The accompanying notes
are an integral part of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
Brazil Minerals, Inc. ("Brazil Minerals"
or the "Company") was incorporated as Flux Technologies, Corp. under the laws of the State of Nevada, U.S. on December
15, 2011. The Company changed its management and business on December 18, 2012, to focus on mineral exploration. Brazil Minerals,
through subsidiaries, owns mineral rights in Brazil for gold, diamonds, lithium, rare earths, titanium, iron, nickel, and sand.
Basis of Presentation and Principles
of Consolidation
The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United
States Securities and Exchange Commission (“SEC”) and are expressed in United States dollars. In the opinion of the
Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary
(consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2020, and the results
of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2020 and
2019, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated
financial statements should be read in conjunction with the financial statements and related notes thereto included in Form 10-K
for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission (the “SEC”) on April
14, 2020.
The consolidated financial statements include
the accounts of the Company and its 99.99% owned subsidiary, BMIX Participações Ltda. ("BMIXP"), which
includes the accounts of BMIXP's wholly-owned subsidiary, Mineração Duas Barras Ltda. ("MDB").
During the year ended December 31, 2014, BMIXP
acquired an initial 25% interest in RST Recursos Minerais Ltda. ("RST"), and during the first quarter of 2015, it acquired
an additional 25% interest in RST, thus bringing its total ownership of RST to 50%. As of March 18, 2015, RST has been consolidated
within the Company's financial statements.
On April 17, 2015, BMIXP incorporated Hercules
Resources Corporation ("HRC"). On May 27, 2015, HRC formalized title to 99.99% of Hercules Brasil Comercio e Transportes
Ltda. ("Hercules Brasil"). Thus, Hercules Brasil is a wholly-owned subsidiary and has been consolidated within the Company's
consolidated financial statements.
On July 27, 2016, upon approval by its Board
of Directors, the Company sold a 99.99% equity interest in Mineração Jupiter Ltda to Jupiter Gold Corporation ("Jupiter
Gold"), a newly created company, in exchange for 4,000,000 shares of the common stock of Jupiter Gold. On December 16, 2016,
the Securities and Exchange Commission ("SEC") declared effective a Registration Statement filed by JGC for the sale
of shares in a public offering in the U.S. As of December 31, 2019, the Company has ownership of approximately 18.9% of the equity
of Jupiter Gold. The Company has concluded that Jupiter Gold and its subsidiary Mineração Jupiter are variable interest
entities (“VIE”) in accordance with applicable accounting standards and guidance. As such, the accounts and results
of Jupiter Gold and Mineração Jupiter have been included in the Company's consolidated financial statements.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All material intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Going Concern
The consolidated financial statements have
been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities in the normal
course of business. The Company has limited working capital, has incurred losses in each of the past two years, and has not yet
received material revenues from sales of products or services. These factors create substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not include any adjustment that might be necessary if
the Company is unable to continue as a going concern.
Fair Value of Financial Instruments
The Company follows the guidance of Accounting
Standards Codification ("ASC") Topic 820, Fair Value Measurement and Disclosure. Fair value is defined as the
exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and
are developed based on market data obtained from sources independent of our Company. Unobservable inputs are inputs that reflect
our Company's assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes
three levels of inputs that may be used to measure fair value:
Level 1. Observable inputs such as quoted
prices in active markets;
Level 2. Inputs, other than the quoted
prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs in which
there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company's financial instruments consist
of cash and cash equivalents, accounts receivable, taxes receivable, prepaid expenses, deposits and other assets, accounts payable,
accrued expenses and convertible notes payable. The carrying amount of these financial instruments approximates fair value due
to either length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated
financial statements.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents
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 Reais (translating into approximately $48,089 as of March
31, 2020).
Inventory
Inventory for the Company consists of ore stockpile,
containing auriferous and diamondiferous gravel, which after processing in a recovery plant yields diamonds and gold, and is stated
at lower of cost or market. No value was placed on sand. 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, 2020 and December 31, 2019, inventory consisted
primarily of rough ore stockpiled for further gold and diamonds recovery. During the three months ended March 31, 2020 and 2019,
the Company did not record any write downs against the value of its inventory.
