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, cobalt, copper, lithium, manganese, nickel,
precious gems (aquamarine, beryl, tourmaline) and sand.
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 Jupiter Gold for the sale of shares in a public offering in the U.S. On July 6, 2018, Jupiter Gold received notice that
its common stock was assigned the ticker symbol "JUPGF". The "F" denotes that Jupiter Gold is a foreign corporation.
As of September 30, 2018, the Company had ownership of approximately 54.7% of the equity of Jupiter Gold. As such, the accounts
and results of Jupiter Gold, and its subsidiary MJL, have been included in the Company's consolidated financial statements. See
Note 2 for more information.
Management's Representation of
Interim Financial Statements
The accompanying unaudited consolidated
financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Certain information and disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States ("GAAP") have been condensed or omitted
as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented
not misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management are
necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring
nature. Interim results are not necessarily indicative of results for a full year. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements at December 31, 2017 and 2016, as presented in the Company's
Form 10-K filed on April 17, 2018 with the SEC.
Basis of Presentation
The consolidated financial statements
of the Company have been prepared in accordance with generally accepted accounting principles ("GAAP") of the United
States of America and are expressed in United States dollars. The consolidated financial statements include the accounts of the
Company and its subsidiaries. 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.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
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 stock and/or obtaining debt
financing. Historically, the Company has funded its operations primarily through the sale of debt and equity securities and through
the receipt of proceeds from revenues. Management's plan to fund its capital requirements and ongoing operations include an increase
in cash received from sales of gold and rough diamonds recovered from a new modular processing and recovery plant. Management's
secondary plan to cover any shortfall is selling its equity securities, including common stock in the Company or common stock in
Jupiter Gold that it owns, and obtaining debt financing. There can be no assurance the Company will be successful in these efforts.
Share Count
All share and per share amounts have
been restated to give effect to a 1-for-500 reverse split of the Company's common stock which became effective on January 27, 2017.
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 recoverable, prepaid expenses, inventory, deposits and other assets,
accounts payable, accrued expenses, deferred revenue 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
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
$62,439 as of September 30, 2018).
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 net realizable value. 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 September 30, 2018 and December
31, 2017, inventory consisted primarily of rough ore stockpiled for further gold and diamonds recovery. During the nine months
ended September 30, 2018, the Company did not record any write downs against the value of its inventory.
Value-Added Taxes Receivable
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 the acquisition of capital equipment from sellers who accept tax credits as payments.
Property and Equipment
Property and equipment are stated at
cost. 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.
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 September 30, 2018 and December 31, 2017, the Company did not
recognize any impairment losses related to mineral properties held.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
Equity Investments without Readily
Determinable Fair Values
In the first quarter of 2018, the Company
adopted the ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10). Under the new guidance, an entity shall no longer
use the cost method of accounting as was applied before, but rather it can elect a measurement alternative for equity investments
that do not have readily determinable fair values and do not qualify for the practical expedient in ASC 820 to estimate fair value
using the NAV per share. Management assessed its investments and concluded that they should be accounted for using measurement
alternative. Under this election, the Company measures its investments 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. ASU
2016-01 requires the Company to make a separate election to use the measurement alternative for each eligible investment, and to
apply the measurement alternative consistently from period to period until the investment's fair value becomes readily determinable.
It further requires that the Company use the prospective method for all equity investments without readily determinable fair values.
Revenue Recognition
On January 1, 2018,
the Company adopted ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"), using the modified retrospective
method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after
January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance
with our historic accounting under ASC 605. As of and for the nine months ended September 30, 2018, the consolidated financial
statements were not materially impacted as a result of the application of Topic 606 compared to Topic 605.
The Company recognizes
revenue under ASC 606, Revenue from Contracts with Customers. 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:
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
·
|
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
|
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 (i.e., the good or service is capable of being distinct).
|
·
|
The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
|
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.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Stock-Based Compensation
The Company records stock-based compensation
in accordance with ASC Topic 718, Compensation - Stock Compensation. ASC 718 requires companies to measure compensation cost for
stock-based employee compensation at fair value at the grant date and recognize the expense over the employee's requisite service
period. Under ASC 718, volatility is based on the historical volatility of our stock or the expected volatility of the stock of
similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination
behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at
the time of grant.
The Company utilizes the Black-Scholes
option-pricing 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 our stock
price over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can
materially affect the estimated value of our employee stock options, it is management's opinion that the Black-Scholes option-pricing
model may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of employee
stock options is determined in accordance with ASC Topic 718 using an option-pricing model, that value may not be indicative of
the fair value observed in a willing buyer/willing seller market transaction.
The Company has adopted a stock plan
to attract, retain and motivate its directors, officers, employees, consultants and advisors. The Company's stock incentive plan
provides for the issuance of up to 25,000,000 common shares for employees, consultants, directors, and advisors.
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 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 September 30, 2018 and
December 31, 2017, 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.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
Earnings (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 September 30, 2018, the Company's potentially dilutive securities
relate to common stock issuable in connection with convertible notes payable, options and warrants.
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.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 840), to increase transparency and comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this standard are
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for a public
entity. Early adoption of the amendments in this standard is permitted for all entities and the Company must recognize and measure
leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently in the
process of evaluating the effect this guidance will have on its financial statements and related disclosures.
We have reviewed other recent accounting
pronouncements issued to the date of the issuance of these consolidated financial statements, and we do not believe any of these
pronouncements will have a material impact on the Company.
