Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Description of Business
Overview
Brazil Minerals, Inc. ("Brazil Minerals", the "Company", "we", "us", or "our"), together with its subsidiaries, is engaged in the business of acquiring controlling positions or significant positions with oversight roles in companies in Brazil in the minerals area or in industries related to minerals. We consolidate the results of our controlled subsidiaries in this Annual Report.
Our progress has been steady, and can be measured in at least two quantifiable ways. First, in terms of mineral assets, in early 2013, our initial year of operations under the current business model and management team, we had 3 mineral rights. As of March 31, 2017, we had 38 mineral rights, as follows:
a)
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10 mineral rights that are mining concessions, the highest level of mineral right in Brazil ("Concessão de Lavra");
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b)
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8 mineral rights that have status just below mining concession ("Requerimento de Lavra"), which allows us to apply for both an upgrade to mining concession and to conduct limited commercial mining;
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c)
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8 mineral rights in the research permit phase ("Autorização de Resquisa"); and
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d)
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12 mineral rights in the phase of application for research permit ("Requerimento de Pesquisa").
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From 2013 to today, we have been taking shape as a holding company owner of different subsidiaries. As of March 31, 2017, we materially owned the following stakes:
(1)
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100% of BMIX Participações Ltda ("BMIXP");
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(2)
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100% of Mineração Duas Barras Ltda ("MDB");
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(3)
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50% of RST Recursos Minerais Ltda. ("RST");
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(4)
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100% of Hercules Resources Corporation ("HRC");
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(4)
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100% of Hercules Brasil Ltda. ("HBR");
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(5)
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58% of Jupiter Gold Corporation ("JGC").
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At the end of the first quarter of 2017, we achieved the deployment of a modular gold and diamond processing plant in one of our mining concessions. The plant uses centrifugation as the primary method of gold separation. Material identified as potentially containing diamonds is retrieved and further processed in specific high-precision equipment for detection of diamonds.
This modular plant is owned by JGC and is solely operated by Brazil Minerals which retains 100% of the diamonds and 50% of the gold recovered from it, while the other 50% of gold is for the account of JGC. Under standard U.S. GAAP consolidation of financial results for subsidiaries, any gold revenues obtained by JGC are added to the revenues of Brazil Minerals.
Results of Operations
Quarter Ended March 31, 2017 Compared to Quarter Ended March 31, 2016
In the quarter ended March 31, 2017, we had revenues of $3,396 as compared to revenues of $2,556 in the quarter ended March 31, 2016, an increase of 32.9%. This increase is explained by the fees received on a service agreement with Jupiter Gold Corporation. Overall, this low level of revenue is explained by the fact that we did not have our new modular plant for diamond and gold effectively deployed until the second quarter of 2017.
Our consolidated cost of goods sold in the first quarter of 2017 was $33,195as compared to to our consolidated cost of goods sold in the first quarter of 2016, which was $40,709. This decline is explained by lesser activity as the new modular plant was being deployed.
Our gross loss in the first quarter of 2017 was $29,799, as compared to our gross loss of $38,153 in the first quarter of 2016, an improvement of 21.90%. This result was primarily due the lower cost of goods sold which was more than compensated for the lower revenues in the first quarter of 2017.
We had an aggregate of $153,933 in operating expenses in the first quarter of 2017, as compared to an aggregate of $204,856 in operating expenses in the first quarter of 2016, a decrease of 24.9%. This decline was mostly due to lower professional fees, general and administrative expenses, and stock-based compensation, which more than offset an increase in compensation and related costs.
In the first quarter of 2017, we had total other expenses of $90,650, as compared to $54,320 in the first quarter of 2016, an increase of 66.9%. This change in 2017 was mostly due to higher interest on promissory notes and zero gain on derivative liabilities which more than offset the lower amortization of debt discount and other fees as compared to the same period in 2016.
In the first quarter of 2017, we experienced a net loss attributable to Brazil Minerals, Inc. stockholders of $269,305, as compared to a net loss of $290,608 in the first quarter of 2016, an improvement of 7.3%. This result was mostly due to the lower operational expenses in the first quarter of 2017 which more than offset higher other expenses as compared to the same period in 2016. On a per share basis (both basic and diluted), in the first quarter of 2017, we had net loss attributable to Brazil Minerals, Inc. stockholders of $0.01, as compared to a net loss of $0.02 in the first quarter of 2016.
In the first quarter of 2017, we had total comprehensive loss of $231,669 as compared to a net loss of $603,965 in the first quarter of 2016, an improvement of 61.6%. This result was primarily driven by lower foreign currency adjustments which more than offset higher net losses in the first quarter of 2017 as compared to the same period in 2016.
Net cash used in operating activities was $175,198 in the first quarter of 2017, as compared to $163,190 in the first quarter of 2016. Net cash used in investing activities was $6,762 in the first quarter of 2017, as compared to $0 in the first quarter of 2016. Net cash provided by financing activities was $211,675 in the first quarter of 2016, as compared to $122,240 in the first quarter of 2016.
Liquidity and Capital Resources
As of March 31, 2017, we had total current assets of $169,416 compared to total current liabilities of $1,127,458 for a current ratio of 0.15 to 1 and working capital of ($958,042). By comparison, on March 31, 2016, we had total current assets of $223,471 compared to current liabilities of $1,364,807 for a current ratio of 0.16 to 1 and working capital of ($1,141,336). On an absolute basis, the relative improvement in working capital is primarily attributable to the decrease in outstanding convertible notes and other short-term obligations.
In the first quarter of 2017, our principal sources of liquidity were the issuance of equity and debt securities. In the first quarter of 2016, our principal sources of liquidity had been issuances of equity and debt securities. During the first quarter of 2017, we received an aggregate of $26,000 in gross proceeds from the sale of common stock.
We believe that financial resources and funds generated from revenues, and equity and debt sales will provide cash flow for operations. We have no plans for any significant cash acquisitions in 2017 or in the foreseeable future.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our financial instruments consist of cash and cash equivalents, loans to a related party, accrued expenses, and an amount due to a director. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in our financial statements. If our estimate of the fair value is incorrect at March 31, 2017, it could negatively affect our financial position and liquidity and could result in our having understated our net loss.
Recent Accounting Pronouncements
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note 1 of the financial statements. We have reviewed all recent accounting pronouncements issued to the date of the issuance of these financial statements, and we do not believe any of these pronouncements will have a material impact on us.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We sold a total of $18,000 in restricted common stock to Kenneth Kincaid on February 14, 2017 and March 3, 2017. We sold $3,000 in restricted common stock to Candice Kincaid on February 14, 2017. We sold $5,000 in restricted common stock to Craig Kincaid on March 3, 2017. All proceeds of the above described transactions were for use in the normal course of business of the Company.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a "smaller reporting company," as defined by Rule 229.10(f)(1).
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the design, operation, and effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of March 31, 2017. On the basis of that evaluation, management concluded that our disclosure controls and procedures designed to provide reasonable assurance that the information required to be disclosed in reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "Commission"), and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure were not effective for the reasons described in Item 4(b), but we intend to make them effective by the actions described in Item 4(b).
(b) Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system is designed to provide reasonable assurance to management and to our Board of Directors regarding the preparation and fair presentation of published financial statements. Our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on his evaluation under the framework in
Internal Control—Integrated Framework,
he concluded that our internal control over financial reporting was effective as of March 31, 2017.