Taxes Receivable
The Company records a receivable for value
added taxes receivable from Brazilian authorities on goods and services purchased by its Brazilian subsidiaries.
The Company intends to recover the taxes through the acquisition of capital equipment from sellers who accept tax credits as payments.
Property and Equipment
Property and equipment are stated at cost,
net of accumulated depreciation. Major improvements and betterments are capitalized. Maintenance and repairs are expensed as incurred.
Depreciation is computed using the straight-line method over the estimated useful life. At the time of retirement or other disposition
of property and equipment, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is
reflected in the statements of operations as other gain or loss, net.
The diamond and gold processing plant and other
machinery are depreciated over an estimated useful life of ten years; vehicles are depreciated over an estimated life of four years;
and computer and other office equipment over an estimated useful life of three years.
Right of use assets and lease liabilities
In February 2016,
the FASB issued ASU No. 2016-02, Leases (“ASC 842”). The standard requires lessees to recognize almost all leases
on the balance sheet as a Right-of-Use ("ROU") asset and a lease liability and requires leases to be classified as either
an operating or a finance type lease. The standard excludes leases of intangible assets or inventory. The standard became effective
for the Company beginning January 1, 2019. The Company adopted ASC 842 using the modified retrospective approach, by applying the
new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods
beginning after January 1, 2019 are presented under ASC 842, while prior period amounts have not been adjusted and continue to
be reported in accordance with our historical accounting under ASC 840. The Company elected the package of practical expedients
permitted under the standard, which also allowed the Company to carry forward historical lease classifications. The Company also
elected the practical expedient related to treating lease and non-lease components as a single lease component for all equipment
leases as well as electing a policy exclusion permitting leases with an original lease term of less than one year to be excluded
from the ROU assets and lease liabilities.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under ASC 842, the
Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based
on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that
are fixed and determinable at the time of commencement. As most of the Company's leases do not provide an implicit rate, the Company
estimated the incremental borrowing rate in determining the present value of lease payments. The ROU asset also includes any lease
payments made prior to commencement and is recorded net of any lease incentives received. The Company lease terms may include options
to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.
Operating leases are
included in operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current
on the Company's condensed consolidated balance sheets.
Mineral Properties
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, 2020 and December 31, 2019,
the Company did not recognize any impairment losses related to mineral properties held.
Intangible Assets
For intangible assets
purchased in a business combination, the estimated fair values of the assets received are used to establish their recorded values.
For intangible assets acquired in a non-monetary exchange, the estimated fair values of the assets transferred (or the estimated
fair values of the assets received, if more clearly evident) are used to establish their recorded values, unless the values of
neither the assets received nor the assets transferred are determinable within reasonable limits, in which case the assets received
are measured based on the carrying values of the assets transferred. Valuation techniques consistent with the market approach,
income approach and/or cost approach are used to measure fair value. Intangible assets consist of mineral rights awarded by the
Brazilian national mining department and held by the Company's subsidiaries.
Impairment of Long-Lived Assets
For long-lived assets,
such as property and equipment and intangible assets subject to amortization, the Company continually monitors events and changes
in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes
in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying
value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is
less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount
over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value
less costs to sell.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Convertible Instruments
The Company evaluates and account for conversion
options embedded in convertible instruments in accordance with ASC 470-20, Debt with Conversion and Other Options.
Applicable U.S. GAAP requires companies to
bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments
according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded
derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the
hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value
under other U.S. GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same
terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments
(when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) by recording,
when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based
upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related
debt to their stated date of redemption.
Variable Interest Entities
The Company determines at the inception of
each arrangement whether an entity in which the Company holds an investment or in which the Company has other variable interests
in is considered a variable interest entity. The Company consolidates VIEs when it is the primary beneficiary. The primary beneficiary
of a VIE is the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect
the economic performance of the VIE; and (2) has the obligation to absorb losses or the right to receive benefits that in either
case could potentially be significant to the VIE. Periodically, the Company assesses whether any changes in the interest or relationship
with the entity affect the determination of whether the entity is still a VIE and, if so, whether the Company is the primary beneficiary.
