Atlas Lithium Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes to those financial statements appearing elsewhere in this Annual Report. This discussion and analysis below includes forward-looking statements that are subject to risks, uncertainties and other factors described in the “Risk Factors” section that could cause actual results could differ materially from those anticipated in these forward- looking statements as a result of various factors. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. . We caution you to read the “Forward Looking Statements” section of our Annual Report. Overview Atlas Lithium Corporation (“Atlas Lithium,” “Brazil Minerals,” the “Company,” “we,” “us,” or “our”) is a mineral exploration and mining company with lithium projects and properties in other critical and battery minerals to power the Green Energy Revolution - nickel, rare earths, graphite, and titanium. Our current focus is on developing our hard-rock lithium project located in Minas Gerais State in Brazil at a well-known, premier pegmatitic district in Brazil. We intend to produce and sell lithium concentrate, a key ingredient for battery supply chain. Lithium is essential for batteries in electric vehicles and demand is expected to outstrip supply. We are in the initial stages of planning to develop and own 100% of a lithium concentration facility capable of producing 150,000 tons of lithium concentrate annually. However, there can be no assurance that we will have the necessary capital resources to develop such facility or, if developed, that we will reach the production capacity necessary to commercialize our products and with the quality needed to meet market demand. All of our mineral projects and properties are located in Brazil and our mineral rights portfolio for critical and battery minerals includes approximately 75,040 acres (304 km 2 ) for lithium in 64 mineral rights, 54,950 acres for nickel (222 km 2 ) in 15 mineral rights, 30,054 acres (122 km 2 ) for rare earths in seven mineral rights, 22,050 acres (89 km 2 ) for titanium in seven mineral rights, and 13,766 acres (56 km 2 ) for graphite in three mineral rights. We believe that we hold the largest portfolio of lithium mineral exploration properties in Brazil, a premier and well-established jurisdiction for hard-rock lithium. 44 Table of Contents We are primarily focused on advancing and developing our hard-rock lithium project located in the state of Minas Gerais, Brazil, where some of our high-potential mineral rights are adjacent to or near large lithium deposits that belong to Sigma Lithium Corporation (Nasdaq: SGML). Our Minas Gerais Lithium Project is our largest project and consists of 52 mineral rights spread over 56,078 acres (227 km 2 ) and predominantly located within the Brazilian Eastern Pegmatitic Province which has been surveyed by the Brazilian Geological Survey and is known for the presence of hard rock formations known as pegmatites which contain lithium-bearing minerals such as spodumene and petalite. Generally, lithium derived from pegmatites is less costly to purify for uses in high technology applications than lithium obtained from brine. Such applications include the battery supply chain for EVs, an area of expected high growth for the next several decades. We believe that we can materially increase our value by the acceleration of our exploratory work and quantification of our lithium mineralization. Our initial commercial goal is to be able to enter production of lithium-bearing concentrate, a product which is highly sought after in the battery supply chain for EVs. We also have 100%-ownership of early-stage projects and properties in other minerals that are needed in the battery supply chain and high technology applications such as nickel, rare earths, graphite, and titanium. We believe that the shift from fossil fuels to battery power will yield long-term opportunities for us not only in lithium but also in such other minerals. Additionally, we have 100%-ownership of several mining concessions for gold and diamonds. Historically, we have had revenues from mining and selling gold, diamonds, and industrial sand. Such endeavors have given us the critical management experience needed to take early-stage projects in Brazil from the exploration phase through successful licensing from regulators and to revenues. As our corporate focus became our lithium properties and those of other critical minerals, we stopped alluvial gold and diamond exploration efforts in 2018 and the sale of our industrial sand in 2022. The company owns 45.11% of the shares of common stock of Apollo Resources Corporation (“Apollo Resources”), a private company currently primarily focused on the development of its initial iron mine. The company also owns approximately 28.72% of Jupiter Gold Corporation (“Jupiter Gold”), a company focused on the development of gold projects and of a quartzite mine, and whose common stock are quoted on the OTCQB under the symbol “JUPGF.” The quartzite mine is fully permitted and is expected to start operations mid 2023. Apollo Resources and Jupiter Gold have not generated any revenues to date. The results of operations from both Apollo Resources and Jupiter Gold are consolidated in our financial statements under accounting principles generally accepted in the United States (“U.S. GAAP”). 