of
              incorporation
      or organization)
            (IRS
      Employer
              Identification
      No.)





Av.
Pardo y Aliaga 699 Of. 802


San
Isidro, Lima, Peru


(Address
of principal executive offices)





+
(51) 1-212-1880


(Registrant’s
telephone number, including area code)





N.A.


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes oNo o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
      accelerated filero
            
            Accelerated fileroNon-accelerated
      filero
            
            Smaller
      reporting companyx(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes oNo x





As of May
17, 2010, there were 70,625,095 shares of the registrant’s common stock
outstanding.







LI3
ENERGY, INC.





TABLE
OF CONTENTS




PagePart
      I – Financial InformationItem 1
            Financial
      Statements
            4Item 2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            23Item
      3
            Quantitative
      and Qualitative Disclosures About Market Risk
            29Item 4T
            Controls
      and Procedures
            29Part
      II – Other InformationItem
      1
            Legal
      Proceedings
            31Item
      1A
            Risk
      Factors
            31Item
      2
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            31Item
      3
            Defaults
      Upon Senior Securities
            31Item
      4
            (Removed
      and Reserved)
            31Item
      5
            Other
      Information
            31Item 6
            Exhibits
            32Signatures
            34





2


Statement
Regarding Forward-Looking Information





This
Quarterly Report on Form 10-Q contains forward-looking statements. All
statements other than statements of historical facts included in this Report
including, without limitation, statements in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations section of this
Report, regarding our financial condition, estimated working capital, business
strategy, the plans and objectives of our management for future operations and
those statements preceded by, followed by or that otherwise include the words
“believes,” “expects,” “anticipates,” “intends,” “estimates,” “projects,”
“target,” “goal,” “plans,” “objective,” “should” or similar expressions or
variations on such expressions are forward-looking statements. We can give no
assurances that the assumptions upon which the forward-looking statements are
based will prove to be correct. Because forward-looking statements are subject
to risks and uncertainties, actual results may differ materially from those
expressed or implied by the forward-looking statements. There are a number of
risks, uncertainties and other important factors that could cause our actual
results to differ materially from the forward-looking statements including, but
not limited to, our ability to identify appropriate corporate acquisition and/or
joint venture opportunities in the lithium mining sector, our ability to
establish technical and managerial infrastructure, our ability to raise the
required capital to take advantage of and successfully participate in such
opportunities, and future economic conditions, political stability and lithium
prices. Descriptions
of some of the risks and uncertainties that could cause our actual results to
differ materially from those described by the forward-looking statements in this
Quarterly Report on Form 10-Q appear in the section captioned “Risk Factors” in
our Current Report on Form 8-K filed with the Securities and Exchange Commission
(the “SEC”) on May 14, 2010.




Except as
otherwise required by the federal securities laws, we disclaim any obligations
or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this Report to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.





3


PART
I – FINANCIAL INFORMATION





Item
1. Financial Statements





LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Balance Sheets


(Unaudited)





As
      of
            
            
            As
      ofMarch
      31,
              2010
            
            
            June
      30,
              2009AssetsCurrent
      Assets:Cash
            
            $
            635,003
            
            
            $
            9,703Other
      receivable
            
            
            42,178
            
            
            
            -Prepaid
      expenses and advances
            
            
            344,197
            
            
            
            -Total
      current assets
            
            
            1,021,378
            
            
            
            9,703Mineral
      rights
            
            
            4,201,607
            
            
            
            -Property
      and equipment, net of accumulated depreciation of $14,274 and
      $11,350, respectively
            
            
            4,921
            
            
            
            7,845Total
      non- current assets
            
            
            4,206,528
            
            
            
            7,845Total
      assets
            
            $
            5,227,906
            
            
            $
            17,548Liabilities
      & Stockholders' DeficitCurrent
      Liabilities:Accounts
      payable
            
            $
            319,692
            
            
            $
            3,921Accrued
      expenses
            
            
            10,627
            
            
            
            4,837Payable
      to related party
            
            
            15,346
            
            
            
            -Loans
      payable
            
            
            95,000
            
            
            
            95,000Derivative
      liabilities - warrant instruments
            
            
            5,910,747
            
            
            
            -Total
      current liabilities
            
            
            6,351,412
            
            
            
            103,758Commitments
      and contingenciesStockholders'
      Deficit:Preferred
      stock, ($0.001 par value, 10,000,000 shares authorized; 0
      shares issued and outstanding) as of March 31, 2010 and June 30,
      2009
            
            
            -
            
            
            
            -Common
      stock, ($0.001 par value, 290,000,000 shares authorized;
      70,625,095 and 121,052,721 shares issued and outstanding) as of March
      31, 2010 and June 30, 2009, respectively
            
            
            70,625
            
            
            
            121,052Additional
      paid-in capital
            
            
            6,507,816
            
            
            
            (13,552
            )Deficit
      accumulated during exploration stage
            
            
            (7,701,947
            )
            
            
            (193,710
            )Total
      stockholders' deficit
            
            
            (1,123,506
            )
            
            
            (86,210
            )Total
      liabilities and stockholders' deficit
            
            $
            5,227,906
            
            
            $
            17,548


See
accompanying notes to unaudited consolidated financial statements




4




LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Statements of Operations


(Unaudited)





June
      24, 2005(inception)Three
      Months Ended
                
                
                Nine
      Months Ended
                
                
                throughMarch
      31,
                
                
                March
      31,
                
                
                March
      31,2010
                
                
                2009
                
                
                2010
                
                
                2009
                
                
                2010Revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2,278Cost
      of goods sold
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,182Gross
      profit
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,096Operating
      expenses:Inventory
      write off
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,469Exploration
      expenses
                
                
                506,423
                
                
                
                -
                
                
                
                506,423
                
                
                
                -
                
                
                
                506,423General
      and administrative expenses
                
                
                1,717,504
                
                
                
                27,453
                
                
                
                2,434,922
                
                
                
                53,306
                
                
                
                2,623,433Total
      operating expenses:
                
                
                2,223,927
                
                
                
                27,453
                
                
                
                2,941,345
                
                
                
                53,306
                
                
                
                3,131,325Other
      income (expense):Unrealized
      loss on fair value of derivative instruments
                
                
                (4,020,079
                )
                
                
                -
                
                
                
                (4,565,419
                )
                
                
                -
                
                
                
                (4,565,419
                )Interest
      income
                
                
                2,568
                
                
                
                -
                
                
                
                4,317
                
                
                
                13
                
                
                
                4,328Interest
      expense
                
                
                (1,902
                )
                
                
                (1,000
                )
                
                
                (5,790
                )
                
                
                (3,002
                )
                
                
                (10,627
                )Net
      loss
                
                $
                (6,243,340
                )
                
                $
                (28,453
                )
                
                $
                (7,508,237
                )
                
                $
                (56,295
                )
                
                $
                (7,701,947
                )Basic
      and diluted loss per share
                
                $
                (0.09
                )
                
                $
                (0.00
                )
                
                $
                (0.09
                )
                
                $
                (0.00
                )Weighted
      average number of common shares outstanding - basic and
      diluted
                
                
                67,273,704
                
                
                
                121,052,721
                
                
                
                86,822,781
                
                
                
                121,052,721





See
accompanying notes to unaudited consolidated financial statements.




5





LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Statement of Changes in Stockholders’ Equity (Deficit)


From
June 24, 2005 (Inception) through March 31, 2010


(Unaudited)





DeficitAccumulatedAdditional
            
            
            DuringCommon
      Stock
            
            
            Paid-In
            
            
            ExplorationShares
            
            
            Amount
            
            
            Capital
            
            
            Stage
            
            
            TotalBalance
      at June 24, 2005 (Inception)
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Stock
      issued for cash on June 24, 2005 at $0.000105 per share
            *
            
            35,526,336
            
            
            
            35,526
            
            
            
            (31,776
            )
            
            
            -
            
            
            
            3,750Stock
      issued for cash on June 24, 2005 at $0.000105 per share
            *
            
            35,526,336
            
            
            
            35,526
            
            
            
            (31,776
            )
            
            
            -
            
            
            
            3,750Net
      loss, period ended June 30, 2005
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      June 30, 2005
            
            
            71,052,672
            
            
            
            71,052
            
            
            
            (63,552
            )
            
            
            -
            
            
            
            7,500Stock
      issued for cash on March 14, 2006 at $0.001056 per share
            *
            
            47,368,454
            
            
            
            47,368
            
            
            
            2,632
            
            
            
            -
            
            
            
            50,000Net
      loss, year ended June 30, 2006
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (14,068
            )
            
            
            (14,068
            )Balance,
      June 30, 2006
            
            
            118,421,126
            
            
            
            118,420
            
            
            
            (60,920
            )
            
            
            (14,068
            )
            
            
            43,432Net
      loss, year ended June 30, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (16,081
            )
            
            
            (16,081
            )Balance,
      June 30, 2007
            
            
            118,421,126
            
            
            
            118,420
            
            
            
            (60,920
            )
            
            
            (30,149
            )
            
            
            27,351Stock
      issued for cash on February 7, 2008 at $.019 per share
            *
            
            2,631,595
            
            
            
            2,632
            
            
            
            47,368
            
            
            
            -
            
            
            
            50,000Net
      loss, year ended June 30, 2008
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (95,656
            )
            
            
            (95,656
            )Balance,
      June 30, 2008
            
            
            121,052,721
            
            
            
            121,052
            
            
            
            (13,552
            )
            
            
            (125,805
            )
            
            
            (18,305
            )Net
      loss, year ended June 30, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (67,905
            )
            