If the Company is not the primary beneficiary in a VIE, the Company accounts for the investment under the equity method or cost
method in accordance with the applicable U.S. GAAP.
The Company has concluded that Jupiter
Gold Corporation and its subsidiary, Mineração Jupiter Ltda are VIEs in accordance with applicable accounting
standards and guidance; and although the operations of Jupiter Gold are independent of the Company, through governance rights,
the Company has the power to direct the activities that are most significant to Jupiter Gold. Therefore, the Company concluded
that it is the primary beneficiary of the Jupiter Gold.
Revenue Recognition
The Company recognizes
revenue under ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). The core principle of the new
revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The following five steps are applied to achieve that core principle:
·
|
Step 1: Identify the contract with the customer
|
·
|
Step 2: Identify the performance obligations in the contract
|
·
|
Step 3: Determine the transaction price
|
·
|
Step 4: Allocate the transaction price to the performance obligations in the contract
|
·
|
Step 5: Recognize revenue when the company satisfies a performance obligation
|
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In order to identify the
performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and
identify each promised good or service that is distinct. A performance obligation meets ASC 606's definition of a "distinct"
good or service (or bundle of goods or services) if both of the following criteria are met:
|
·
|
The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer
|
|
·
|
The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e.,
|
If a good or service is
not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified
that is distinct.
The transaction price
is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services
to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When
determining the transaction price, an entity must consider the effects of all of the following:
·
|
Variable consideration
|
·
|
Constraining estimates of variable consideration
|
·
|
The existence of a significant financing component in the contract
|
·
|
Noncash consideration
|
·
|
Consideration payable to a customer
|
Variable consideration
is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
The transaction price
is allocated to each performance obligation on a relative standalone selling price basis.
The transaction price
allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over
time as appropriate.
Costs of Goods
Sold
Included within costs
of goods sold are the costs of cutting and polishing rough diamonds and costs of production such as diesel fuel, labor and transportation.
Stock-Based Compensation
In accordance with ASC No. 718, Compensation
– Stock Compensation (“ASC 718”), the Company measures the cost of stock-based compensation arrangements
based on the grant-date fair value and recognizes the cost in the financial statements at the time goods are received or over the
period during which employees and non-employees are required to provide services. If the Company cannot estimate reliably the fair
value of the goods and services received, the Company shall measure their value indirectly by reference to the fair value of the
equity instruments granted. For transactions with employees and others providing similar services, the Company measures the fair
value of the services by reference to the fair value of the equity instruments granted. Stock-based compensation arrangements may
include stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee stock purchase
plans.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company utilizes the Black-Scholes simulation
model, which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex
and subjective variables including the expected life of options granted and the expected volatility of the Company’s stock
price over a period equal to or greater than the expected life of the options.
Foreign Currency
The Company's foreign subsidiaries use a local
currency as the functional currency. Resulting translation gains or losses are recognized as a component of accumulated other comprehensive
income. Transaction gains or losses related to balances denominated in a currency other than the functional currency are recognized
in the consolidated statements of operations. Net foreign currency transaction losses included in the Company's consolidated statements
of operations were negligible for all periods presented.
Income Taxes
The Company accounts for income taxes in accordance
with ASC Topic 740, Income Taxes (“ASC 740”). ASC 740 requires a company to use the asset and liability method
of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. As of March 31,
2020 and December 31, 2019, the Company's deferred tax assets had a full valuation allowance.
Under ASC 740, a tax position is recognized
as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination being
presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The
Company has identified the United States Federal tax returns as its "major" tax jurisdiction.
On December 22, 2017, the United States enacted
the Tax Cuts and Jobs Act ("TCJA"), which instituted fundamental changes to the taxation of multinational corporations,
including a reduction the U.S. corporate income tax rate to 21% beginning in 2018.