45 Table of Contents Results of Operations Fiscal Year Ended December 31, 2022 Compared to Fiscal Year Ended December 31, 2021 Revenue for the year ended December 31, 2022, totaled $6,765, compared to revenue of $10,232 during the year ended December 31, 2021, representing a decrease of 33.9%. Such revenue was comprised solely of sales of industrial sand that we mine in one of our mineral rights. Industrial sand is a residual business line as we are primarily focused on our lithium exploration program. In December 2022, the company closed its sand business. Cost of goods sold for the year ended December 31, 2022, totaled $63,548, as compared to cost of goods sold of $245,810 during the year ended December 31, 2021, representing a decrease of 74.15%. Cost of goods sold is primarily comprised of labor, fuel, repairs and maintenance on our mining equipment. As mentioned above, this costs refer to Industrial sand production which is a residual business line as we are primarily focused on our lithium exploration program. Gross loss for the year ended December 31, 2022, totaled $56,783, compared to gross loss of $235,578 during the year ended December 31, 2021 representing decrease of 75.9%. Operating expenses for the year ended December 31, 2022, totaled $4,608,887, compared to operating expenses of $3,280,514 during the year ended December 31, 2021 representing an increase of 40.49%. The increase was mostly due to general and administrative expenses related to cost of listing our common stock on Nasdaq and increased financing efforts, and non-cash stock-based compensation from issuances of stock options to officers and directors. Increase noted on “other operating expenses” refers to the expenses of the lithium project drilling campaign. Other expenses for the year ended December 31, 2022 totaled $155,812, compared to other expenses of $509,374 during the year ended December 31, 2021 representing a decrease of 69,4%. The decrease is mainly due to interest expense on promissory notes due to amortization debt discounts and loss on the extinguishment of debt related to common stock purchase warrants issued in a settlement with a noteholder during the year ended December 31, 2021. As a result, we incurred a net loss attributable to our stockholders of $3,790,423, or $0.82 per share, for the year ended December 31, 2022, compared to a net loss attributable to our stockholders of $2,772,358, or $0.75 per share, during the year ended December 31, 2021. We anticipate that our largest expense item for the next twelve months will be drilling expense as we explore lithium targets and delineate our lithium resources. Such expenses can vary depending on the number of drills employed and the number of hours per week that each drilling team works. Our current plan is to continue to have a robust drilling campaign throughout 2023. However, we are dependent on a number of factors which may alter such plans, including, among others, financial resources, availability of qualified drills and personnel to operate them, and permitting. Liquidity and Capital Resources As of December 31, 2022, we had cash and cash equivalents of $280,525 and a working capital deficit of $2,452,553, compared to cash and cash equivalents $22,776 and a working capital deficit of $940,475 as of December 31, 2021. Net cash used in operating activities totaled $1,480,530 for the year ended December 31, 2022, compared to net cash used of $1,101,680 during the year ended December 31, 2021 representing an increase in cash used of $378,850 or 34%. 46 Table of Contents Net cash used in investing activities totaled $2,846,356 for the year ended December 31, 2022, compared to net cash used of $961,362 during the year ended December 31, 2021 representing an increase in cash used of $1,884,994 or 196%. The increase is mainly due to the mining rights purchases completed in 2022. Net cash provided by financing activities totaled $4,502,356 for the year ended December 31, 2022, compared to $1,789,938 during the year ended December 31, 2021 representing an increase in cash provided of $2.712,418 or 151%. We currently have no off-balance sheet arrangements. We have limited working capital, have historically incurred net operating losses, and have not yet received material revenues from the sale of products or services. Our primary sources of liquidity have been derived through proceeds from the (i) issuance of debt and (ii) sales of our equity and the equity of one of our subsidiaries. For example, On January 12, 2023, the Company completed its firm underwritten public offering of 776,250 shares of the Company’s common stock (which includes the shares subject to the over-allotment option, exercised by the underwriter in full), for aggregate gross proceeds of $4,657,500 (prior to deducting any underwriting discounts, commissions, and other offering expenses). Also, on January 30, 2023, the Company raised an aggregate of $4 million in gross proceeds from the sale of its common stock in transaction exempt under Regulation S of the Securities Act. We believe our cash on hand will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months through March 2024. Our future short- and long-term capital requirements will depend on several factors, including but not limited to, the rate of our growth, our ability to identify areas for mineral exploration and the economic potential of such areas, the exploration and other drilling campaigns needed to verify and expand our mineral resources, the types of processing facilities we would need to install to obtain commercial-ready products, and the ability to attract talent to manage our different areas of endeavor. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the needed financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to scale back our existing operations and growth plans, which could have an adverse impact on our business and financial prospects and could raise substantial doubt about our ability to continue as a going concern. Currency Risk We operate primarily in Brazil which exposes us to currency risks. Our business activities may generate intercompany receivables or payables that are in a currency other than the functional currency of the entity. Changes in exchange rates from the time the activity occurs to the time payments are made may result in it receiving either more or less in local currency than the local currency equivalent at the time of the original activity. Our consolidated financial statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar affect the translation of each foreign subsidiary’s financial results into U.S. dollars for purposes of reporting in the consolidated financial statements. Our foreign subsidiaries translate their financial results from the local currency into U.S. dollars in the following manner: (a) income statement accounts are translated at average exchange rates for the period; (b) balance sheet asset and liability accounts are translated at end of period exchange rates; and (c) equity accounts are translated at historical exchange rates. Translation in this manner affects the shareholders’ equity account referred to as the foreign currency translation adjustment account. This account exists only in the foreign subsidiaries’ U.S. dollar balance sheets and is necessary to keep the foreign subsidiaries’ balance sheets in agreement. 