            
            (67,905
            )Balance,
      June 30, 2009
            
            
            121,052,721
            
            
            
            121,052
            
            
            
            (13,552
            )
            
            
            (193,710
            )
            
            
            (86,210
            )October
      2009, cancellation of former officer's shares
            
            
            (71,052,626
            )
            
            
            (71,052
            )
            
            
            71,052
            
            
            
            -
            
            
            
            -October
      2009, stock issued to the chief executive officer for
      services at $0.0032 per share
            
            
            1,500,000
            
            
            
            1,500
            
            
            
            3,300
            
            
            
            -
            
            
            
            4,800November
      10, 2009, common stock sold in private placement offering at
      $.25 per share, less offering cost totaling $42,392
            
            
            6,400,000
            
            
            
            6,400
            
            
            
            1,018,222
            
            
            
            -
            
            
            
            1,024,622




6




DeficitAccumulatedAdditional
            
            
            DuringCommon
      Stock
            
            
            Paid-In
            
            
            ExplorationShares
            
            
            Amount
            
            
            Capital
            
            
            Stage
            
            
            TotalNovember
      12, 2009, common stock sold in private placement offering at
      $.25 per unit, less offering cost totaling $5,350
            
            
            2,120,000
            
            
            
            2,120
            
            
            
            299,447
            
            
            
            -
            
            
            
            301,567November
      17, 2009, common stock sold in private placement offering at
      $.25 per unit, less offering cost totaling $31,243
            
            
            1,820,000
            
            
            
            1,820
            
            
            
            234,944
            
            
            
            -
            
            
            
            236,764December
      15, 2009, common stock sold in private placement offering at
      $.25 per unit, less offering cost totaling $4,859
            
            
            1,900,000
            
            
            
            1,900
            
            
            
            260,222
            
            
            
            -
            
            
            
            262,122December
      23, 2009, common stock sold in private placement offering at
      $.25 per unit, less offering cost totaling $76,632
            
            
            1,760,000
            
            
            
            1,760
            
            
            
            167,361
            
            
            
            -
            
            
            
            169,121December
      2009, stock issued to a consultant for services at $0.61 per
      share
            
            
            750,000
            
            
            
            750
            
            
            
            456,750
            
            
            
            -
            
            
            
            457,500February
      2010, stock issued to a consultant for services at $0.93 per
      share
            
            
            375,000
            
            
            
            375
            
            
            
            348,375
            
            
            
            -
            
            
            
            348,750March
      12, 2010, stock issued for acquisition of mineral rights at
      $0.91 per share
            
            
            4,000,000
            
            
            
            4,000
            
            
            
            3,636,000
            
            
            
            -
            
            
            
            3,640,000Amortization
      of stock-based compensation
            
            
            -
            
            
            
            -
            
            
            
            25,695
            
            
            
            -
            
            
            
            25,695Net
      loss, period ended March 31, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (7,508,237
            )
            
            
            (7,508,237
            )Balance,
      March 31, 2010
            
            
            70,625,095
            
            
            $
            70,625
            
            
            $
            6,507,816
            
            
            $
            (7,701,947
            )
            
            $
            (1,123,506
            )





See
accompanying notes to unaudited consolidated financial statements.





7


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Consolidated
Statements of Cash Flow


(Unaudited)




Nine
      Months
              Ended
            
            
            Nine
      Months
              Ended
            
            
            June
      24, 2005
              (inception)
              throughMarch
      31,
            
            
            March
      31,
            
            
            March
      31,2010
            
            
            2009
            
            
            2010Cash
      Flows from Operating ActivitiesNet
      loss
            
            $
            (7,508,237
            )
            
            $
            (56,295
            )
            
            $
            (7,701,947
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
            
            
            2,924
            
            
            
            2,925
            
            
            
            14,579Stock-based
      compensation
            
            
            836,745
            
            
            
            -
            
            
            
            836,745Unrealized
      loss on fair value of derivative instruments
            
            
            4,565,419
            
            
            
            -
            
            
            
            4,565,419Write
      off inventory
            
            
            -
            
            
            
            -
            
            
            
            1,469Changes
      in operating assets and liabilities:Increase
      in other receivable
            
            
            (42,178
            )
            
            
            -
            
            
            
            (42,178
            )Increase
      in inventory
            
            
            -
            
            
            
            -
            
            
            
            (1,469
            )Increase
      in prepaid expenses and advances
            
            
            (344,197
            )
            
            
            (3
            )
            
            
            (344,197
            )Increase
      in accounts payable
            
            
            240,771
            
            
            
            25,702
            
            
            
            244,692Increase
      in accrued expenses
            
            
            5,790
            
            
            
            3,002
            
            
            
            10,627Increase
      in payable to related party
            
            
            15,346
            
            
            
            -
            
            
            
            15,346Net
      cash used in operating activities
            
            
            (2,227,617
            )
            
            
            (24,669
            )
            
            
            (2,400,914
            )Cash
      Flows from Investing ActivitiesAcquisition
      of mineral rights
            
            
            (486,607
            )
            
            
            -
            
            
            
            (486,607
            )Acquisition
      of equipment
            
            
            -
            
            
            
            -
            
            
            
            (9,500
            )Increase
      in leasehold improvement
            
            
            -
            
            
            
            -
            
            
            
            (10,000
            )Net
      cash used in investing activities
            
            
            (486,607
            )
            
            
            -
            
            
            
            (506,107
            )Cash
      Flows from Financing ActivitiesIncrease
      in loans payable
            
            
            -
            
            
            
            -
            
            
            
            95,000Proceeds
      from issuance of common stock, net of offering costs
            
            
            3,339,524
            
            
            
            -
            
            
            
            3,447,024Net
      cash provided by financing activities
            
            
            3,339,524
            
            
            
            -
            
            
            
            3,542,024Net
      increase (decrease) in cash
            
            
            625,300
            
            
            
            (24,669
            )
            
            
            635,003Cash
      at beginning of period
            
            
            9,703
            
            
            
            24,800
            
            
            
            -Cash
      at end of period
            
            $
            635,003
            
            
            $
            131
            
            
            $
            635,003Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Income
      taxes
            
            $
            -
            
            
            $
            -
            
            
            $
            -Interest
            
            $
            -
            
            
            $
            -
            
            
            $
            -Non-cash
      financing transactions:Common
      stock cancelled
            
            $
            71,052
            
            
            $
            -
            
            
            $
            71,052Issuance
      of common stock for acquisition of mineral rights
            
            $
            3,640,000
            
            
            $
            -
            
            
            $
            3,640,000Fair
      value of derivative instruments in private offering
            
            $
            1,345,328
            
            
            $
            -
            
            
            $
            1,345,328


See
accompanying notes to unaudited consolidated financial statements.





8


LI3
ENERGY, INC.


(An
Exploration Stage Company)


Notes
to Consolidated Financial Statements


For
the quarterly period ended March 31, 2010


(Unaudited)





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. The Company’s principal products have
been soy-blend wax candles (the “Legacy Business”). Recently, however, the
Company decided to redirect its business focus and strategy toward identifying
and pursuing business opportunities in the energy sector and related lithium
mining in North and South America. The Company is in the exploration stage
in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic No. 915 (formerly Statement of Financial
Accounting Standards (“SFAS”) No.7, “Accounting and Reporting by
Development Stage Enterprises”). Its activities to date have been
limited to capital formation, organization, and development of its business,
including acquisition of mineral assets.





On
October 19, 2009, the Company amended its articles of incorporation with the
Secretary of the State of Nevada, pursuant to which we changed our name from
NanoDynamics Holdings, Inc. to Li3 Energy, Inc., to reflect our plans to focus
on our business strategy on the energy sector and related lithium mining
opportunities in North and South America.





On
November 6, 2009, the Company formed Li3 Energy Peru SRL, a wholly owned
subsidiary in Peru, to explore mining opportunities in Peru and in South
America.





Split-off
of Legacy Business





In
connection with the discontinuation of the Company’s previous business and the
redirecting of its business strategy to focus on the energy sector and related
lithium mining opportunities in North and South America, the Company split off
and sold all of the assets and liabilities of the Legacy Business (the
“Split-Off”) to Jon Suk, the Company’s founding stockholder. The Split Off
closed on October 19, 2009. As more fully described in a Form 8-K filed by the
Company with the SEC on December 14, 2009, the Company contributed all of its
assets and liabilities relating to the Legacy Business, whether accrued,
contingent or otherwise, and whether known or unknown, to a newly organized,
wholly owned subsidiary, Mystica Candle, Inc., a Nevada corporation (“Split-Off
Sub”), and immediately thereafter sold all of the outstanding capital stock of
Split-Off Sub to Mr. Suk in exchange for 71,052,626 shares of the Company’s
common stock, $0.001 par value per share that Mr. Suk then owned. The 71,052,626
shares surrendered by Mr. Suk have been cancelled.





NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The
accompanying unaudited interim financial statements of Li3 Energy, Inc. have
been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange Commission
(“SEC”), and should be read in conjunction with the audited financial statements
and notes thereto contained in the Company’s latest Annual Report filed with the
SEC on Form 10-K. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. Notes to the financial statements which would substantially
duplicate the disclosure contained in the audited financial statements for the
most recent fiscal year ending June 30, 2009, as reported in Form 10-K, have
been omitted.