The TCJA also requires a one-time transition
tax on the mandatory deemed repatriation of the cumulative earnings of certain of the Company's foreign subsidiaries as of December
31, 2017. To determine the amount of this transition tax, the Company must determine the amount of earnings generated since inception
by the relevant foreign subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings, in addition to potentially
other factors. The Company believes that no such tax will be due since its Brazilian subsidiaries have, when required, paid taxes
locally and that they have incurred a cumulative operating deficit since inception.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic Income (Loss) Per Share
The Company computes loss per share in accordance
with ASC Topic 260, Earnings per Share, which requires presentation of both basic and diluted earnings per share on the
face of the statement of operations. Basic loss per share is computed by dividing net loss available to common shareholders by
the weighted average number of outstanding common shares during the period. Diluted loss per share gives effect to all dilutive
potential common shares outstanding during the period. As of March 31, 2020, the Company's potentially dilutive securities relate
to common stock issuable in connection with convertible notes payable, options and warrants. If all holders of preferred stock,
convertible notes payable, options and warrants exercised their right to convert their securities to common stock, the common stock
issuable would be in excess of the Company's authorized, but unissued shares of common stock.
Other Comprehensive
Income
Other comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources,
other than net income and including foreign currency translation adjustments.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the current period presentation. These reclassifications had no impact on net earnings (loss) or and financial position.
Recent Accounting Pronouncements
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations except
as noted below:
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (“Topic 740”), which enhances and simplifies various aspects of the income tax accounting guidance,
including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership
changes in investments, and interim-period accounting for enacted changes in tax law. The amendment will be effective for public
companies with fiscal years beginning after December 15, 2020; early adoption is permitted. The Company is evaluating the impact
of this amendment on its consolidated financial statements.
In February 2020, the FASB issued ASU 2020-02,
Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases
(Topic 842), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13
and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15,
2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate
a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its
consolidated financial statements.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – COMPOSITION OF CERTAIN FINANCIAL
STATEMENT ITEMS
Property and Equipment
The following table sets forth the components of the Company's property
and equipment at March 31, 2020 and December 31, 2019:
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book
Value
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book
Value
|
Capital assets subject to depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers and office equipment
|
|
$
|
2,766
|
|
|
$
|
(574
|
)
|
|
$
|
2,192
|
|
|
$
|
2,144
|
|
|
$
|
(739
|
)
|
|
$
|
1,405
|
|
Machinery and equipment
|
|
|
348,260
|
|
|
|
(249,393
|
)
|
|
|
98,867
|
|
|
|
435,659
|
|
|
|
(298,845
|
)
|
|
|
136,814
|
|
Vehicles
|
|
|
127,367
|
|
|
|
(105,083
|
)
|
|
|
22,284
|
|
|
|
164,275
|
|
|
|
(129,692
|
)
|
|
|
34,583
|
|
Total fixed assets
|
|
$
|
478,393
|
|
|
$
|
(355,050
|
)
|
|
$
|
123,343
|
|
|
$
|
602,078
|
|
|
$
|
(429,276
|
)
|
|
$
|
172,802
|
|
For the three months ended March 31, 2020 and
2019, the Company recorded depreciation expense of $13,746 and $17,881, respectively.
Intangible Assets
Intangible assets consist of mining rights
are not amortized as the mining rights are perpetual. The carrying value was $407,311 and $509,862 at March 31,
2020 and December 31, 2019, respectively.
Equity Investments without Readily Determinable
Fair Values
On October 2, 2017, the Company entered into
an exchange agreement whereby it issued 25,000,000 shares of its common stock in exchange for 500,000 shares of Ares Resources
Corporation, a related party. The shares were recorded at $150,000, or $0.006 per share. The shares were valued based upon the
lowest market price of the Company's common stock on the date the agreement.
Under ASC 321-10, Investments – Equity
Securities, the Company elected to use a measurement alternative for its equity investment that does not have a readily determinable
fair value. As such, the Company measured its investment at cost, less any impairment, plus or minus any changes resulting from
observable price changes in orderly transactions for an identical or similar investment of the same issuer.
