Brazil Minerals, Inc. — Q2 2015 Form 10-Q
Filing identity: The supplied filing is for Brazil Minerals, Inc. (BMIX), not Atlas Lithium Corp. It covers the quarter and six months ended June 30, 2015; financial statements are unaudited and in U.S. dollars.
Business context and reporting period
BMIX is a U.S. holding company with Brazilian operations involving diamond and gold mining, sand, and mortar. It reported ownership of 100% of Mineração Duas Barras (MDB), 50% of RST, and a wholly owned Hercules Brasil subsidiary. RST holds diamond and gold mineral rights; Hercules was established to pursue construction materials and mortar.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $28,780 | $97,162 | $40,186 | $101,444 |
| Gross profit (loss) | ($68,232) | $22,613 | ($96,840) | $25,554 |
| Operating expenses | $264,583 | $510,815 | $458,821 | $884,647 |
| Operating loss | ($332,815) | ($488,202) | ($555,661) | ($859,093) |
| Net loss | ($899,346) | ($968,684) | ($555,478) | ($1,367,508) |
| Operating cash flow | Not presented quarterly | ($413,503) | $363,039 |
Gross margin was approximately -237% in Q2 and -241% for the first half, versus approximately 23% and 25%, respectively, in the comparable 2014 periods. The first-half 2015 net loss was helped by a $748,505 gain on derivative liabilities, while debt-discount amortization was $648,932. These noncash and financing-related items materially affect reported results.
At June 30, cash was $69,889; current assets were $531,933 and current liabilities $2,916,133, implying negative working capital of approximately $2.38 million based on the balance sheet. Total liabilities were $3,104,580, including $961,564 of derivative liabilities. Inventory was $180,135. The company reported $643,537 of net financing cash flow and $38,600 of investing cash outflow for the first half.
Material changes versus prior period
- First-half revenue fell about 60% year over year, while production costs rose and gross profit turned to a loss. Management attributed lower revenue to fewer days of gravel processing and higher costs to diesel, gravel gathering, and preparation of the RST area.
- First-half operating expenses declined about 48%, including lower stock-based compensation, and operating loss narrowed about 35%.
- First-half net loss narrowed about 59%, but included a large derivative-liability gain; debt-discount amortization rose substantially.
- Common shares issued and outstanding increased from 118.6 million at December 31, 2014 to 1.234 billion at June 30, 2015. The filing reports 2.378 billion shares outstanding as of August 17, 2015.
- BMIX acquired an additional 25% of RST, bringing its ownership to 50%, and began consolidating RST in March 2015. The other 50% is owned by related party Brazil Mining, Inc.
Outlook, risks, and unusual items
- Management targeted eliminating most or all floorless variable-rate convertible debt during 2015 and becoming cash-flow positive by the end of Q1 2016 or sooner. It expected materially higher revenue once mining in the RST initial area reached steady state; these are forward-looking expectations, not assured results.
- Management said nine exploratory drill holes in a small portion of the RST area encountered commercially viable gravel containing diamonds and gold, while cautioning that results may not extend to the broader area and material production is not assured.
- The company disclosed substantial doubt about its ability to continue as a going concern, citing limited working capital and recurring losses. It depended on operating cash generation, equity sales, or debt financing; success was not assured. It reported $205,000 of equity and debt proceeds after June 30 in the financial-statement note, and separately described subsequent financing in the MD&A.
- Convertible notes included variable conversion prices at substantial discounts to market. The company estimated notes could convert into approximately 1.7 billion shares; conversion of all potential securities could exceed authorized common shares. A January 2014 secured note was past due at June 30 and in technical default, though no payment demand had been made.
- Derivative-liability accounting produced a significant first-half gain and substantial quarter-to-quarter earnings volatility. Foreign-currency translation reduced first-half comprehensive results by $130,166.
- The company reported no deliveries during the first half under two diamond delivery agreements. Customer deposits were $588,752 at June 30, including obligations associated with future deliveries.
- Management reported disclosure controls and procedures were ineffective, while concluding internal control over financial reporting was effective. The filing does not explain this distinction in the supplied text.
Important facts for investors to verify
- Registrant and period: Confirm the filing belongs to Brazil Minerals, Inc., not Atlas Lithium Corp.
- Conflicting MD&A figures: The MD&A gives different first-half cash-flow amounts and ending cash than the financial statements: operating cash flow of ($748,399), investing outflow of $113,721, financing inflow of $1,012,789, and ending cash of $126,188, versus the statements’ ($413,503), ($38,600), $643,537, and $69,889. The filing text does not provide a clear reconciliation.
- Working capital discrepancy: The MD&A states current liabilities of $3,087,346 and negative working capital of $2,555,413; the balance sheet reports current liabilities of $2,916,133, implying negative working capital of about $2,384,200.
- Q2 comparison discrepancy: The MD&A refers to Q2 2014 gross profit of $222,613, whereas the statement of operations reports $22,613. The statement value is used above.
- Liquidity and financing: Verify cash availability, overdue debt status, subsequent financing proceeds, and the company’s ability to fund operations without further dilutive borrowing or equity issuance.
- Execution and dilution: Verify RST drilling, production economics, mortar sales and margins, diamond delivery obligations, and the effect of outstanding and potentially convertible securities on share count.