Atlas Lithium Corp - Quarter Report: 2015 March (Form 10-Q)

(Mark One)

 

 

For the quarterly period ended March 31, 2015

 

 

For the transition period from ____________ to ____________

Indicate by check mark whether the issuer (1) 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 ☒  No ☐

 

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 ☒  No ☐

 

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.

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.

As of April 30, 2015 the registrant had 438,021,726 shares of common stock, par value $.001 per share, issued and outstanding.

Item 1.  FINANCIAL STATEMENTS

F-1

F-2

F-3

F-4

The ability of the Company to continue as a going concern is dependent on the Company generating cash from its operations, the sale of its common stock and/or obtaining debt financing. During the three months ended March 31, 2015, the Company funded operations primarily through the receipt of $296,600 in net proceeds from convertible notes payable. Subsequent to quarter end, the Company has received $90,500 in proceeds related to sale of common stock and warrants. Management's plans include selling its equity securities and obtaining debt financing to fund its capital requirements and ongoing operations; however, there can be no assurance the Company will be successful in these efforts.

F-5

F-6

The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents to the extent that the funds are not being held for investment purposes. The Company's bank accounts are deposited in FDIC insured institutions. Funds held in U.S. banks are insured up to $250,000 and funds held in Brazilian banks are insured up to 250,000 Brazilian Reals (approximately $77,925 as of March 31, 2015).

Inventory consists of rough diamonds, gold, ore stockpile, parts, supplies and related production costs and is stated at lower of cost or market. The amount of any write-down of inventories to net realizable value and all losses, are recognized in the period the write-down of loss occurs. At March 31, 2015 and December 31, 2014, all inventory consisted of ore stockpile.

The Company records a receivable for value added taxes recoverable from Brazilian authorities on goods and services purchased by its Brazilian subsidiaries. The Company intends to recover the taxes through diamond and gravel sales.

In June 2014, the Company entered into an agreement to purchase 25% of the equity of RST Recursos Minerais Ltda ("RST") for cash payments of 250,000 Brazilian Reals and the issuance of shares of the Company's common stock valued at 100,000 Brazilian Reals. In connection with this agreement the Company issued 1,428,572 shares of common stock with a value of $43,868 and made cash payments of $107,858. As of December 31, 2014, the investment was accounted for using the equity method. Effective March 18, 2015, the Company purchased an additional 25% of RST, see Note 2 for additional information. The remaining 50% interest in RST is owned by BMI, a related party. RST's assets are 10 mining concessions (the highest level of mineral right in Brazil) for diamond and gold as well as 12 other mineral rights. Income and expenses related to RST were insignificant during the three months ended March 31, 2015. At the date of acquisition of the additional ownership percentage the Company accounted for the investments in RST as a business combination, see Note 2.

F-7

Costs of exploration, carrying and retaining unproven mineral lease properties are expensed as incurred. Mineral property acquisition costs, including licenses and lease payments, are capitalized. Although the Company has taken steps to verify title to mineral properties in which it has an interest, these procedures do not guarantee the Company's rights. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects.

 

Impairment losses are recorded on mineral properties used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. As of March 31, 2015 and December 31, 2014, the Company did not recognize any impairment losses related to mineral properties held.

 

F-8

F-9

F-10

In June 2014, the Company entered into an agreement to purchase 25% of the equity of RST Recursos Minerais Ltda ("RST") for cash payments of 250,000 Brazilian Reais and the issuance of shares of the Company's common stock valued at 100,000 Brazilian Reais. In connection with this agreement the Company issued 1,428,572 shares of common stock with a value of $43,868 and made cash payments of $107,858. At December 31, 2014, the investment was accounted for using the equity method. Effective March 18, 2015, the Company purchased an additional 25% of RST from a third party for R$400,000 or $124,680. Under the terms of the agreement, the Company is to make monthly payments ranging from R$75,000 to R$100,000 beginning March 25, 2015. As of March 31, 2015, R$350,000 or $109,095 remained payable in connection with the acquisition and is included within notes payable on the accompanying balance sheet.

F-11

Intangible assets consist of mining rights at MDB and RST and are not amortized as rights are perpetual.  The carrying value was $673,409 and $124,245 at March 31, 2015 and December 31, 2014, respectively. See Note 2 for additional information.