The Company has recognized the cost of its
investment in Ares, which is a private company with no readily determinable fair value, at its cost of $150,000 and accounts for
the investment as an equity investment without a readily determinable fair value. The Company owns less than 5% of the total shares
outstanding of Ares Resources Corporation.
Accounts Payable and Accrued Liabilities
|
|
March 31, 2020
|
|
December 31, 2019
|
Accounts payable and other accruals
|
|
$
|
146,436
|
|
|
$
|
141,916
|
|
Accrued interest
|
|
|
531,630
|
|
|
|
496,448
|
|
Total
|
|
$
|
678,066
|
|
|
$
|
638,364
|
|
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – CONVERTIBLE PROMISSORY NOTES PAYABLE
The following tables set forth the components
of the Company’s convertible debentures as of March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
December 31, 2019
|
Convertible notes payable – fixed conversion price
|
|
$
|
244,000
|
|
|
|
244,000
|
|
Convertible notes payable – variable conversion price
|
|
|
727,314
|
|
|
|
733,614
|
|
Less: loan discounts
|
|
|
(82,500
|
)
|
|
|
(153,000
|
)
|
Total convertible notes, net
|
|
$
|
888,814
|
|
|
$
|
824,614
|
|
The following table sets forth a summary of change in our convertible
notes payable for the three months ended March 31, 2020:
|
|
March 31,
2020
|
Beginning balance
|
|
$
|
824,614
|
|
Amortization of debt discounts associated with convertible debt
|
|
|
70,500
|
|
Conversion of convertible note principal into common stock
|
|
|
(18,480
|
)
|
Increase in principal amounts outstanding due to lender adjustments per terms of the note agreements
|
|
|
12,180
|
|
Total convertible notes, net
|
|
$
|
888,814
|
|
Convertible Notes Payable - Fixed Conversion
Price
On January 7, 2014, the Company issued to a
family trust a senior secured convertible promissory note in the principal amount, and received gross proceeds, of $244,000 and
warrants to purchase an aggregate of 488,000 shares of the Company's common stock at an exercise price of $62.50 per share through
December 26, 2018. The Company received gross proceeds of $244,000 for the sale of such securities. The outstanding principal of
the note bears interest at the rate of 12% per annum. The note is convertible at the option of the holder into common stock of
the Company at a conversion rate of one share for each $50.00 of principal and interest converted. As of March 31, 2020, all warrants
issued in connection with this note had expired.
The outstanding principal on the note was payable
on March 31, 2015, which as of the date of these financial statements is past due and in technical default. The Company is in negotiations
with the note holder to satisfy, amend the terms or otherwise resolve the obligation in default. No demand for payment has been
made. As a result of the default, the interest rate on the note increased to 30% per annum. Interest was payable on September 30,
2014 and on the maturity date. As of March 31, 2020, the Company has accrued interest payable totaling $402,309 in connection with
this note.
Convertible Notes Payable - Variable Conversion Price
At various times to fund operations, the Company
issues convertible notes payable in which the conversion features are variable. In addition, some of these convertible notes payable
have on issuance discounts and other fees withheld.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – CONVERTIBLE PROMISSORY NOTES PAYABLE (CONTINUED)
During the year ended December 31, 2016, the
Company issued to one noteholder, in various transactions, $242,144 in convertible promissory notes with fixed floors and received
an aggregate of $232,344 in proceeds. The convertible promissory notes each bear interest at 8.0% per annum and mature one year
from issuance ranging from July to December 2017. After six months from issuance, each convertible promissory note is convertible
at the option of the holder at a 50% discount to the lowest traded price of the Company's common stock over the previous 20 days.
In addition, each note's conversion rate has a floor of $0.0001. Total debt discounts related to the beneficial conversion features
of $241,852 were recorded and are being amortized over the life of the notes. As of March 31, 2020, the outstanding principal balance
on these notes total $178,094, and all discounts were fully amortized.