9


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)
 a. Principles of Consolidation





The
unaudited consolidated financial statements include the accounts of Li3 Energy
Peru SRL, the Company’s wholly-owned subsidiary, after the elimination of
significant intercompany accounts and transactions.





b. Cash
Equivalents





The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. At March 31, 2010,
the Company had cash deposits of approximately $628,170 in a single account at a
U.S. bank, which is $378,170 in excess of the FDIC’s $250,000 current insured
limits. The Company has not experienced any losses on its deposits of cash and
cash equivalents.





c. Property
and Equipment





Property
and equipment are stated at cost. Equipment and fixtures are being depreciated
using the straight-line method over the estimated asset lives ranging from 3 to
7 years.





d. Mineral
Exploration and Development Costs





The
Company did not incur any mineral exploration or development costs during the
periods presented, however, the Company’s accounting policies for such costs
are:





All
exploration expenditures are expensed as incurred. Significant property
acquisition payments for active exploration properties are capitalized. If
no minable ore body is discovered, previously capitalized costs are expensed in
the period the property is abandoned. Expenditures to develop new mines, to
define further mineralization in existing ore bodies, and to expand the
capacity of operating mines, are capitalized and amortized on a unit of
production basis over proven and probable reserves.





Should a
property be abandoned, its capitalized costs are charged to operations. The
Company charges to operations the allocable portion of capitalized costs
attributable to properties sold. Capitalized costs are allocated to
properties sold based on the proportion of claims sold to the claims remaining
within the project area.





Costs of
acquiring mineral properties are capitalized by project area upon purchase of
the associated claims. Costs to maintain the mineral rights and leases are
expensed as incurred. When a property reaches the production stage, the
related capitalized costs will be amortized, using the units of production
method on the basis of periodic estimates of ore reserves.





e. Income
Taxes





Income
taxes are provided in accordance with FASB ASC Topic No. 740 (formerly SFAS No.
109, “Accounting for Income
Taxes”). A deferred tax asset or liability is recorded for all
temporary differences between financial and tax reporting and 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.


10


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)
 f. Share-based Payments





The
Company determines the fair value of stock option awards granted to employees in
accordance with FASB ASC Topic No. 718 – 10 (formerly SFAS No. 123(R), “Share-Based
Payments”) and to non-employees in accordance with FASB ASC Topic
No. 505 – 50 (formerly EITF 96-18 “Accounting for Equity Instruments Issued to
Non-Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”).





g. Earnings
(Loss) per Share





The
Company accounts for earnings (loss) per share in accordance with FASB ASC Topic
No. 260 – 10 (formerly SFAS No. 128,“Earnings per Share”), which
specifies the computation, presentation and disclosure requirements for earnings
(loss) per share for entities with publicly held common stock and requires the
presentation of basic earnings (loss) per share and diluted earnings (loss) per
share.





Basic net
loss per share amounts are computed by dividing the net loss by the weighted
average number of common shares outstanding. In periods in which the
Company reports a net loss, dilutive securities are excluded from the
calculation as the effect would be anti-dilutive.





h. 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.





i. Recent
Accounting Pronouncements





In June
2009, the FASBissued SFAS No.
168,“The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162 ” (“SFAS 168”). The
FASBAccounting Standards
Codification, (“Codification” or “ASC”) became the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. On
the effective date of SFAS 168, the Codification superseded all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification became
non-authoritative.





Following
SFAS 168, the FASB will no longer issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead, it will
issue Accounting Standards Updates (ASU’s). The FASB will not consider ASU’s as
authoritative in their own right; rather these updates will serve only to update
the Codification, provide background information about the guidance, and provide
the bases for conclusions on the change(s) in the Codification. SFAS
No. 168 is incorporated in ASC Topic 105,Generally Accepted Accounting
Principles.The Company adopted
SFAS No. 168 in the third calendar quarter of its 2010 fiscal year, and the
Company will provide reference to both the Codification topic reference and the
previously authoritative references related to Codification topics and
subtopics, as appropriate.





Effective
January 1, 2009, the Company adopted FASB ASC Topic No. 815 – 40,Derivatives and Hedging - Contracts
in Entity’s Own Stock (formerly Emerging Issues Task Force Issue No.
07-5,Determining Whether an
Instrument or Embedded Feature is Indexed to an Entity’s Own Stock). The
adoption of FASB ASC Topic No. 815 – 40’s requirements can affect the accounting
for warrants and many convertible instruments with provisions that protect
holders from a decline in the stock price (or “down-round” provisions). For
example, warrants with such provisions will no longer be recorded in equity and,
instead, will be treated as a liability with subsquent changes in value recorded
in the income statement. Down-round provisions reduce the exercise price of
a warrant or convertible instrument if a company either issues equity shares for
a price that is lower than the exercise price of those instruments or issues new
warrants or convertible instruments that have a lower exercise price. The
Company evaluates whether warrants or convertible instruments contain provisions
that protect holders from declines in the Company’s stock price or otherwise
couldresult in
modification of the exercise price and/or shares to be issued under the
respective debt, warrant or preferred stock agreements 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.


11


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)
 NOTE 3. GOING CONCERN





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company currently has no sources of
recurring revenue and has generated net losses of $7,701,947 and negative cash
flows from operations of $2,400,914 during the period from June 24, 2005
(inception) through March 31, 2010.





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
ultimately to attain profitability. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.





NOTE
4. MINERAL RIGHTS





Peru
Acquisition





On
February 23, 2010, Li3 Energy, Inc. (“Li3 Energy” or the “Company”) acquired,
through a new wholly owned subsidiary, Li3 Energy Peru SRL, 100% of the assets
of the Loriscota, Suches and Vizcachas Projects (the “Projects”) located
respectively in the Provinces of Puno, Tacna and Moquegua, Peru. The assets
consist solely of undeveloped mineral rights. The aggregate purchase price
for the assets was $50,000 which was paid in cash.





Nevada
Acquisition





On March
12, 2010, pursuant to an Asset Purchase Agreement (the “Nevada APA”) by and
among the Company, Next Lithium Corp., an Ontario corporation, and Next Lithium
(Nevada) Corp., a Nevada corporation (together, “Next Lithium”), the Company
acquired all of Next Lithium’s interests in and rights under (a) an agreement
dated October 30, 2009 (the “CSV, LM and MW Option Agreement”), pursuant to
which GeoXplor Corp., a Nevada corporation (“GeoXplor”), granted to Next Lithium
the sole, exclusive and irrevocable right and option (the “CSV, LM and MW
Option”), exercisable in the manner described below, to acquire a 100%
beneficial interest in the associated placer mining claims known as the CSV
Placer Mineral Claims, LM Placer Mineral Claims and MW Placer Mineral Claims;
and (b) an agreement dated October 30, 2009 (the “BSV Option Agreement,” and,
together with the CSV, LM and MW Option Agreement,
the “Option Agreements”), pursuant to which GeoXplor granted to Next Lithium the
sole, exclusive and irrevocable right and option (the “BSV Option,” and,
together with the CSV, LM and MW Option, the “Nevada Options”), exercisable in
the manner described below, to acquire a 100% beneficial interest in the
associated placer mining claims known as the BSV Placer Mineral Claims; as well
as all associated rights and records.




12


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)





Under the
terms of the Nevada APA, the Company acquired the Nevada Options and associated
rights in exchange for 4,000,000 shares of our common stock valued at $3,640,000
on the date of acquisition. The Nevada APA contains customary
representations, warranties and indemnifications by Next Lithium. 2,500,000
of these shares of the Company’s common stock will be held in escrow for one
year against any indemnifiable liabilities that may arise. These 2,500,000
shares held in escrow were issued and outstanding as of March 31,
2010.





Under the
CSV, LM and MW Option Agreement, as amended, the Company paid GeoXplor
$311,607 on the closing of the acquisition under the Nevada APA, subject to a
$50,000 hold back for a period of 12 months, conditioned on registration of all
of the CSV Placer Mineral Claims, LM Placer Mineral Claims and MW Placer Mineral
Claims. For each such claim (other than certain claims that are lode claims
and certain claims that are on land withdrawn by the Secretary of the Interior
for a solar energy study area) that is unable to be registered for any reason
prior to the end of such period, $500 will be forfeited by GeoXplor out of the
$50,000 hold back. In addition, on the closing of the acquisition under the
Nevada APA, Next Lithium assigned to GeoXplor 500,000 of the restricted shares
of the Company’s common stock received by Next Lithium under the Nevada
APA.





Upon the
Company's becoming the owner of a 100% interest in the CSV Placer Mineral
Claims, LM Placer Mineral Claims and MW Placer Mineral Claims, in accordance
with the CSV, LM and MW Option Agreement, the Company will pay Geoxplor a 3.0%
net smelter return royalty on the proceeds from production of all ores,
minerals, metals, concentrates and mineral resources (an "NSR") derived from
mining operations on the related properties. The Company may, at any time after
the date of grant of the NSR and up to the date of commencement of commercial
production on such properties, purchase all or any portion of such NSR from
Geoxplor for $3 million or the applicable portion thereof.





Similarly,
upon the Company's becoming the owner of a 100% interest in the BSV Placer
Mineral Claims, in accordance with the BSV Option Agreement, the Company will
pay Geoxplor a 3.0% NSR derived from mining operations on the related
properties. The Company may, at any time after the date of grant of the NSR and
up to the date of commencement of commercial production on such properties,
purchase all or any portion of such NSR from Geoxplor for $3 million or the
applicable portion thereof.





Under the
BSV Option Agreement, as amended, the Company must pay to GeoXplor $100,000 on
July 29, 2010. In addition, on the closing of the acquisition under the
Nevada APA, Next Lithium assigned to GeoXplor 1,000,000 of the restricted shares
of the Company’s common stock received by Next Lithium under the Nevada
APA.