F-12

F-13

On March 31, 2015, the derivative liabilities were revalued at $717,036 resulting in a gain of $955,813 related to the change in fair market value of the derivative liabilities. The derivative liabilities were revalued using the Black-Scholes option pricing model with the following average assumptions: an exercise price of $0.0007, our stock price on the date of grant ($0.0011), expected dividend yield of 0%, expected volatility of 257.77%, risk-free interest rate of 0.12%, and an expected term of 0.3 years. The fair market value of the derivative liabilities is highly dependent upon the Company's traded stock price during the period in which the exercise price is determined, typically the 20 days prior to quarter end, and the closing stock price on the date of valuation, typically quarter end. The larger the difference in these two prices, typically, the greater the derivative liability.

F-14

F-15

F-16

F-17

On April 30, 2014, the Company entered into Subscription Agreements with four investors (the "Buyers"), pursuant to which the Buyers agreed to pay to the Company an aggregate of $500,000 and the Company sold them an aggregate of 3,750,000 shares of the Company's common stock (the "Shares"), two year options to purchase an aggregate of 1,875,000 shares of Common Stock at an exercise price of $0.12 per share, payable in cash to the Company (the "Options"), and agreed to deliver to the Buyers from time to time on or before December 31, 2015, polished and GIA-graded diamonds of at least 0.4 carats having $200,000 inaggregate Rappaport value. The Company agreed to pledge with third party collateral agents for the Buyers an aggregate of 8,000,000 shares of its common stock, valued at approximately $800,000 at the time the transaction was consummated, in order to secure the delivery of the diamonds. The number of shares pledged is subject to periodic adjustment as diamonds are delivered and as the market price of the Company's stock may change. As of March 31, 2015 and December 31, 2014, the required reserve was 363,636,364 and 123,076,923 shares of common stock, respectively. On the date of the agreement, the Company reserved for the Buyers or their designees,. The fair value of the options was  $57,662 was calculated using the Black-Scholes option pricing model with the following assumptions: our stock price on date of grant ($0.09), expected dividend yield of 0%, expected volatility of 77.56%, risk-free interest rate of 0.11%, and an expected term of 2 years.  The common stock issued was valued at $348,750 based upon the closing market price of the Company's common stock. Since the agreement contained various elements, the Company allocated the $47,544 to the options, $287,552 to the shares issued and $164,904 to deferred revenue based upon the relative fair market value. There were no deliveries under this contract during the three months ended March 31, 2015.

As of March 31, 2015 and December 31, 2014, amounts due from Brazil Minerals, Inc. ("BMI"), an entity with common management of the Company, in connection with loans made for operating purposes were $148,306 and $123,691, respectively. The loan does not incur interest and is due on demand.

F-18

 

NOTE 8 - SUBSEQUENT EVENTS

In accordance with FASB ASC 855-10 Subsequent Events, the Company has analyzed its operations subsequent to March 31, 2015 to the date these consolidated financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements, except as noted below.

 

Subsequent to quarter end, and until April 30, 2015 the Company received $90,500 in proceeds related to common stock and warrants sold.

Subsequent to quarter end, the Company issued 109,142,827 shares of common stock in connection with conversions of convertible notes payable.

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the notes to those financial statements appearing elsewhere in this Report.

This Quarterly Report contains forward-looking statements. Forward-looking statements for Brazil Minerals, Inc. reflect current expectations, as of the date of this Quarterly Report, and involve certain risks and uncertainties. Actual results could differ materially from those anticipated in these forward- looking statements as a result of various factors. Factors that could cause future results to materially differ from the recent results or those projected in forward-looking statements include: unprofitable efforts resulting not only from the failure to discover mineral deposits but also from finding mineral deposits that, though present, are insufficient in quantity and quality to return a profit from production; market fluctuations; government regulations, including regulations relating to royalties, allowable production, importing and exporting of minerals, and environmental protection; competition; the loss of services of key personnel; unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of infrastructure as well as general economic conditions.

 

Overview

 

 

Some significant developments to our business during the first quarter of 2015 were as follows:

(1)

In January 2015, Brazil's Mining Department ("Departamento Nacional de Produção Mineral", in Portuguese, or "DNPM") approved the addition of sand as a mineral entity to one of our mining concessions. Mining concessions are the highest level of mineral rights in Brazil. They permit the owner to mine and commercialize specified minerals in perpetuity, as long as continuous observance of the Brazilian mining code is followed. With the addition of sand, that mining concession now permits the mining of diamond, gold and sand. This achievement validated our operational prowess in capably performing the many demanding steps to be taken with local mining authorities to obtain approval of the addition of a mineral species to a concession license. Our initial application for inclusion of sand was initially submitted in December 2013 and throughout 2014 several additional studies were performed and reports filed to support our application.