During the year ended December 31, 2017, the
Company issued to one noteholder in various transactions $477,609 in convertible promissory notes with fixed floors and received
an aggregate of $454,584 in proceeds. The convertible promissory notes each bear interest at 8.0% per annum and mature one year
from issuance ranging from January to August 2018. After six months from issuance, each convertible promissory note is convertible
at the option of the holder at a 50% discount to the lowest traded price of the Company's common stock over the previous 20 days.
In addition, each note's conversion rate has a floor of $0.0001. Total debt discounts related to the beneficial conversion features
of $447,272 were recorded and are being amortized over the life of the notes. As of March 31, 2020, the outstanding principal balance
on these notes total $138,000, and all discounts were fully amortized.
During the year ended December 31, 2018, the
Company issued to one noteholder in various transactions $137,306 in convertible promissory notes with fixed floors and received
an aggregate of $130,556 in proceeds. The convertible promissory notes each bear interest at 8.0% per annum and mature one year
from issuance ranging from August 2018 to April 2019. After six months from issuance, each convertible promissory note is convertible
at the option of the holder at a 50% discount to the lowest traded price of the Company's common stock over the previous 20 days.
In addition, each note's conversion rate has a floor of $0.0001. Total debt discounts related to the beneficial conversion features
of $122,755 were recorded and are being amortized over the life of the notes. As of March 31, 2020, the outstanding principal balance
on these notes total $129,220, and all discounts were fully amortized.
During the year ended December 31, 2019, the
Company issued to one noteholder in various transactions $282,000 in convertible promissory notes with fixed floors and received
an aggregate of $276,000 in proceeds. The convertible promissory notes each bear interest at 8.0% per annum and mature one year
from issuance in July 2020. After six months from issuance, each convertible promissory note is convertible at the option of the
holder at a 50% discount to the lowest traded price of the Company's common stock over the previous 20 days. In addition, each
note's conversion rate has a floor of $0.0001. Total debt discounts related to the beneficial conversion features of $276,000 and
$6,000 for issuance costs were recorded and are being amortized over the life of the notes. As of March 31, 2020, the outstanding
principal balance on these notes total $282,000, and the associated unamortized discounts totaled $82,500.
While many of these convertible notes are past
their original maturity dates, the Company continues to maintains a favorable relationship and work with the lender with regard
to financing its working capital needs.
As of March 31, 2020, the Company has accrued
interest payable totaling $118,143 in connection with these variable convertible notes. During the three months ended March 31,
2020 and 2019, $70,500 and $8,299 of the discounts were amortized to interest expense, respectively.
During the three months ended March 31, 2020
and 2019, the Company issued 33,350,046 and 128,257,767 shares of common stock upon conversion of $23,532 and $60,487,
respectively, in notes payable and accrued interest.
Future Potential Dilution
Most of the Company's convertible notes payable
contain adjustable conversion terms with significant discounts to market. As of March 31, 2020, the Company's convertible notes
are convertible into an aggregate of approximately 1,212,189,583 shares of common stock. Due to the variable conversion prices
on some of the Company's convertible notes, the number of common shares issuable is dependent upon the traded price of the Company's
common stock.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS PAYABLE
As of March 31, 2020 and December 31, 2019,
the Company had $209,128 in principal outstanding from bridge loans. The loans payable bear interest at 8.0% per annum and are
payable upon demand. As of March 31, 2020, the Company has accrued interest payable totaling $11,179 in connection with these loans
payable.
NOTE 5 – OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities are comprised
solely of social contributions and other employee-related costs at our operating subsidiaries located in Brazil. The Company has
been funding these amounts upon the termination of a worker or employee. The balance of these employee related costs as of March
31, 2020 and December 31, 2019 amounted to $152,540 and $192,729, respectively.
NOTE 6 – STOCKHOLDERS' DEFICIT
Authorized and Amendments
As of March 31, 2020, the Company had 1,200,000,000
common shares authorized with a par value of $0.001 per share.