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 September 30, 2018 and December 31, 2017:
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Gross Carrying Amount
|
Accumulated Depreciation
|
Net Book Value
|
|
Gross Carrying Amount
|
Accumulated Depreciation
|
Net Book Value
|
Capital assets subject to depreciation:
|
|
|
|
|
|
|
|
Computers, software and office equipment
|
1,548
|
(745)
|
803
|
|
901
|
(863)
|
38
|
Machinery and equipment
|
|
438,262
|
(251,761)
|
186,501
|
|
520,645
|
(250,067)
|
270,578
|
Vehicles
|
|
|
|
|
165,375
|
(104,779)
|
60,596
|
|
200,164
|
(105,308)
|
94,856
|
Total fixed assets
|
|
|
605,185
|
(357,285)
|
247,900
|
|
721,710
|
(356,238)
|
365,472
|
For the three and nine months ended September 30, 2018 and
2017, the Company recorded depreciation expense of $19,426 and $17,125 and $63,401 and $55,521, respectively.
Intangible Assets
Intangible assets consist of mining
rights are not amortized as the mining rights are perpetual. The carrying value was $513,261 and $620,805 at September 30, 2018
and December 31, 2017, 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 825-10, 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.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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.
Accounts Payable and Accrued Liabilities
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Accounts payable and other accruals
|
|
$
|
146,105
|
|
|
$
|
132,172
|
|
Accrued interest
|
|
|
360,546
|
|
|
|
275,478
|
|
Total
|
|
$
|
506,651
|
|
|
$
|
407,650
|
|
NOTE 3 – CONVERTIBLE PROMISSORY
NOTES PAYABLE
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
(the "Note") 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 "Warrants"). 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. All principal on the
Note was payable on March 31, 2015 (the "Maturity Date"), which as of the date of this filing 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 September 30, 2018, the Company has accrued interest
payable totaling $292,509. 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.
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.
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. 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.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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. 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.
During the nine months ended September
30, 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. 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 $116,005 were recorded
and are being amortized over the life of the notes.
As of September 30, 2018, the Company
has $887,084 in principal of notes payable with remaining discounts of $16,598 and deferred financing costs of $227, with a net
balance of $870,259. The convertible notes payable incur interest at rates ranging from 8.0% to 30.0% per annum with due dates
ranging from July 2017 to April 2019. Though some of the notes are past their original maturity dates, the lender has not issued
a formal notice of default and continues to assist the Company with financing to support its working capital needs.
During the nine months ended September
30, 2018 and 2017, $314,785 and $277,094 of the discounts were amortized to interest expense, respectively.
During the nine months ended September
30, 2018 and 2017, the Company issued 181,525,265 and 19,629,192 shares of common stock upon conversion of $146,766 and $66,115,
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 September 30, 2018, the Company's convertible notes are convertible into an aggregate of approximately 1,429,075,000
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. As the aggregate potential dilutive shares issuable
upon such conversions exceeds the current number of authorized shares, the Company intends to amend its Articles of Incorporation
to increase the authorized number of shares of its common stock.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 4 – STOCKHOLDERS' DEFICIT
Authorized and Amendments
The Company filed a 1-for-500 reverse
split with the state of Nevada on December 15, 2016, which became effective on January 27, 2017. On February 15, 2017, the Company
amended its Articles of Incorporation to increase the authorized number of shares of its common stock to 100 million shares. On
October 23, 2017, an amendment of the charter of the Company filed with the Secretary of State of Nevada increased the number of
authorized common shares to 250,000,000.
As of December 31, 2017, the Company
had 250,000,000 common shares authorized with a par value of $0.001 per share.
On March 15, 2018, an amendment of the
charter of the Company filed with the Secretary of State of Nevada increased the number of authorized common shares to 950,000,000.
As of September 30, 2018, the Company
had 950,000,000 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.
Nine Months Ended September 30,
2018 Common Stock Transactions
During the nine months ended September
30, 2018, the Company issued 181,525,265 shares of common stock upon conversion of $145,766 in convertible notes payable and accrued
interest.
Nine Months Ended September 30,
2017 Common Stock Transactions
During the nine months ended September
30, 2017, the Company issued 1,800,000 shares of common stock for cash proceeds of $21,834. Additionally, the Company issued 19,629,192
shares of common stock upon conversion of $66,115 in convertible notes payable and accrued interest.
See Note 3 for additional discussions
of common stock issuances in connection with convertible notes.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
Common Stock Options
During the year ended December 31, 2017,
the Company granted options to purchase an aggregate of 10,226,100 shares of common stock to non-management directors. The options
were valued at $87,500 in total. The options were valued using the Black-Scholes option pricing model with the following average
assumptions: our stock price on date of grant (range of $0.03 to $0.07), expected dividend yield of 0%, historical volatility ranging
from 221% to 234%, risk-free interest rate of 1.80%, and an expected term of 5.00 years.
During the nine months ended September
30, 2018, the Company granted options to purchase an aggregate of 18,268,000 shares of common stock to non-management directors.
The options were valued at $37,500 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 ($0.0019 to $0.0026), expected dividend yield of 0%, historical volatility
calculated between a range of 209.5% to 217.0%, risk-free interest rate between a range of 1.80% to 2.95%, and an expected term
of 5 years.
NOTE 5 – 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 6 - RELATED PARTY TRANSACTIONS
Chief Executive Officer
As of September 30, 2018 and December
31, 2017, 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 $644,070 and $502,397, 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.
BRAZIL MINERALS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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, 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. As of September 30, 2018 and December 31, 2017, no
change in the value of the Ares common stock was recorded as the recorded value still approximated fair value.
NOTE 7 - SUBSEQUENT EVENTS
In accordance with FASB ASC 855-10 Subsequent
Events, the Company has analyzed its operations subsequent to September 30, 2018 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 for the below:
On November 5, 2018, the common stock of Brazil
Minerals’ subsidiary Jupiter Gold Corporation began trading in the U.S. over the counter market with ticker symbol JUPGF.