Furthermore,
under the BSV Option Agreement, as amended, the Company must pay to GeoXplor
$75,000 on October 30, 2010 and $75,000 on April 30, 2011. In addition, the
Company agreed to spend a minimum of $500,000 by October 30, 2010, an additional
$750,000 by October 30, 2011 and an additional $750,000 by October 30, 2012, on
exploration, development, reclamation and related work on the BSV Placer Mineral
Claims.





13


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)
 NOTE 5. PROPERTY AND EQUIPMENT





Property
and equipment consists of the following:





March
      31,
              2010
            
            
            June
      30,
              2009Leasehold
      improvement and equipment
            
            $
            19,195
            
            
            $
            19,195Less:
      Accumulated depreciation
            
            
            (14,274
            )
            
            
            (11,350
            )Net
      property and equipment
            
            $
            4,921
            
            
            $
            7,845





Depreciation
expense for the nine-month period ending March 31, 2010 and 2009 were $2,924 and
$2,925, respectively.





NOTE
6. PAYABLE TO RELATED PARTY





Starting
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 the Li3
Energy’s chief executive officer and interim financial officer function in the
same capacities (“related party company”). As such, certain net common costs
initially paid by the related party company for the nine months ended March 31,
2010 and 2009, were allocable to Li3 Energy, as follows:





Nine
      Months Ended
              March
      31,2010
            
            
            2009Administrative
      salaries
            
            $
            5,100
            
            
            $
            -Utilities
      and maintenance expenses
            
            
            12,203
            
            
            
            -$
            17,303
            
            
            $
            -





During the three months ended March 31,
2010, the Li3 Energy paid $1,957 tothe related party company.As of March 31, 2010, the
related payable due to the related party company arising from these net common
costs amounting to $15,346 is shown as Payable to related party in the
consolidated balance sheet.





NOTE
7. LOANS PAYABLE





The
Company issued a $50,000 unsecured Promissory Note dated June 5, 2008
(the”Note”) to Milestone Enhanced Fund Ltd. (“Milestone”) in connection with
Milestone’s $50,000 working capital loan to the Company, and the terms and
conditions of such Note allow for prepayment of the principal and accrued
interest any time without penalty. The interest rate is 8% per annum and the
maturity date is May 2010. The total interest accrued at March 31, 2010 is
$7,301.





The
Company issued an unsecured Convertible Promissory Note (the “Convertible Note”)
dated April 30, 2009, bearing an interest rate of 8.25% per annum, in the amount
of $45,000, due on November 8, 2010 to Milestone. The Convertible Note is
convertible pursuant to terms to be mutually determined by the Company and
Milestone. The total interest accrued at March 31, 2010 is $3,326.





14


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)
 NOTE 8. DERIVATIVE LIABILITIES





The
Company determined that warrants to purchase a total of 14,203,000 shares of
common stock issued in the 2009 Unit Offering contained provisions that protect
holders from declines in the Company’s stock price that could result in
modification of the exercise price under the warrant 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. As a result, these warrants were not
indexed to the Company’s own stock. The fair value of these 2009 Unit
Offering warrants was recognized as derivative warrant instruments and will be
measured at fair value at each reporting period. The Company measured the
fair value of these instruments as of March 31, 2010, and recorded $4,020,079
and $4,565,419 unrealized loss to the statement of operations for the three and
nine months ended March 31, 2010. The Company determined the fair values of
these securities using a lattice valuation model.





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





Balance
      at
              June
      30,
              2009
            
            
            Initial
      valuation of derivative liabilities upon issuance of new warrants during
      the period
            
            
            Increase
              (Decrease) in
              Fair Value of
              Derivative
              Liability
            
            
            Balance
      at
              March
      31,
              2010Derivative
      warrant instruments
            
            $
            —
            
            
            $
            1,345,328
            
            
            $
            4,565,419
            
            
            $
            5,910,747$
            —
            
            
            $
            1,345,328
            
            
            $
            4,565,419
            
            
            $
            5,910,747





The fair
value of the derivative warrant instruments is estimated using the lattice
valuation model with the following assumptions as of March 31,
2010:





Common
      stock issuable upon exercise of warrants
            
            
            14,203,000Estimated
      market value of common stock on measurement date (1)
            
            $
            0.43Exercise
      price
            
            $
            0.50 - $1.00Risk
      free interest rate (2)
            
            
            0.29
            %Warrant
      lives in years
            
            
            4.86
      – 4.98Expected
      volatility (3)
            
            
            149.06
            %Expected
      dividend yield (4)
            
            NoneProbability
      of reset to conversion price (5)
            
            25%





(1)
            The
      estimated market value of the stock is measured each period end and is
      based on a calculation by management after consideration of price per
      share received in private offerings and reported public market
      prices.





(2)
            The
      risk-free interest rate was determined by management using the 3 month
      LIBOR rate .(3)
            The
      volatility factor was estimated by management using the historical
      volatilities of comparable companies in the same industry and region,
      because the Company does not have adequate trading history to determine
      its historical volatility.





(4)
            Management
      determined the dividend yield to be 0% based upon its expectation that
      there will not be earnings available to pay dividends in the near
      term.(5)
            This
      represents management’s estimate of the probability that the Company will
      issue stock at a price lower than the warrants’ exercise
      price.




15


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)
 NOTE 9. STOCKHOLDERS’ EQUITY





Common
Stock splits





On July
11, 2008, the Company declared a 3.031578 for 1 forward stock split on each
share of its common stock issued and outstanding at the close of business on
July 21, 2008, in the form of a stock dividend. All share and per share amounts
have been retroactively adjusted for all periods presented.





On
October 19, 2009, the Company’s Board of Directors declared a 15.625 for 1
forward stock split in the form of a dividend. The record date for this
stock dividend was November 20, 2009, and the payment and effective date was
November 23, 2009. Shares issued prior to November 20, 2009 and per share
amounts have been retroactively restated to reflect the impact of the stock
split.





Common
Stock issued for services





On
October 19, 2009, the Company’ Board of Directors authorized the issuance of
1,500,000 shares of its common stock to its Chief Executive Officer as
compensation for services to be rendered to the Company. Management determined
the fair value of the stock issued to the Chief Executive Officer at $0.0032 per
share based on the stock price on October 19, 2009. Accordingly, stock-based
compensation expense of $4,800 was recognized in the accompanying statements of
operations for the nine months ended March 31, 2010.





On
December 22, 2009, the Company’ Board of Directors authorized the issuance of
750,000 shares of its common stock in exchange for consulting services. The
transaction was valued in accordance with FASB ASC Topic No. 505 – 50 (formerly
EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”). Management determined the fair value of the stock issued to the
consultant to be $0.61 per share based on the stock price on December 22, 2009.
Accordingly, stock-based compensation expense of $457,500 was recognized in the
accompanying statements of operations for the nine months ended March 31,
2010.





In
February 2010, the Company’ Board of Directors authorized the issuance of
375,000 shares of its common stock in exchange for consulting services. The
transaction was valued in accordance with FASB ASC Topic No. 505 – 50 (formerly
EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services”). Management determined the fair value of the stock issued to the
consultant to be $0.93 per share based on the stock price on February 16, 2010.
Accordingly, stock-based compensation expense of $348,750 was recognized in the
accompanying statements of operations for the three and nine months ended March
31, 2010.





Common
Stock issued for acquisition of mineral rights





On March
12, 2010, the Company’ Board of Directors authorized the issuance of 4,000,000
shares of its common stock in as part of its acquisition of mineral rights from
Next Lithium (see Note 4). Management determined the fair value of the stock
issued to be $0.91 per share based on the stock price on that date for a total
of $3,640,000.




16


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)





On June
24, 2005, the Company issued 35,526,336 (after giving effect to the common stock
splits) shares of common stock to a director for cash valued at $0.0001 per
share for total consideration of $3,750.





On June
24, 2005, the Company issued 35,526,336 (after giving effect to the common stock
splits) shares of common stock to a director for cash valued at $0.0001 per
share for total consideration of $3,750.





On March
14, 2006, the Company issued 47,368,454 shares of common stock for cash valued
at $0.001 per share for total consideration of $50,000.





On
February 7, 2008, the Company issued 2,631,595 shares of common stock for cash
valued at $0.019 per share for a total consideration of $50,000.





On
October 19, 2009, the Board of Directors authorized the Company to offer up to a
maximum of 16,000,000 units (the “2009 Unit Offering”) at an offering price of
$0.25 per Unit. Each Unit consisted of (i) one share of the Company’s common
stock, par value $0.001 per share (“Common Stock ”), (ii) a warrant representing
the right to purchase one-half of one (0.5) share of Common Stock, exercisable
for a period of five years at an exercise price of $0.50 per whole share (the “A
Warrant ”), and (iii) a warrant representing the right to purchase one-half of
one (0.5) share of Common Stock, exercisable for a period of five years at an
exercise price of $1.00 per whole share (the “B Warrant ,” and together with the
A Warrant, the “Warrants”). On November 10, 2009 (“Initial Closing’), the
Company sold 6,400,000 Units for total proceeds to the Company of $1,600,000
($1,557,608 net after offering expenses), and warrants to purchase 6,400,000
shares of Common Stock. The Company offered the Units directly and through
finders (the “Finders”).





On
November 12, 2009, the Company completed the second closing (the “Second
Closing”) of the Offering. In the Second Closing, the Company sold 2,120,000
Units for an aggregate of $530,000 ($524,650 net after offering
expenses).