Series A Preferred Stock
On December 18, 2012, the Company filed with
the Nevada Secretary of State a Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock ("Series
A Stock") to designate one share of a new series of preferred stock. The Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock provides that for so long as Series A Stock is issued and outstanding, the holders of Series
A Stock shall vote together as a single class with the holders of the Company's Common Stock, with the holders of Series A Stock
being entitled to 51% of the total votes on all such matters regardless of the actual number of shares of Series A Stock then outstanding,
and the holders of Common Stock are entitled to their proportional share of the remaining 49% of the total votes based on their
respective voting power.
Three Months Ended March 31, 2020 Transactions
During the three months ended March 31, 2020,
the Company issued 5,000,000 shares of common stock to an accredited investor pursuant to a subscription agreement dated April
18, 2018 for which the funds were received in a prior period. The Company issued 5,666,594 shares of common stock to non-employees
for services rendered. The Company issued 33,350,046 shares of common stock upon conversion of $23,532 in convertible notes payable
and accrued interest.
Additionally, during the three months ended
March 31, 2020, the Company exchanged 200,000,000 shares of common stock returned by an accredited investor for 150,000 shares
of Jupiter Gold’s common stock held as an investment by the Company. The Company used the quoted fair value of each entity’s
common stock on the dates of exchange to determine the exchange ratio.
See Note 8 – Related Party Transactions
for additional disclosures of common stock issuances.
Three Months Ended March 31, 2019 Transactions
During the three months ended March 31, 2019,
the Company issued 128,257,767 shares of common stock upon conversion of $60,487 in convertible notes payable and accrued interest.
Common Stock Options
During the three months
ended March 31, 2020, the Company granted options to purchase an aggregate of 8,439,000 shares of common stock to non-management
directors. The options were valued at $12,500 in total. The options were valued using the Black-Scholes option pricing model with
the following average assumptions: our stock price on the date of the grant which was $0.0013, expected dividend yield of 0.0%,
historical volatility calculated as 221.07%, risk-free interest rate of 0.38%, and an expected term of 5 years.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases offices in Pasadena, California,
U.S., and in the municipality of Olhos D'Agua, Brazil. Such costs are immaterial to the consolidated financial statements.
NOTE 8 - RELATED PARTY TRANSACTIONS
Chief Executive Officer
The following tables set forth the components
of the Company’s related party payables as of March 31, 2020 and December 31, 2019:
|
|
March 31,
2020
|
|
December 31, 2019
|
Salary, retirement contributions and advances payable to related party
|
|
$
|
18,765
|
|
|
$
|
11,777
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable to related party
|
|
$
|
566,743
|
|
|
$
|
566,743
|
|
Less: loan discounts
|
|
|
(15,431
|
)
|
|
|
(96,270
|
)
|
Total convertible notes payable to related party, net
|
|
$
|
551,312
|
|
|
$
|
470,473
|
|
|
|
|
|
|
|
|
|
|
Total related party payables
|
|
$
|
570,077
|
|
|
$
|
482,250
|
|
As of March 31, 2020 and December 31, 2019,
amounts payable to the Chief Executive Officer for accrued salaries, retirement contributions, and advances made net of any repayments
included within related party payable were $585,508 and $578,520, respectively.
Effective June 30, 2018, the Company issued
a convertible promissory note in the principal amount of $445,628 to its Chief Executive Officer against a portion of these unpaid
compensatory balances. The note bears no interest and is payable on demand. The note is convertible at the option of the holder
at the lower of (i) the average of the five lowest bid prices of the Company's common stock over the previous 20 trading days or
(ii) the lowest price per share at which the Company sold its common stock in a transaction with a person who is not a manager,
officer, or director of the Company during the period from the date hereof until the giving of notice of the election to convert
or the lowest price per share at which a noteholder who is not a manager, officer, or director of the Company converted any debt
of the Company into shares of the Company during the period from the date hereof until the giving of notice of the election to
convert. The note's conversion rate has a floor of $0.0001. Total debt discounts related to the beneficial conversion features
of $445,628 were recorded and are being amortized over a one-year period consistent with the maturity dates of convertible notes
issued to third party holders. As of March 31, 2019, all discounts were fully amortized.
