Deconsolidation of MAB-C and MAB-Z and Equity Investment

6 Months Ended

Jun. 30, 2015

Notes to Financial Statements

Note 3 - Deconsolidation of MAB-C and MAB-Z and Equity Investment

3.     Deconsolidation of MAB-C and MAB-Z and Equity Investment

The Company had accounted for the 49% investment in MAB-C under ASC 810-10-5, as a variable interest entity (VIE).  There are two primary models for determining whether consolidation is appropriate. These two models are a) the voting interest model; and b) the variable interest model.

Under the variable interest model, a controlling financial interest is assessed differently than under the voting interest model. This difference in assessment is required because a controlling financial interest may be achieved other than by ownership of shares or voting interests. A controlling financial interest in the VIE requires BOTH of the following: a) the power to direct the activities that most significantly impact the VIE’s economic performance; and b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Corporations established under Zimbabwean law, must have a controlling ownership interest held by domestic parties. As a result of this statute, 51% of MAB-C was owned by Tapiwa and Asswell Gurupira (domestic residents of Zimbabwe), and the remaining 49% was held by the Company. MAB-C owned 100% of MAB-Z, a domestic Zimbabwe corporation. MAB-Z was the owner of the majority of the Company’s assets and obligor of a majority of the Company’s liabilities on a consolidated basis. In late 2013, the ownership of the mining rights on the Dodge Mines was challenged through litigation against MAB-Z. Despite holding legal certificates of ownership of the Dodge Mines claims that MAB-Z had, the legal system in Zimbabwe was not as clear cut as to the ownership. Several of these lawsuits were heard, with MAB-Z being victorious on each and every count. However, appeals continued to be filed, and the outcome of these appeals was not known, and with the Dodge Mine claims being in question, it delayed exploration and future revenue streams from the barite that was the subject of those claims. When the Company entered into the mining industry in Zimbabwe with the clear title to these Dodge Mine claims, both the economic conditions in Zimbabwe as well as the relationship between the Company and the Gurupiras, was better than at the end of the first quarter of 2015. Tapiwa Gurupira was, until December 28, 2014, a director of the Company.

In 2012, despite not having voting control of MAB-C, the entire five member board of directors of MAB-C were acting as a cohesive unit in the best interest of the Company, and  the Company had met both conditions of the VIE model, and therefore recognized MAB-C as a VIE and consolidated MAB-C into the Company’s financial statements under ASC 810. During late 2014, culminating on December 28, 2014, it became evident to the Company, that the relationship with the board members located in Africa and the board members located in the USA for MAB-C had soured. The cohesiveness that embodied the prior two years was not there, and the funding of the operations in Africa had stopped. Essentially, the power to direct the activities that most significantly impact MAB-C’s economic performance had terminated. As of December 28, 2014, the Company had considered that the investment of MAB-C was no longer a VIE, and thus would be considered an equity investment under ASC 970-323.

On December 28, 2014, the Company deconsolidated MAB-C, a VIE due to the fact that the Company no longer has the power to direct the activities that most significantly impacted MAB-C’s economic performance. The following table presents the assets and liabilities of the former VIE controlled company on the date of deconsolidation: 

Assets
Cash	$	12,138
Prepaid expenses		24,902
Fixed assets		4,713
Mining rights		433,000
Goodwill		25,000
Asset retirement obligation		83,350
Total assets	$	583.103
Liabilities
Accounts payable and accrued liabilities	$	222,301
Payable to Mabwe Minerals, Inc.		1,956,036
Due to related parties		426,456
Unearned revenue		108,740
Asset retirement obligation		83,350
Loans payable		129,500
Securitized loan/overdraft default (a)		413,489
Total liabilities	$	(3,339,872	)

As of December 28, 2014, the date of deconsolidation, MAB-C’s net liabilities totaled $2,756,769.

(a) In addition, MAB-Z the wholly-owned subsidiary of MAB-C entered into a securitized loan with a financial institution in May 2013 in the amount of $420,000. Payments were being made in accordance with the term of the agreement, however, the financial institution automatically withdrew funds from MAB-Z’s bank accounts as payments were due, despite the fact that available funds were not in the account causing significant overdrafts. The overdrawn account as of December 28, 2014 amounted to $378,489. MAB-Z recorded all of the default interest and fees related to this loan, and carried the $35,000 balance of the loan as a liability. Since the security on the loan agreement called for unlimited guarantees to the shareholders, which was MAB-C as it owned 100% of MAB-Z, by virtue of the 49% investment, the Company  recognized the $413,489 as a liability on its balance sheet as guarantor in accordance with ASC 460-10. The Company believes that the other guarantees of this debt will be sufficient to cover any outstanding obligation prior to the financial institution coming after the shareholders of MAB-Z, however has recorded the liability.

As a result of the deconsolidation, the Company will treat their 49% investment in accordance with ASC 970-323 as an equity method investment. Investments in less than 50% interest in the voting securities of the investee company are accounted for using the equity method of accounting. Investment in equity investee is increased by additional investments and earnings and decreased by dividends and losses. The Company reviews such investment in equity investee for impairment whenever events and circumstances indicate a decline in the recoverability of its carrying value.

Effective December 28, 2014, the Company’s deconsolidated MAB-C as a result of no longer having the power to direct the activities that most significantly impact MAB-C’s economic performance. The Company’s retained non-controlling investment in MAB-C at fair value at the date of deconsolidation amounted to $2,756,769, net of the loss related to the write-off of $1,965,036 and the recognition of liabilities related to the guarantee of the debt of MAB-C in the amount of $413,489, which nets to a gain of $387,244.  The Company’s share of the earnings or losses of the equity investee is reflected in the caption “Gain on deconsolidation, net of impairment of loan from MAB-C” in the statements of operations. Upon the transfer of the 49% ownership in MAB-C to another entity, the guaranty of debt transferred along with this. As a result, the $413,489 was converted to equity. 

The following table sets forth certain information about the Company’s Investment in MAB-C:

	% of  Outstanding  Shares		Carrying  Amount of  Investment
MAB-C at December 31, 2014	49	%	$	-

Gain on deconsolidation, net of impairment of loan from MAB-C

	Years Ended December 31,
	2014		2013
MAB-C	$	387,244	$	-

The Company recorded its share of MAB-C’s net gain using the equity method of accounting and such investment has been reduced to zero. Under ASC 323-10-35 “Investments – Equity Method”, the equity method investor shall discontinue applying the equity method when the investment has been reduced to zero and shall not provide for additional losses, unless the equity method investor provides or commits to provide additional funds to the investee, has guaranteed obligations of the investee, or is otherwise committed to provide further financial support to the investee. The Company is not obligated or committed to provide additional funds or further financial support to MAB-C and as such the Company shall not record additional share of losses of MAB-C upon reducing such investment to zero. There was no gain recognized during the three months ended March 31, 2015. On March 30, 2015 the Company transferred its 49% interest in MAB-C to Mabwe Minerals Inc., a South Dakota corporation.