On
November 17, 2009, the Company completed the third closing (the “Third Closing”)
of the Offering. In the Third Closing, the Company sold 1,820,000 Units for
an aggregate of $455,000 ($423,757 after offering expenses).





On
December 15, 2009, the Company completed the fourth closing (the “Fourth
Closing”) of the Offering. In the Fourth Closing, the Company sold
1,900,000 Units for an aggregate of $475,000 ($470,141 net after offering
expenses).





On
December 23, 2009, the Company completed the fifth and final closing (the “Final
Closing”) of the Offering. In the Final Closing, the Company sold 1,760,000
Units for an aggregate of $440,000 ($363,368 net after offering
expenses).





In the
aggregate, the Company sold 14,000,000 Units for gross proceeds of $3,500,000
($3,339,524 net after offering expenses) during the 2009 Unit
Offering.





The
Company determined that warrants to purchase a total of 14,203,000 shares of
common stock issued in the 2009 Unit Offering contained provisions that protect
holders from declines in the Company’s stock price that couldresult in modification
of the exercise price under the respective warrant agreements based on a
variable that is not an input to the fairvalue of a
“fixed-for-fixed” option as defined under FASB ASC Topic No. 815 – 40 -
15. As a result, these warrants are not indexed tothe Company’s own
stock. At the Initial Closing, Second Closing, Third Closing, Fourth
Closing, and Final Closing of the 2009 Unit Offering, the fair value of these
warrants was determined to be approximately $532,986, $223,083, $186,993,
$208,019 and $194,247, respectively, which were recorded as a derivative
liability and as a reduction in Additional Paid-in Capital at the time of
issuance.




17


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)





Par
      value of common stock issued
            
            $
            14,000Paid-in
      capital
            
            
            1,980,196Derivative
      warrant instruments
            
            
            1,345,328Offering
      expenses
            
            
            160,476Total
      gross proceeds
            
            $
            3,500,000




Common
Stock cancelled





On
October 19, 2009, 71,052,626 shares of the Company’s common stock owned by the
founding director, were surrendered in exchange for the Company’s interest in a
split-off subsidiary, Mystica Candle, Inc., as more fully described in a Form
8-K of the same date filed by the Company with the SEC. The net assets of
the Split-Off Subsidiary were $0 as of October 19, 2009. Therefore, this
transaction was valued at $0.





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.





Stock
Option Awards





On
December 9, 2009, the Company granted 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. The options vest pro-rata in
three annual installments beginning on the first anniversary of the date of
grant and have a 10 year term.





A summary
of stock option activity is presented in the table below:





Number of
              Shares
            
            
            Weighted-
              average
              Exercise
              Price
            
            
            Weighted-
              average
              Remaining
              Contractual
              Term (years)
            
            
            Aggregate
              Intrinsic
              Valueat
              March 31, 2010Outstanding
      at June 30, 2008
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Granted
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Expired/Forfeited
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Outstanding
      at June 30, 2009
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Granted
            
            
            600,000
            
            
            $
            0.25
            
            
            
            9.70
            
            
            
            390,000Exercised
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Expired /
      Forfeited
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Outstanding
      at March 31, 2010
            
            
            600,000
            
            
            $
            0.25
            
            
            
            9.70
            
            
            $
            390,000Exercisable
      at March 31, 2010
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —




Warrants
 
 Summary information regarding common
stock warrants issued and outstanding as of March 31, 2010 is as
follows:
 
 Warrants
                    
                    
                    Weighted Average
                      Exercise
    PriceOutstanding at year ended June 30,
      2009
                    
                    
                    -
                    
                    
                    $
                    -Issued
                    
                    
                    14,203,000
                    
                    
                    
                    0.75Exercised
                    
                    
                    -
                    
                    
                    
                    -Cancelled
                    
                    
                    -
                    
                    
                    
                    -Expired
                    
                    
                    -
                    
                    
                    
                    -Outstanding at March 31, 2010
                    
                    
                    14,203,000
                    
                    
                    $
                    0.75
  Warrants outstanding and
      exercisable as of March 31, 2010Exercise
    Price
                    Outstanding Number of
      Shares
                    
                    Remaining
                      Life
                    
                    Exercisable
                      Number of
      Shares$
                    0.50
                    
                    3,200,0000
                    
                    4.61 years
                    
                    
                    3,200,0000$
                    1.00
                    
                    3,200,0000
                    
                    4.61 years
                    
                    
                    3,200,0000$
                    0.50
                    
                    1,060,000
                    
                    4.62 years
                    
                    
                    1,060,000$
                    1.00
                    
                    1,060,000
                    
                    4.62 years
                    
                    
                    1,060,000$
                    0.50
                    
                    910,000
                    
                    4.63 years
                    
                    
                    910,000$
                    1.00
                    
                    910,000
                    
                    4.63 years
                    
                    
                    910,000$
                    0.50
                    
                    1,006,000
                    
                    4.71 years
                    
                    
                    1,006,000$
                    1.00
                    
                    1,006,000
                    
                    4.71 years
                    
                    
                    1,006,000$
                    0.50
                    
                    925,500
                    
                    4.73 years
                    
                    
                    925,500$
                    1.00
                    
                    925,500
                    
                    4.73 years
                    
                    
                    925,50014,203,000
                    
                    
                    
                    
                    14,203,000




18


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)





The fair
value of the options granted during the nine months ended March 31, 2010 was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:





Market
      value of stock on grant date
            
            $0.46
            (1)Risk-free
      interest rate (1)
            
            2.89%
            %Dividend
      yield
            
            0.00
            %Volatility
      factor
            
            133.67%
            %Weighted
      average expected life (2)
            6.5
            years (2)Expected
      forfeiture rate
            
            0%
            %%





(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.




NOTE
10. FAIR VALUE MEASUREMENTS





As
defined in FASB ASC Topic No. 820 – 10 (formerly SFAS 157), 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.




19


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)


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 (formerly SFAS 157), 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
the lattice valuation model (see Note 8).





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 March 31, 2010:





Fair
      Value Measurements at March 31, 2010Description
              
              Quoted
      Prices In Active Markets for Identical Assets
                (Level
      1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
      Unobservable Inputs
                (Level
      3)
              
              
              Total
      Carrying Value as of
                March
      31, 2010Derivative
      warrant instruments
              
              $
              -
              
              
              $
              -
              
              
              $
              5,910,747
              
              
              $
              5,910,747Total
              
              $
              -
              
              
              $
              -
              
              
              $
              5,910,747
              
              
              $
              5,910,747
 
 20


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)





Significant Unobservable Inputs (Level 3)Three Months Ended
            
            
            Nine Months EndedMarch
      31,
            
            
            March
      31,2010
            
            
            2009
            
            
            2010
            
            
            2009Beginning
      balance
            
            $
            (1,890,668
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            -Total
      gains (losses)
            
            
            (4,020,079
            )
            
            
            -
            
            
            
            (4,565,419
            )
            
            
            -Settlements
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Additions
            
            
            -
            
            
            
            -
            
            
            
            (1,345,328
            )
            
            
            -Transfers
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Ending
      balance
            
            $
            (5,910,747
            )
            
            $
            -
            
            
            $
            (5,910,747
            )
            
            $
            -Change
      in unrealized gains (losses) included in earnings relating to derivatives
      still held as of March 31, 2010 and 2009
            
            $
            (4,020,079
            )
            
            $
            -
            
            
            $
            (4,565,419
            )
            
            $
            -




NOTE
11. COMMITMENTS AND CONTINGENCIES





Puna
Lithium





Pursuant
to an Assignment Agreement dated as of March 12, 2010 (the “Assignment
Agreement”), the Company will purchase all of Puna Lithium Corporation
(“Puna”)’s interests in and rights under a letter of intent dated November 23,
2009, as amended (the “Letter of Intent”), entered into by and among Puna, Lacus
Minerals S.A., an Argentinean corporation ("Lacus"), and the shareholders of
Noto Energy S.A. ("Noto" and “Noto Shareholders,” as applicable). Puna owns an
option to acquire up to an aggregate eighty percent (80%) interest in 123,000
acres of Chilean salar ground located across 9 Chilean salars, including the
producing Salar de Atacama.




After the
assignment of the Letter of Intent under the Assignment Agreement, on March 12,
2010, the Company entered into a certain Master Option Agreement with Lacus (the
“Master Option Agreement”), for the acquisition of three options, exercisable in
the manner described in the Master Option Agreement, to acquire up to an
aggregate of eighty-five percent (85%) interest in :  (a)
approximately 70,000 acres situated on prospective brine salars in Argentina,
known as Rincón, Centenario and Pocitos (the “Master Lacus Properties”); and (b)
salt-mining claims on approximately 9,000 additional acres in Areas of Mutual
Interest (as defined below) on some of those same salars (the “Third Parties
Properties” and, together with the Master Lacus Properties, the “Lacus
Properties”) that may be acquired upon exercise of two options (collectively,
the “Third Parties Options”).




As
consideration to Lacus for entering into the Master Option Agreement and as a
condition to maintain the first option (“First Option”) under the Master Option
Agreement in good standing until duly exercised, the Company paid Lacus $200,000
which was capitalized as mineral rights in the consolidated balance sheet as of
March 31, 2010.





Also on
March 12, 2010, the Company entered into a certain 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, an
Argentinean corporation which beneficially owns a one hundred percent (100%)
interest over 2,995 acres also situated on brine salars in Argentina, known as
Cauchari (the “Noto Properties” and, together with the Lacus Properties, the
"Argentina Properties").