47 Table of Contents Critical Accounting Policies and Estimates Our financial instruments consist of cash and cash equivalents and accrued expenses. 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 December 31, 2022, it could negatively affect our financial position and liquidity and could result in our having understated our net loss. 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. Fair Value of Financial Instruments We follow 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 us. Unobservable inputs are inputs that reflect our 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. As of December 31, 2022 and 2021, our derivative liabilities were considered a level 2 liability. We do not have any level 3 assets or liabilities. Our 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. 48 Table of Contents 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. 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 we have taken steps to verify title to mineral properties in which it has an interest, these procedures do not guarantee our 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 December 31, 2022 and 2021, we did not recognize any impairment losses related to mineral properties held. Impairment of Intangible Assets with Indefinite Useful Lives We account for intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other (“ASC 350”). ASC 350 requires that intangible assets with indefinite useful lives no longer be amortized, but instead be evaluated for impairment at least annually. On an annual basis, in the fourth quarter of the fiscal year, we review our intangible assets with indefinite useful lives for impairment by first assessing qualitative factors to determine whether the existence of events or circumstances makes it more-likely-than-not that the fair value of an intangible asset is less than its carrying amount. If it is determined that it is more-likely-than-not that the fair value of an intangible asset is less than its carrying amount, the intangible asset is further tested for impairment by comparing the carrying amount to its estimated fair value using a discounted cash flow. Impairment, if any, is measured as the amount by which an indefinite-lived intangible asset’s carrying amount exceeds its fair value. Application of impairment tests requires significant management judgment, including the determination of fair value of each indefinite-lived intangible asset. Judgment applied when performing the qualitative analysis includes consideration of macroeconomic, industry and market conditions, overall financial performance of the entity, composition, or strategy changes affecting the recoverability of asset groups. Judgments applied when performing the quantitative analysis includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these judgments, estimates and assumptions could materially affect the determination of fair value for each indefinite-lived intangible asset. 49 Table of Contents Impairment of Long-Lived Assets For long-lived assets, such as property and equipment and intangible assets subject to amortization, we continually monitor 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, we assess 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, we recognize 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. Convertible Instruments We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 470-20, “Debt with Conversion and Other Options”. Applicable 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 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. We account 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 We determine at the inception of each arrangement whether an entity in which we hold an investment or in which we have other variable interests in is considered a variable interest entity. We consolidate VIEs when we are 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, we assess 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 we are the primary beneficiary. If we are not the primary beneficiary in a VIE, we account for the investment under the equity method or cost method in accordance with the applicable GAAP. We have concluded that Apollo Resources, Jupiter Gold and their subsidiaries are VIEs in accordance with applicable accounting standards and guidance; and although the operations of Apollo Resources and Jupiter Gold are independent of ours, because our chief executive officer, Marc Fogassa, is also the controlling shareholder of both Apollo Resources and Jupiter Gold, we may be considered to have power to direct the activities that are most significant to Apollo Resources and Jupiter Gold. Therefore, we concluded that we are the primary beneficiary of both Apollo Resources and Jupiter Gold. 50 Table of Contents Stock-Based Compensation We record 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. We utilize 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. On June 20, 2018, the FASB issued ASU 2018-07 which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. Equity classified share-based payments for employees was fixed at the time of grant. Equity-classified nonemployee share-based payment awards are measured at the grant date of the award which is the same as share-based payments for employees. We adopted the requirements of the new rule as of January 1, 2019, the effective date of the new guidance. Foreign Currency Our 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 our consolidated statements of operations were negligible for all periods presented. 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. 51 Table of Contents Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information to be reported under this Item is not required of smaller reporting companies. Item 8. Financial Statements and Supplementary Data. Our financial statements, including the notes thereto, together with the report from our independent registered public accounting firm are presented beginning at page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None .