Brazil Minerals, Inc. — Form 10-Q for the quarter ended September 30, 2017
Entity note: The request identifies Atlas Lithium Corp., but the supplied filing is for Brazil Minerals, Inc. The filing describes a Brazil-focused mining and minerals holding company; confirm the issuer and filing match the intended investment.
Business context and reporting period
The filing reports unaudited third-quarter and nine-month 2017 results, with comparisons to the corresponding 2016 periods. Through subsidiaries, the company mines and sells diamonds, gold, sand and mortar, and reports 37 mineral rights in Brazil. It describes a gradual return to mining, while noting equipment repairs constrained production. The company consolidates Jupiter Gold Corporation (JGC), in which its ownership is reported as approximately 58% in the notes and 55% in MD&A.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2017: $17,933; 2016: $7,752 | 2017: $30,387; 2016: $11,821 |
| Cost of revenue | 2017: $36,651; 2016: $47,461 | 2017: $113,528; 2016: $112,293 |
| Gross loss | 2017: $18,718; 2016: $39,709 | 2017: $83,141; 2016: $100,472 |
| Operating expenses | 2017: $394,162; 2016: $194,656 | 2017: $769,930; 2016: $638,837 |
| Net loss attributable to Brazil Minerals shareholders | 2017: $494,395; 2016: $444,727 | 2017: $1,122,029; 2016: $1,039,455 |
Third-quarter revenue increased 131%, which management attributed to resuming mining; cost of revenue fell 23%, helped by more accessible production locations and lower diesel and labor use. The gross loss narrowed, but operating expenses rose 102%, primarily due to $164,574 in noncash stock-based compensation. Nine-month stock compensation was $164,574 versus $57,568 in 2016. Third-quarter basic and diluted loss per share was $0.01 versus $0.03; nine-month loss per share was $0.02 versus $0.06. The weighted-average share count rose substantially year over year.
- Cash flow, nine months: Operating cash used was $549,415 versus $417,976 in 2016; investing cash used was $37,991 versus $44,544; financing cash provided was $714,909 versus $372,340. Financing included $415,420 net proceeds from convertible notes and $212,766 from sales of subsidiary stock to noncontrolling investors.
- Cash and liquidity: Cash was $145,547 at September 30, 2017, versus $7,139 at December 31, 2016. Current assets were $260,288 and current liabilities $1,434,466, implying working capital of negative $1,174,178 and a current ratio of 0.18.
- Debt and obligations: Convertible-note principal was $891,389, with $298,101 of remaining discounts; the balance sheet reports current notes net of discounts of $567,828. Total liabilities were $1,638,250. Accounts payable and accrued expenses were $403,960, and related-party payable was $462,678, principally amounts owed to the CEO for accrued salary, retirement contributions and advances.
- Equity and assets: Total assets were $1,324,101, including $648,149 of intangible mineral rights and $415,664 of net property and equipment. Total stockholders’ deficit was $314,149. Common shares issued and outstanding were 86,181,478 at quarter-end; 94,995,911 were reported outstanding as of November 21, 2017.
Material changes, outlook and risks
The filing states that the company has incurred recurring losses, limited working capital and no material product or service revenue, creating substantial doubt about its ability to continue as a going concern. Management expects to rely on operating revenue, royalties, equity sales and debt financing. Its plan includes increased gold and rough-diamond sales from a modular processing plant owned by JGC; gold revenue is shared 50/50 with JGC, while diamond revenue is retained by the company. Management says there can be no assurance that financing or operating plans will succeed. It had no plans for significant cash acquisitions in the foreseeable future.
Most convertible notes have variable conversion prices at significant discounts to market. The company estimated that notes could convert into approximately 293.5 million common shares, dependent in part on the trading price, compared with 100 million authorized shares at September 30, 2017. On October 23, 2017, after quarter-end, authorized common shares increased to 250 million. One secured note was past due and in technical default; its interest rate rose to 30%, and the company was negotiating with the holder. No payment demand had been made. The filing also cites mineral discovery and production uncertainty, commodity-market fluctuations, regulation, competition, key-personnel loss, weather and infrastructure risks. JGC’s planned OTC quotation was an aspiration for late 2017 or Q1 2018, not a guarantee.
Disclosure controls and procedures were described as ineffective, while management separately concluded internal control over financial reporting was effective. The filing says there were no material control changes during the quarter. No material subsequent events were reported other than the share authorization increase and November 24, 2017 bylaw and director changes.
Most important facts to verify
- Confirm the filing is for the intended issuer: the supplied report names Brazil Minerals, Inc., not Atlas Lithium Corp.
- Reconcile JGC ownership, reported as approximately 58% in the notes and 55% in MD&A.
- Confirm the liquidity comparison in MD&A: its stated September 30, 2016 figures appear to match the December 31, 2016 balance-sheet figures, so the comparison is unclear.
- Review the past-due secured note, conversion terms, dilution exposure, authorized-share increase and subsequent share issuance.
- Assess the going-concern funding plan, operating recovery, and the conflicting control conclusions regarding disclosure controls and financial reporting controls.