21


LI3
ENERGY, INC.
 (An
Exploration Stage Company)
 Notes
to Consolidated Financial Statements
 For
the quarterly period ended March 31, 2010
 (Unaudited)





These
Argentina Properties are located mid-way between SQM’s producing brine mines on
Salar de Atacama in Chile and FMC’s producing mine on Hombre Muerto Salar in
Argentina, the fifth largest lithium producer in the world.





Under the
Master Option Agreement, the Company shall acquire upon closing, the options
thereunder for an aggregate amount of $700,000 and the obligation to complete a
minimum of $3.7 million in work commitments with respect to the Lacus Properties
through the one year anniversary of the closing date. The Master Option
Agreement contains customary representations, warranties and indemnifications by
Lacus, and closing thereunder is subject to customary conditions to closing,
which is expected to occur on or prior to June 10, 2010. Provided that the
Company successfully acquires and maintains the Lacus Options, the Company will
be given the rights, respectively: (i) subject to certain conditions, to acquire
(the “First Option”), within 30 days of the Company’s delivery of the
Feasibility Plan (as defined in the Master Option Agreement) to Lacus (which is
due no later than 18 months after the closing), a 55% beneficial interest in the
Argentina Properties in exchange for $650,000 and the grant to Lacus of a 45%
beneficial interest in any other acreage outside the Properties but within the
Centenario, Pocitos and Rincón Salars which only include lithium and potash
mining properties which are in an early stage of exploration (any “Area of
Mutual Interest”); (ii) subject to certain conditions, to acquire, within 60
days of the Company’s delivery of the Feasibility Study (as defined in the
Master Option Agreement) to Lacus, an
additional 20% beneficial interest in the Argentina Properties and any Areas of
Mutual Interest in exchange for $2.2 million; and (iii) subject to certain
conditions, to acquire, within 30 days of the Company providing certain evidence
of sufficient financing to commence Commercial Production (as defined in the
Master Option Agreement), an additional 10% beneficial interest in the Argentina
Properties and any Areas of Mutual Interest in exchange for $5 million. In the
event the First Option is terminated without the Company exercising it, the
Company will be required to transfer the entire interest in any Areas of Mutual
Interest to Lacus for no consideration and take certain other actions in
connection with the transfer of operational control of the prospects from the
Company to Lacus.





The
Assignment Agreement and Share Purchase Agreement are expected to be closed
during the fourth quarter of fiscal year 2010.





NOTE
12. SUBSEQUENT EVENTS





On April
22, 2010, the Company’s Board of Directors granted under the 2009 Equity
Incentive Plan options to purchase 200,000 shares of its Common Stock to a
consultant. These options vest immediately and have a 5 year term. They were
granted with an exercise price equal to $0.32 per share. The fair value of
the options is $114,783 at the grant date.








22


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





The
following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described. This discussion contains
forward-looking statements. Please see “Forward-Looking Statements” above
and “Risk Factors” included in our Current Report on Form 8-K filed with the
Securities and Exchange Commission (“SEC”) on May 14, 2010 (the “May 14 Form
8-K”), for a discussion of the uncertainties, risks and assumptions associated
with these forward-looking statements.





The
following discussion and analysis of the Company’s financial condition and
results of operations is based on our condensed consolidated financial
statements as of March 31, 2010, and for the three and nine months ended March
31, 2010 and 2009, which are unaudited. In the opinion of management,
such financial statements include the adjustments and accruals necessary for a
fair presentation of the results for the interim periods. These interim results
are not necessarily indicative of results for a full year. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with United States Generally Accepted Accounting
Principles (“GAAP”) have been condensed or omitted in these financial statements
as of March 31, 2010 and for the three and nine months ended March 31, 2010 and
2009.





You
should read this discussion and analysis together with such financial statements
and the notes thereto.





Background
and Recent Developments





Li3
Energy, Inc. (the “Company,” “we,” “us,” or “our”) is an exploration stage
mining company. We were incorporated on June 24, 2005, in Nevada as Mystica
Candle Corp. We were originally in the business of manufacturing, marketing
and distributing soy-blend scented candles and oils, but we were unable to
continue that business because of a lack of financial results and
resources. We have redirected our focus, therefore, towards identifying,
acquiring and developing lithium brine mining properties in the
Americas.





On
October 19, 2009, we changed our name to Li3 Energy, Inc., to reflect our plans
to focus our business strategy on the energy sector and related lithium mining
opportunities in North and South America.





On
February 23, 2010, we acquired certain mineral claims in Peru, as described
below. Prior to this acquisition, we were a “shell company” (as such term
is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended). We believe that as a result of the acquisition we ceased to be a
shell company on that date. Since exiting “shell company” status, we have
acquired certain additional assets and agreements, as described in this Report
and in the May 14 Form 8-K. The information contained in the May 14 Form
8-K, together with the information contained in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2009, and our subsequent Quarterly Reports on
Form 10-Q and our Current Reports on Form 8-K, as filed with the Securities and
Exchange Commission, constituted the current “Form 10 information” necessary to
satisfy the conditions contained in Rule 144(i)(2) under the Securities Act of
1933, as amended.





Peru





On
February 23, 2010, we acquired 100% of the assets of the Loriscota, Suches and
Vizcachas projects located respectively in the Regions of Puno, Tacna and
Moquegua, Peru. The assets consist solely of nine undeveloped mineral
claims prospective for lithium and potassiumand have, and have had, no
operations or revenues to date. The claims cover a total area of 19,500 acres.
The aggregate purchase price for the assets was $50,000. We currently do notanticipate spending material amounts onexploration
work with respect to these projects over the next 12
months.




23





For
additional information about the terms of this acquisition and about the
projects, see Item 8.01, “Description of Business—Our Projects—Peru” in the May
14 Form 8-K, which information is incorporated herein by reference.





Nevada





On March
12, 2010, we acquired, from the prior optionee, options to acquire a 100%
beneficial interest in the association placer mining claims known as the CSV
Placer Mineral Claims, LM Placer Mineral Claims, MW Placer Mineral Claims
and BSV Placer Mineral Claims (the “Nevada Claims”), which cover up to
60,600 acres (net of certain of the Nevada Claims that are on land withdrawn by
the Secretary of the Interior for a solar energy study area) in Big Smoky Valley
near Tonopah in west central Nevada.





We
acquired the options and associated rights in exchange for the issuance of
4,000,000 restricted shares of our common stock to the seller optionee, of which
1,500,000 shares were then assigned by the seller to the optionor and the
remaining 2,500,000 shares will be held in escrow for one year against any
liabilities indemnifiable by the seller that may arise.





Under the
terms of the option agreements, we also paid the optionor $311,607 on the
closing of the acquisition (subject to a $50,000 hold back for a period of 12
months, against certain of the Nevada Claims being unable to be registered
for any reason prior to the end of such period). In addition, under the
terms of the option agreements we must pay to the optionor $100,000 on July
29, 2010.





We will
also have to pay the optionor $75,000 on October 30, 2010, and $75,000 on April
30, 2011. In addition, we agree to spend a minimum of $500,000 by October
30, 2010, an additional $750,000 by October 30, 2011 and an additional $750,000
by October 30, 2012, on exploration, development, reclamation and related work
on certain of the Nevada Claims.





For
additional information about the terms of this acquisition and the option
agreements, and about the Nevada Claims, see Item 8.01, “Description of
Business—Our Projects—Nevada” in the May 14 Form 8-K, which information is
incorporated herein by reference.





We have
begun the permitting process for an exploration program, expect to begin the
program in the second half of calendar year 2010, and anticipate that such
program will include surface sampling, regional and detailed seismic surveys,
and diamond drilling and pumping tests. We currently anticipate spending
$250,000 on future installments of acquisition costs and $500,000 on exploration
costs with respect to our Nevada assets over the next 12 months.




Chile





We have
signed a letter of intent to purchase an option to acquire up to an aggregate
eighty percent (80%) interest in nine salars covering 123,000 acres on the Puna
Plateau of Chile, including the Salar de Atacama.





The
transaction is subject to legal and financial due diligence by us and
negotiation of definitive documentation. There can be no assurance that
this transaction will be consummated.




24





For
additional information about the prospective Chile properties, see Item 8.01,
“Description of Business—Our Projects—Chile” in the May 14 Form 8-K, which
information is incorporated herein by reference.





Argentina





On March
12, 2010, we acquired the rights of a private party under a letter of intent to
purchase (a) options to acquire up to an aggregate of eighty-five percent (85%)
interest in (i) approximately 70,000 acres situated on prospective brine salars
in Argentina, known as Rincón, Centenario and Pocitos, and (ii) salt-mining
claims on approximately 9,000 additional acres on some of those same salarsthat may be acquired upon
exercise of options, and (b) 100% of the stock of an Argentinean corporation
that beneficially owns a 100% interest over 2,995 acres situated on brine salars
in Argentina known as Cauchari.





At the
same time, on March 12, 2010, we entered into a definitive master option
agreement, with the holder of the properties and claims, covering
these two options on Rincón, Centenario and Pocitos, and we entered into a share
purchase agreement for the acquisition of the Argentinean corporation holding
the Cuachari assets.





We
acquired the letter of intent and associated rights in exchange for 8,000,000
restricted shares of our common stock, payment of which is subject – among other
customary conditions – to closing under the master option
agreement.





Under the
master option agreement, we will acquire on closing, the two options on the
Rincón, Centenario and Pocitos salars for an aggregate amount of $700,000 and
the obligation to complete a minimum of $3.7 million in work commitments on the
70,000 acres by the first anniversary of the closing. The master
option agreement contains customary conditions to closing, which is expected to
occur on or prior to June 10, 2010. There can be no assurance, however, that the
closing will occur.