 

 

---

 

 

(2)

Geological work performed by an outside consultancy estimated at 454,813 tons the amount of free sand available superficially in one of several areas at a mining concession. Sand is beneficial to us in two ways: its cash flows are independent from diamond and gold operations and it is easily obtained with very low extraction costs. Our high quality sand, as attested by geochemical analysis, is sought after for use in civil construction and preparation of multiple materials. Sand is available naturally since we are at the margins of a river, but in particular sand can be continuously replenished or partially replenished over time since sand is also a byproduct of the processing of gravel at our diamond and gold recovery plant.

(3)

In February 2015, we received US$200,000 in cash from a group of value-added investors from the sale of three-year maturity notes with a fixed conversion price. These notes are not secured and not backed by any collateral. Any conversion to our common stock is at a fixed price of $0.0025 per share. With their investment, the investors collectively also received three-year options to purchase common stock at $0.005 per share.

(4)

In February 2015, we acquired the last two remaining capital equipment items needed for us to have our own initial complete fleet for operations in diamonds, gold and sand. We acquired a front-end loader and a large truck and paid approximately half of their cost with sand, and the other half in cash in periodic payments. In particular, this capital equipment investment substantially reduced our ongoing operational costs as we had been paying almost US$10,000 per month in rentals for a loader and a truck. By eliminating such rentals, and with the ability to extract higher productivity from our own equipment, we believe that we will recoup the cash portion of this transaction in a few months. Currently we have no remaining rentals of capital equipment.

(5)

In March 2015, we became titled owners of 50% of RST Recursos Minerais, Ltda. ("RST"), a Brazilian company with 10 mining concessions and 12 other minerals rights, all for diamond and gold. These RST mining concessions are located in the same general area as our diamond and gold recovery plant. After more than a year of negotiations, the total acquisition price for 50% of RST was approximately $270,000 at the then prevailing exchange rates. Prior to our involvement, the last time RST shares had been acquired by a publicly-traded company occurred in June 2008, when a Canadian issuer contractually agreed to pay US$10.5 million dollars for 100% of RST. Subsequently this Canadian buyer paid US$2 million to the sellers, but was unable to pay the remainder due to the global financial crisis affecting its situation. RST was never explored by it or other owners since then and its mining concession areas have remained essentially untouched. RST mining concessions and minerals rights are located on the banks of the Jequitinhonha River, a well-known alluvial diamond and gold area for the last two centuries. RST has no workers at this time, and any eventual mining in an RST area could possibly be processed at our plant.

(6)

In March 2015, we retained José Francescatto, a well-known diamond and gold geologist, to be our Senior Geologist. Mr. Francescatto has over 36 years of experience primarily in diamond and gold properties. In particular, he was the Chief of Geology at Mineração Tejucana S/A ("Tejucana"). Tejucana has a revered history as the most successful diamond mining company in Brazil. It mined mostly inside the Jequitinhonha River using dredges. RST, a company in which we now have a 50% stake, is the successor name for most of Tejucana's diamond and gold properties. The river banks of the RST areas were not explored by Tejucana in any detail, and thus remain promising locations for mining. Mr. Francescatto has also worked at Kinross, a large global miner, and two Brazilian public companies, Magnesita and Tractorbel.

(7)	In March 2015, we signed a forbearance agreement with St. George Investments, LLC ("St. George") which resulted in approximately $62,500 in convertible debt being extinguished from a certain note held by St. George by conversion at approximately $0.0022 per share.

 

---

 

 

(8)	In March 2015, we signed a non-exclusive contract with a Brazilian company for the ongoing sale of sand until December 31, 2015. Pursuant to this contract, this customer is obligated to purchase a minimum volume of sand per month.

Subsequent to quarter end:

(1)	In April 2015, we announced that we had mined our largest rough diamond to date at 4.01 carats. This gem has very good appearance and no visible points or inclusions, and thus appears to be able to yield high color and clarity grades. This diamond is being cut and polished.

