Brazil Minerals, Inc. — Form 10-Q summary
Issuer clarification: The filing is for Brazil Minerals, Inc. (BMIX), not Atlas Lithium Corp. It reports the quarter and six months ended June 30, 2014; financial statements are unaudited. The company mines and sells diamonds and gold in Brazil, primarily through its subsidiary Mineração Duas Barras Ltda. (MDB).
Financial performance and position
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $97,162 | $101,444 | $145,619 quarter; $151,382 six months |
| Gross profit / margin | $22,613 / 23.3% | $25,554 / 25.2% | $62,698 / 43.1% quarter; $68,461 / 45.2% six months |
| Net loss | $968,684 | $1,367,508 | $1,166,182 quarter; $1,343,007 six months |
| Operating cash flow | Not separately presented | $316,007 provided | $461,746 used in six months |
| Cash and equivalents | $643,098 at June 30, 2014 | $104,785 at December 31, 2013 |
- Six-month operating expenses were $884,647, down 37.2% from $1,408,147. Stock-based compensation fell to $353,797 from $1,009,400.
- Total assets were $2,243,987; total liabilities were $2,527,521, producing stockholders’ equity deficiency of $283,534. Current assets of $1,296,675 were below current liabilities of $2,027,521; reported negative working capital was $730,846.
- Current liabilities included $486,894 of convertible notes, net of debt discount; a $750,626 derivative liability; and $998,592 of deferred revenue, including current and non-current amounts. The company had $290,660 in accrued expenses and accounts payable.
- Investing activities used $777,802, including $500,000 to increase the MDB stake and $255,585 for capital assets. Financing activities provided $934,110, principally from note proceeds. Cash increased by $538,313 during the six months.
Changes, developments, and outlook
- Revenue declined 33.3% for the quarter and 33.0% for the six months. Management attributed lower production and higher cost of sales as a percentage of revenue to mining an underwater area that required continuous pumping. Management expected the targeted area’s richer gravel to compensate over time for access costs.
- MDB’s production is the source of consolidated revenue. Management described mining-front selection, equipment, fuel, labor, commodity prices, and seasonal rainfall as important factors. The rainy season in northern Minas Gerais generally runs December through April, when revenue is expected to be substantially lower.
- During the quarter, BMIX acquired an additional 18.75% of MDB for $500,000 cash and 675,000 shares, bringing reported ownership to 73.75%. After quarter-end, it acquired another 13.13% for $350,000; the filing says the subsidiary then held 86.88%.
- The company reported receiving $930,000 from diamond forward sales and other financing during the quarter, and $1.74 million in gross proceeds from financings and diamond pre-sales during the six months. Deferred revenue included $1.025 million received for future diamond deliveries; $26,408 was recognized upon delivery during the period.
- Management said current resources and operating funds were expected to cover anticipated expenditures for the foreseeable future, but estimated operational funding needs could be $500,000 or less over 12 months. Acquisitions could require additional equity or debt financing; management acknowledged dilution trade-offs and uncertainty in production-related funding needs.
- Risks cited include unsuccessful or uneconomic mineral exploration, commodity-market fluctuations, regulation and environmental requirements, competition, key-personnel loss, weather, infrastructure disruption, and general economic conditions. The company also noted mineral-title risks and that NOL tax benefits are subject to ownership-change limitations.
- Convertible financing carried substantial dilution and accounting complexity: notes had interest rates generally of 10% (one 12% note), conversion features including discounts to market prices, warrants, and debt discounts. The June 27 debenture had $378,000 face value and generated $350,000 gross proceeds; it was secured by pledged company shares.
- Management concluded disclosure controls and internal control over financial reporting were not effective as of June 30, 2014, citing limited segregation of duties outside MDB, Portuguese-language accounting records, and inventory-control processes. Management proposed hiring bilingual accounting personnel and regular inventory valuation reviews.
- After quarter-end, the company also reported selling 2.6 million restricted shares for $118,000 on August 8, 2014. It stated there were no other material subsequent events requiring disclosure.
Investor facts to verify
- Confirm the issuer and security being analyzed: this filing is Brazil Minerals, Inc., not Atlas Lithium Corp.
- Reconcile the MD&A’s Q2 operating-expense figure of $495,791 with the financial statements’ $510,815; the filing text does not clearly explain the difference.
- Assess liquidity and near-term obligations, including negative working capital, convertible-note maturities and conversion terms, derivative liabilities, and future diamond-delivery commitments.
- Verify that diamond pre-sale proceeds are matched by timely deliveries and that pledged-share collateral requirements can be met.
- Evaluate the operational recovery and cost implications of mining the underwater area, seasonal production variability, and the economics of MDB’s reported mineral rights and operations.
- Review remediation of the disclosed control weaknesses and the accuracy of inventory valuation and translated accounting records.