These
options would give us the right to acquire, subject to certain
conditions: (i) within 30 days of our delivery of a feasibility plan
(which is due no later than 18 months after the closing), a 55% beneficial
interest in and to the 70,000 acres on Rincón, Centenario and Pocitos, in
exchange for our paying $650,000 and granting to the seller a 45% beneficial
interest in any other lithium and potash mining acreage we acquire outside the
70,000 acres but within the Rincón, Centenario and Pocitos salars, including the
9,000 acres mentioned above (“areas of mutual interest”); (ii) within 60 days of
our delivery of a feasibility study, an additional 20% beneficial interest in
the 70,000 acres and any areas of mutual interest, in exchange for our paying
$2.2 million; and (iii) within 30 days of our providing evidence of sufficient
financing to commence commercial production, an additional 10% beneficial
interest in the 70,000 acres and any areas of mutual interest, in exchange
for our paying $5 million. We are also responsible to pay all payments scheduled
to be made under the seller’s options on the 9,000 acres, which will amount
to $900,000,
unless we and the seller determine not to exercise those options.





Under the
share purchase agreement, we would acquire on closing, 100% of the issued and
outstanding shares of the Argentinean corporation holding the Cuachari assets,
for an aggregate of $300,000. The closing thereunder is subject, among
other customary conditions to closing, to closing under the master option
agreement.





For
additional information about the terms of these acquisitions and the master
option agreement and share purchase agreement, and about the prospective Rincón,
Centenario, Pocitos and Cuachari properties, see Item 8.01, “Description of
Business—Our Projects—Argentina—Puna Lithium Transaction” in the May 14
Form 8-K, which information is incorporated herein by reference.




25




If we
succeed in acquiring these interests in Chile and Argentina, we expect to spend
approximately $800,000 on future installments of our acquisition costs and $2.9
million on exploration and development work on the properties in Argentina and
another $225,000 on acquisition costs and $1,000,000 on exploration and
development work on the projects in Chile over the next 12 months. Similarly, if
we succeed in acquiring Rincón South, then we expect to spend additional amounts
on acquisition costs and exploration and development work with respect to such
project as well.





The
consideration we have paid and/or expect to be required to pay for our current
and prospective properties are summarized in the following
table:





Properties
                          
                          ConsiderationCommon
      Stock
                          
                          Cash
                          
                          
                          Work CommitmentsShares
      already issued
                          
                          Shares
      to be
                            issued
      at
                            Closing
                          
                          Already
      paid
                          
                          
                          To
      be paid by May 15, 2011
                          
                          
                          To
      be paid after May 15,
      2011
                          
                          
                          Due
      by
                            May
      15, 2011
                          
                          
                          Due
      after
                            May
      15, 2011Nevada
      Claims
                          
                          
                          4,000,000
                          
                          —
                          
                          $
                          311,607
                          
                          
                          $
                          250,000
                          
                          
                          $
                          —
                          
                          
                          $
                          500,000
                          
                          
                          $
                          1,500,000Argentina
      Properties
                          
                          
                          —
                          
                          8,000,000
                          
                          
                          500,000
                          
                          
                          
                          800,000
                          
                          
                          
                          8,450,000
                          
                          
                          
                          2,900,000
                          
                          
                          
                          800,000Peru
      (Loriscota, Suches and Vizcachas Projects)
                          
                          
                          —
                          
                          —
                          
                          
                          50,000
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Chile
                          
                          
                          —
                          
                          2,000,000
                          
                          
                          25,000
                          
                          
                          
                          225,000
                          
                          
                          
                          —
                          
                          
                          
                          1,000,000
                          
                          
                          
                          6,000,000TOTAL
                          
                          
                          4,000,000
                          
                          10,000,000
                          
                          $
                          886,607
                          
                          
                          $
                          1,275,000
                          
                          
                          $
                          8,450,000
                          
                          
                          $
                          4,400,000
                          
                          
                          $
                          8,300,000





If we
succeed in acquiring Rincón South or any other projects, then we would expect to
incur additional financial commitments with respect to such properties that are
not reflected in the above table.





Results
of Operations





Results
of Operations





Three
Months Ended March 31, 2010 Compared with Three Months Ended March 31,
2009





Revenues





We are
still in our exploration stage and have generated no revenues to
date.




Exploration
Expenses




We incurred $506,423 of exploration expenses in the
three and nine months ended March 31, 2010, compared to $0 of exploration
expenses in the corresponding periods of the prior year.




Operating
Expenses





We
incurred general and administrative expenses of $1,717,504 and $27,453 for the
three months ended March 31, 2010and 2009, respectively.
These expenses mainly consisted of consultancy fees, travel expenses,
professional fees incurred in connection with the day to day operation of our
business, exploration expenses on properties wherein we were granted exploration
rights, and the preparation and filing of our periodic reports. The increase of
$2,196,474 from the 2009 to the 2010 three month periods was due as a result of
the ramping up of our business, exploration expenses on properties wherein we
were granted exploration rights in properties located in Nevada and South
America, expenditures incurred in connection with our review and analysis of
prospective mining operation investment opportunities, the hiring by the Company
of a consultant, travel expenses incurred in relation with prospective and
acquired mineral rights properties, and an increase of legal and professional
fees incurred in connection with the ramping up of our business.




26





Other
Income (Expense)





Other
expense for the three months ended March 31, 2010, was $4,019,413 compared to
other expense of $1,000 for the three months ended March 31, 2009 primarily due
to our
recognition, during the three months ended 3-31-2010, of an unrealized loss from
the increase in the fair value of the derivative liability related to our
outstanding warrant instruments of $4,020,079 .
Interest income in the amount of $2,568 was earned on our cash deposits
resulting from our 2009 Private Placement for the three months ended March 31,
2010 as compared to $13 during the three months ended March 31,
2009. Interest expense amounted to $1,902 during the three months ended
March 31, 2010 as compared to $1,000 during the three months ended March 31,
2009, and were incurred in connection with interest bearing notes that we sold
to finance our short term working capital needs.




Net
Loss





Our net
loss for the three months ended March 31, 2010 was $6,243,340. Net loss for the
three months ended March 31, 2009 was $28,453.





Nine
Months Ended March 31, 2010 Compared with Nine Months Ended March 31,
2009





Revenues





We are
still in our exploration stage and have generated no revenues to
date.





Operating
Expenses





We
incurred general and administrative expenses of $2,941,345 and $53,306 for the
nine months ended March 31, 2010 and 2009, respectively. These expenses mainly
consisted of consultancy fees, travel expenses, professional fees incurred in
connection with the day to day operation of our business, exploration expenses
on properties wherein we were granted exploration rights, and the preparation
and filing of our periodic reports. The increase of $2,888,039 from the 2009 to
the 2010 nine month periods was a result of the ramping up of our business,
exploration expenses on properties wherein we were granted exploration rights in
properties located in Nevada and South America, expenditures incurred in
connection with our review and analysis of prospective mining operation
investment opportunities, the hiring by the Company of consultants, travel
expenses incurred in relation with prospective and acquired mineral rights
properties, and an increase of legal and professional fees incurred in
connection with the ramping up of our business.





Other
Income (Expense)





Other
expense for the nine months ended March 31, 2010, was $4,566,892 compared to
other expense of $2,989 for the nine months ended March 31, 2009, primarily due
to our recognition of an
unrealized loss from the increase in the fair value of the derivative liability
related to our outstanding warrant instruments of $4,565,419 .
Interest income in the amount of $4,317 was earned on our cash deposits
resulting from our 2009 Private Placement for the nine months ended March 31,
2010 as compared to $13 during the nine months ended March 31,
2009. Interest expense amounted to $5,790 during the nine months ended
March 31, 2010 as compared to $3,002 during the nine months ended March 31,
2009, and were incurred in connection with interest bearing notes that we sold
to finance our short term working capital needs.




27





Net
Loss





Our net
losses for nine months ended March 31, 2010 and 2009 were $7,508,237 and
$56,295, respectively.





Liquidity
and Capital Resources





Due to
our brief history and historical operating losses, our operations have not been
a source of liquidity, and our sources of liquidity primarily have been debt and
proceeds from the issuance and sale of our securities in a private placement in
2009. Although we have begun the acquisition of certain lithium 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 lithium 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, overall market
and economic conditions, the downturn and volatility in the US equity markets
and the trading price of our common stock may limit our ability to raise the
capital needed to execute our plan of operations. We recognize that the US
economy is currently experiencing a period of uncertainty and that the capital
markets have been depressed from recent levels. 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.





In
November and December 2009, we raised gross proceeds of $3,500,000 from the sale
of units of our common stock and common stock purchase warrants in a private
placement. We have been using the net proceeds from the private placement
towards the implementation of our business development plan and for general
working capital purposes. We will require additional capital to execute our
exploration and development plans for our existing lithium mining properties and
any others that we may be successful in acquiring. We plan to seek to raise such
capital through additional sales of our equity or debt securities. There can be
no assurance, however, that such financing will be available to us or, if it is
available, that it will be available on terms acceptable to us and that it will
be sufficient to fund our expected needs. If we are unable to obtain sufficient
financing, we may not be able to proceed with our exploration and development
plans or meet our ongoing operational working capital needs.





At March
31, 2010, we had cash and cash equivalents of $635,003, as compared to $9,703 at
June 30, 2009. This increase in cash and cash equivalents resulted from the
$3,339,524 of net proceeds from the 2009 private placement, offset by
approximately $2.7 million of cash used in operations and acquisition of mineral
rights.