(2)

In April 2015, we announced preliminary results for the drilling of a new dry area for diamonds and gold, utilizing the Company's own Banka 4-inch drill. The first two exploration holes in such area yielded a sizeable layer of "starched quartz" gravel, known locally to be the richest type for diamonds and gold. The mineral rights area where this drilling took place has hundreds of acres, and is situated along the margins of the Jequitinhonha River. It is a dry location, amenable to a potential program of extraction by open surface excavation and removal and transport of the white gravel to our diamond and gold processing and recovery plant. We are pursuing only a focused research campaign of a few drilling holes, for  a relatively small expense, to guide us in choosing locales for dry mining with the highest expected yield and therefore profitability. While the results obtained have been highly encouraging, there is no assurance that these preliminary findings will be replicable to the entirety of or other locations in this area, or that a material amount of minerals will be found.

Results of Operations

Comparison of Three Months Ended March 31, 2015 to Three Months Ended March 31, 2014

We had revenues of $11,406 and $4,282 during the three months ended March 31, 2015 ("Q1 2015") and three months ended March 31, 2014 ("Q1 2014"), respectively.

 

Our cost of goods sold in Q1 2015, consisting entirely of production expenses, was $40,014. In Q1 2014, we had $1,341 of production expenses and also no other costs of goods sold.

Our gross loss in Q1 2015 was $28,608 as compared to a gross profit of $2,941 in Q1 2014. This was attributable to higher production expenses in Q1 2015.

 

We had an aggregate of $194,238 in total operating expenses in Q1 2015, a decrease of $179,653 or approximately 48.1% as compared to the $373,832 in total operating expenses in Q1 2014. The primary reasons for the decrease in total operating expenses in Q1 2015 as compared to Q1 2014 were that professional fees decreased from $161,779 to $34,915 and stock based compensation decreased from $123,402 to $34,200.

Our loss from operations decreased by $148,045 or approximately 39.9%, from $370,891 in Q1 2014 to $222,846 in Q1 2015. The decrease in loss from operations was as a result of the $179,653 decrease in total operating expenses, which was partially offset by an increase in gross loss.

The Company had total other income of $566,714 in Q1 2015 as compared to a total other expense of $27,933 in Q1 2014. This was attributable to a gain on derivative liabilities in Q1 2015 of $885,853 as compared to only an $11,832 gain on derivative liabilities in Q1 2014, which difference was partially offset by amortization of debt discount and other fees increasing to $261,556 in Q1 2015 as compared to $28,306 in Q1 2014.

 

 

---

 

 

 

Primarily as a result of the $594,647 increase in total other income in Q1 2015 as compared to Q1 2014 and a $148,045 decrease in loss from operations, we had net income of $343,868 in Q1 2015 as compared to a net loss of $398,824 in Q1 2014, a difference of $742,692.

Net cash used in operating activities was $177,928 for Q1 2015 as compared to net cash provided by operating activities of $249,661 for Q1 2014, primarily as a result of there being $525,000 of customer deposits in Q1 2014 and none in Q1 2015.

Net cash used in investing activities decreased from $261,245 for Q1 2014 to $35,525 for Q1 2015, primarily because $245,579 was used for acquisition of capital assets in Q1 2014 while only $10,910 was used for such purpose in Q1 2015.

Net cash provided by financing activities decreased from $504,000 in Q1 2014 to $281,015 in Q1 2015 as proceeds of sales of convertible notes decreased from $529,000 in Q1 2014 to $281,015 in Q1 2015.

The effect of the foregoing and other changes in cash flows was that cash and cash equivalents decreased to $23,538 at March 31, 2015 from $665,461 at March 31, 2014.

 

Liquidity and Capital Resources

 

At March 31, 2015, we had total current assets of $521,954 compared to total current liabilities of $2,595,575 for a negative working capital of $2,073,621 as compared to total current assets of $538,765, total current liabilities of $3,062,857 and a negative working capital of $2,524,092 as of December 31, 2014. The improvement in our negative working capital as of March 31, 2015 was primarily the result of a decrease in derivative liabilities as a result of conversions of portions of our convertible notes.

 

In 2015, our principal sources of liquidity have been private placements of our convertible notes. During the three months ended March 31, 2015, we received an aggregate of $266,600 in gross proceeds as a result of various financings, of which $200,000 where from fixed-rate, fixed-floor convertible debt and $66,600 were from variable rate convertible debt.

We believe there is sufficient capital to fund our operations for at least the next twelve months. However, we may need additional capital to fund the purchase price for future acquisitions or investments and may seek equity or debt financing for such purposes.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements.

 

---

- 6 -

 

- 7 -