On April 7, 2019, the Company’s board
of directors approved the issuance of a convertible note in the principal amount of $261,631 to its Chief Executive Officer against
a portion of these unpaid compensatory balances. The note bears interest at an annual rate of 6.0% and is payable on demand. The
note is convertible at the option of the holder at the lower of (i) $0.00045 or (ii) the lowest price per share at which a noteholder
who is not a manager, officer, or director of the Company converted any debt of the Company into common stock of the Company during
the period from the date hereof until the giving of notice of the election to convert. Total debt discounts related to the beneficial
conversion features of $261,631 were recorded and are being amortized over a one-year period consistent with the maturity dates
of convertible notes issued to third party holders. As of March 31, 2020, there were unamortized debt discounts of $15,431 related
to this note.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - RELATED PARTY TRANSACTIONS (CONTINUED)
Jupiter Gold Corporation
On February 12, 2020, the Company sold 900,000
shares of Jupiter Gold common stock that it held as an investment, 180,500 warrants to purchase up to 180,500 shares of Jupiter
Gold common stock at $0.60 per share, and 50,000,000 warrants to purchase up to 50,000,000 shares of Brazil Minerals common stock
at $0.0015 per share for gross proceeds of $250,000 to an accredited investor.
On February 14, 2020, the Company loaned $225,000
to Jupiter Gold in the form of a convertible promissory note. The note bears interest at 6.0% per annum and matures on December
31, 2023. As an inducement to enter into the transaction, the Company received 67,000 warrants to purchase up to 67,000 shares
of Jupiter Gold common stock at a price of $0.60 per share. After any time after issuance, the note is convertible at the option
of the holder at a rate of one share of Jupiter Gold common stock for each $0.60 of loan principal. On February 15, 2020, the Company
converted the promissory note in return for 375,000 shares of Jupiter Gold common stock.
Investment in Ares Resources Corporation's
Common Stock
On October 2, 2017, the Company entered into
an exchange agreement whereby it issued 25,000,000 shares of its common stock in exchange for 500,000 shares of Ares Resources
Corporation. Our chief executive officer also serves as an officer of Ares Resources Corporation, thus making it a related party
under common ownership and control. The shares were recorded at $150,000, or $0.006 per share. The shares were valued based upon
the lowest market price of the Company's common stock on the date the agreement.
On March 11, 2020, the Company issued 53,947,368
shares of common stock to Lancaster Brazil Fund pursuant to an addendum to the share exchange agreement dated September 28, 2018.
The Company recorded a loss on exchange of equity with a related party of $76,926 representing the fair value of the additional
shares of common stock issued.
As of March 31, 2020 and December 31, 2019,
no change in the value of the Ares common stock was recorded as the recorded value still approximated fair value.
NOTE 9 – RISKS AND UNCERTAINTIES
In light of the SEC's Division of Corporate
Finance Disclosure Guidance Topic Number 9, dated March 25, 2020, on the impact of COVID-19, the Company notes the following as
of May 20, 2020:
|
·
|
The Company has not had any reports of COVID-19 among its workforce;
|
|
·
|
The Company has been able to continue local operations of the Company in Brazil as they are located in a rural area currently unaffected by any lockdown restrictions implemented elsewhere in Brazil;
|
|
·
|
Travel between the U.S. and Brazil has essentially ceased; this is mitigated by the use of live streaming video and other methods as needed;
|
|
·
|
Some exploratory research of some of the Company’s projects have been delayed as certain municipalities in Brazil have unilaterally restricted the entry of outside persons; these actions are being legally challenged by branches of the state administration and the Company is monitoring all new developments;
|
|
·
|
The Company has postponed any expenses which are not critical to it at the moment.
|
NOTE 10 - SUBSEQUENT EVENTS
In accordance with
FASB ASC 855-10 Subsequent Events, the Company has analyzed its operations subsequent to March 31, 2020 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.