Accounts
payable and accrued expenses increased by $321,561 to $330,319 at March 31,
2010, from $8,758 at June 30, 2009. The increase was attributable to the
additional legal and professional fees associated with the ramping up of our
business and costs related to the 2009 private placement.





If we are
successful in acquiring the various projects that we have discussed above, then
we expect to require an aggregate of approximately $6.8 million over the next 12
months to pay our acquisition costs and exploration and development costs
associated with such projects as well as our currently anticipated general and
administrative and other costs. We will require substantial additional funds to
execute our planned activities over the next 12 months. While we may seek to
raise such funds through the sale of our equity or debt securities, there can be
no assurance that we will be able to do so in a timely manner, on reasonably
favorable terms or at all. If our financing efforts are unsuccessful, then we
will need to reduce our planned activities or cease operations
altogether.




28





Off-Balance
Sheet Arrangements





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





Item
3. Quantitative and Qualitative Disclosures About Market Risk





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





Item
4T. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





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





●
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;





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





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





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




29





As of
March 31, 2010, management assessed the effectiveness of our internal control
over financial reporting based on the criteria for effective internal control
over financial reporting established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) and SEC guidance on conducting such assessments. Based on that
evaluation, they concluded that, during the period covered by this report, such
internal controls and procedures were not effective to detect the inappropriate
application of U.S. GAAP rules as more fully described below. This was due to
deficiencies that existed in the design or operation of our internal controls
over financial reporting that adversely affected our internal controls and that
may be considered to be material weaknesses.





The
matters involving internal controls and procedures that our management
considered to be material weaknesses under the standards of the Public Company
Accounting Oversight Board were: (1) inadequate segregation of duties consistent
with control objectives; and (2) ineffective controls over period end financial
disclosure and reporting processes primarily due to limited financial accounting
staff resources. The aforementioned material weaknesses were identified by our
Chief Executive Officer in connection with the review of our financial
statements as of March 31, 2010.





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




Management’s
Remediation Initiatives





In an
effort to remediate the identified material weaknesses and other deficiencies
and enhance our internal controls, we have initiated, or plan to initiate, the
following series of measures:





We have
increased our personnel resources and technical accounting expertise within the
accounting function by hiring an independent consulting firm to assist us in the
preparation of our financial statements and an experienced interim Chief
Financial Officer, and, as a result of these hires, we expect to be able to
create a segregation of duties consistent with control objectives. We have
appointed three outside directors to our board of directors and expect to
appoint at least one additional outside director in 2010. We expect to
establish a separate audit committee made up exclusively of outside directors,
including an “audit committee financial expert,” which will undertake the
oversight in the establishment and monitoring of required internal controls and
procedures such as reviewing and approving estimates and assumptions made by
management.





We
anticipate that these additional initiatives will be at least partially, if not
fully, implemented by June 30, 2010, the end of our current fiscal
year.





Changes
in Internal Controls over Financial Reporting





Except
for the appointment of independent directors resulting in a majority of our
Board of Directors being independent, during the quarterly period ended March
31, 2010, there was no change in our internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.





30





PART
II – OTHER INFORMATION





Item
1. Legal Proceedings





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





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





Item
1A. Risk Factors





There
have been no material changes from the risk factors disclosed in the May 14
Form 8-K under Item 8.01, “Risk Factors,” therein.





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





On April
5, 2010, pursuant to a consulting agreement with Mirador Consulting, Inc., we
issued 375,000 shares of common stock to Mirador for a total purchase price of
$375. The shares were issued without registration under the Securities
Act of 1933, as amended, in reliance on the exemption from the registration
requirements thereof under Section 4(2) of the Act, in a transaction that did
not involve any public offering.





On March
16, 2010, in connection with the closing of our Nevada APA, we issued an
aggregate of 4,000,000 shares of common stock. The shares were issued without
registration in reliance on the exemptions from the registration requirements of
the Securities Act of 1933, as amended, under Section 4(2) and Regulation D of
the Act. The transaction did not involve any public offering, and the recipients
of the shares made customary representations regarding their status as
accredited investors, as defined in Rule 501 of Regulation D.





Item
3. Defaults upon Senior Securities





None.





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





None.





Item
5. Other Information





None.





31





Item
6. Exhibits





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





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





·
            should not in all instances be
      treated as categorical statements of fact, but rather as a way of
      allocating the risk to one of the parties if those statements prove to be
      inaccurate;





·
            have been qualified by
      disclosures that were made to the other party in connection with the
      negotiation of the applicable agreement, which disclosures are not
      necessarily reflected in the
agreement;





·
            may apply standards of
      materiality in a way that is different from what may be viewed as material
      to you or other investors;
and





·
            were made only as of the date
      of the applicable agreement or such other date or dates as may be
      specified in the agreement and are subject to more recent
      developments.





Accordingly,
these representations and warranties may not describe the actual state of
affairs as of the date they were made or at any other time. Additional
information about the Company may be found elsewhere in this Form 10-Q and the
Company’s other public filings, which are available without charge through the
SEC’s website at http://www.sec.gov.





Exhibit Number
            
            SEC
Report
              Reference Number
            
            Description10.1*
            
            10.1
            
            Asset
      Purchase Agreement, dated as of February 16, 2010, among the Registrant,
      Next Lithium Corp. and Next Lithium (Nevada) Corp.10.2*
            
            10.2
            
            Option
      Agreement, dated October 30, 2009, among GeoXplor Corp. and the Registrant
      (as successor to Next Lithium Corp. and Next Lithium (Nevada) Corp.),
      relating to the CSV Placer Mineral Claims, LM Placer Mineral Claims and MW
      Placer Mineral Claims10.3*
            
            10.3
            
            Option
      Agreement, dated October 30, 2009, among GeoXplor Corp. and the Registrant
      (as successor to Next Lithium Corp. and Next Lithium (Nevada) Corp.),
      relating to the BSV Placer Mineral Claims10.4*
            
            10.4
            
            Amendment
      to CSV, LM and MW Option Agreement, dated as of February 16, 2010, among
      GeoXplor Corp. and the Registrant (as successor to Next Lithium Corp. and
      Next Lithium (Nevada) Corp.)




32




Exhibit Number
            
            SEC
Report
              Reference Number
            
            Description


10.5*
            
            10.5
            
            Amendment
      to BSV Option Agreement, dated as of February 16, 2010, among GeoXplor
      Corp. and the Registrant (as successor to Next Lithium Corp. and Next
      Lithium (Nevada) Corp.)10.6*
            
            10.6
            
            Consent
      to Assignment Agreement, dated as of February 16, 2010, among GeoXplor
      Corp., Next Lithium Corp., Next Lithium (Nevada) Corp. and the Registrant,
      relating to the CSV, LM and MW Option Agreement and the BSV Option
      Agreement10.7*
            
            10.7
            
            Registration
      Rights Agreement, dated as of February 16, 2010, among the Registrant,
      Next Lithium Corp. and Next Lithium (Nevada) Corp.10.8*
            
            10.8
            
            Escrow
      Agreement, dated as of February 16, 2010, among the Registrant, Next
      Lithium Corp., Next Lithium (Nevada) Corp. and Gottbetter & Partners,
      LLP, as escrow agent10.9**†
            
            10.14
            
            Engagement
      Letter, dated January 7, 2010, between the Registrant and Marin Management
      Services, LLC10.10**
            
            10.15
            
            Assignment
      Agreement, dated as of March 12 , 2010, between Puna Lithium Corporation
      and the Registrant10.11**
            
            10.16
            
            Master
      Option Agreement, dated as of March 12, 2010, between Lacus Minerals S.A.
      and the Registrant10.12**
            
            10.17
            
            Share
      Purchase Agreement, dated as of March 12, 2010, among the Registrant,
      Beatriz Silvia Vasques Nístico and Daniel Boris Gordon31.1
            
            
            
            Certification
      of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            
            
            
            Certification
      of Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1¶
            
            
            
            Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2¶
            
            
            
            Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002







*
            Filed
      with the SEC on March 18, 2010, as an exhibit, numbered as indicated
      above, to the Registrant’s Current Report (SEC File No. 333-127703) on
      Form 8-K, which exhibit is incorporated herein by
    reference.**
            Filed
      with the SEC on May 14, 2010, as an exhibit, numbered as indicated above,
      to the Registrant’s Current Report (SEC File No. 333-127703) on Form 8-K,
      which exhibit is incorporated herein by reference.†
            Management
      contract or compensatory plan or arrangement¶
            This
      certification is being furnished and shall not be deemed “filed” with the
      SEC for purposes of Section 18 of the Exchange Act, or otherwise subject
      to the liability of that section, and shall not be deemed to be
      incorporated by reference into any filing under the Securities Act or the
      Exchange Act, except to the extent that the Registrant specifically
      incorporates it by reference.




33


SIGNATURES





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





Date:
      May 17, 2010
            LI3
      ENERGY, INC.By:
            /s/
      Luis F. SaenzName: Luis
      F. SaenzTitle:  
      Chief Executive Officer
              (Principal Executive Officer)By:
            /s/
      Eric E. MarinName: Eric
      E. MarinTitle:  
      Interim Chief Financial Officer
              (Principal Financial Officer)





34




EXHIBIT
INDEX





Exhibit Number
            
            Description31.1
            
            Certification
      of Principal Executive Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            
            Certification
      of Principal Financial Officer, pursuant to SEC Rules 13a-14(a) and
      15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1¶
            
            Certification
      of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002*32.2¶
            
            Certification
      of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002*





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





35