Filing summary
Registrant: The supplied filing is for Brazil Minerals, Inc. (BMIX), not Atlas Lithium Corp. It is a Form 10-Q for the quarter ended September 30, 2016, with year-to-date results for the nine months then ended. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
Brazil Minerals, through subsidiaries and joint ventures, mines and sells diamonds, gold, sand and mortar and holds mineral rights in Brazil. It reported 38 mineral rights as of September 30, 2016. The company said its third-quarter focus was testing portable gold-recovery equipment and developing lower-cost, scalable gold and diamond processing. Jupiter Gold Corporation (JGC), formed in 2016, held mineral rights through its subsidiary; Brazil Minerals reported approximately 60% ownership of JGC at quarter-end.
Key financial results
| Metric | Three months ended September 30, 2016 | Nine months ended September 30, 2016 | Prior-year comparison |
|---|---|---|---|
| Revenue | $7,752 | $11,821 | $18,326 and $58,512, respectively |
| Gross profit (loss) | $(39,709) | $(100,472) | $9,753 and $(87,087), respectively |
| Operating expenses | $194,656 | $638,837 | $213,588 and $672,409, respectively |
| Net loss attributable to Brazil Minerals | $(444,727) | $(1,039,455) | $(50,705) and $(606,183), respectively |
- Margins: Gross loss was reported in both the 2016 quarter and year-to-date period. The filing attributes the quarterly deterioration to lower revenue and higher production costs; year-to-date cost of revenue declined but not enough to offset the revenue drop.
- Cash flow: The cash flow statement reports net cash used in operating activities of $417,976 and investing activities of $44,544 for the nine months; financing provided $372,340. Cash declined from $64,357 at the start of the period to $12,002. The MD&A gives different operating and investing cash-flow amounts, as noted under facts to verify.
- Liquidity: Current assets were $205,209 and current liabilities were $1,117,510, for a working-capital deficit of $912,301 and a current ratio of 0.18. Cash was $12,002.
- Debt and liabilities: Current convertible notes, net of discounts, were $314,809; derivative liabilities were $88,175. Total liabilities were $1,309,754. A $244,000 secured convertible note due September 30, 2015 remained past due and in technical default, although the company said the holder had not demanded payment.
- Equity: Total stockholders’ deficit was $38,307. Common shares issued and outstanding increased from 6.22 billion at December 31, 2015 to 12.42 billion at September 30, 2016. The filing reported 12.80 billion outstanding as of November 17, 2016.
Material changes versus the prior comparable period
- Third-quarter revenue fell 57.7% year over year; nine-month revenue fell 79.8%. Management attributed the reduction to waiting for gold-recovery equipment before restarting production.
- Third-quarter gross results shifted from a $9,753 profit to a $39,709 loss. Nine-month gross loss widened from $87,087 to $100,472.
- Quarterly net loss attributable to the company increased to $444,727 from $50,705; the nine-month loss increased to $1,039,455 from $606,183. Lower gains on derivative liabilities and other expenses contributed to the year-over-year change.
- The company said it extinguished $200,000 of convertible-note principal plus accrued interest in exchange for Brazil Minerals shares and JGC securities. It also exchanged all Series C and about 44% of Series B preferred stock for JGC securities, reducing those potential conversions into Brazil Minerals common stock.
- Convertible notes from St. George Investments were extinguished, according to management. The company nevertheless reported substantial potential dilution: notes from holders indicating an intention to convert represented approximately 3.2 billion common shares, and total potential conversions could exceed authorized but unissued shares at quarter-end.
Outlook, risks and unusual items
- Outlook: Management expected the portable gold plant, with planned additions to process thicker material and recover diamonds, to support increased gold and diamond sales. It also expected sand and mortar sales to contribute to cash generation. Management believed these sources could eventually make the company cash-flow positive, but gave no assurance.
- Funding and going concern: The filing states that limited working capital, recurring losses and lack of material product revenue raise substantial doubt about the company’s ability to continue as a going concern. Management expected to rely on operating revenue, equity sales, debt financing and/or sales of interests in mineral-specific subsidiaries; availability on satisfactory terms was not assured.
- Operating and market risks: The filing cites exploration and production uncertainty, mineral-price fluctuations, regulation, competition, weather and infrastructure disruption, and risks to mineral-property title. The company also has foreign-currency exposure through Brazilian operations.
- Unusual items and dilution: Nine-month results included a $229,426 loss on extinguishment of debt and a $193,170 gain from remeasurement of derivative liabilities. Variable-price conversion terms, preferred-stock conversions and share issuances create significant dilution risk. In November 2016, the company increased its authorized common shares to 15 billion.
- Controls: Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2016, while noting the inherent limitations of controls.
Important facts for investors to verify
- Confirm issuer identity: the provided filing names Brazil Minerals, Inc., despite the request metadata naming Atlas Lithium Corp.
- Reconcile cash-flow figures: the statement reports operating cash use of $417,976 and investing cash use of $44,544, while MD&A reports $368,092 and $94,428, respectively.
- Check the status, maturity and conversion terms of the past-due secured note and other convertible obligations, including the reported potential 3.2 billion shares and subsequent increase in authorized shares.
- Assess the timing, operating performance and funding needs of the portable processing plant and whether sales can materially improve cash generation.
- Review the going-concern disclosure, working-capital deficit, related-party amounts payable to the CEO, and the company’s ability to obtain additional financing.