The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
Notes
to the Consolidated Financial Statements
December 31, 2015 and 2014
NOTE 1 – NATURE OF ACTIVITIES
AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Activities, History and
Organization
DynaResource, Inc. (The “Company”,
“DynaResource”, or “DynaUSA”) was organized September 28, 1937, as a California corporation under the name
of West Coast Mines, Inc. In 1998, the Company re-domiciled to Delaware and changed its name to DynaResource, Inc. The
Company is in the business of acquiring, investing in, and developing precious metal properties, and the production of precious
metals.
In 2000, the Company formed a wholly
owned subsidiary, DynaResource de México S.A. de C.V., chartered in México (“DynaMéxico”). This
Company was formed to acquire, invest in and develop resource properties in México. DynaMéxico owns a portfolio
of mining concessions that currently includes its interests in the San José de Gracia Project (“SJG”) in northern
Sinaloa State, México. The SJG District covers 69,121 hectares (170,802 acres) on the west side of the Sierra Madre mountain
range. The Company currently owns 80% of the outstanding capital of DynaMéxico.
In 2005, the Company formed DynaResource
Operaciones de San Jose De Gracia S.A. de C.V. (“DynaOperaciones”), and acquired effective control of Mineras de DynaResource,
S.A. de C.V. (formerly Minera Finesterre S.A. de C.V., “DynaMineras”). The Company owned 25% of DynaMineras and acquired
effective control of DynaMineras by acquiring the option to purchase the remaining 75% of the Shares of DynaMineras. The Company
finalized the option and acquisition of DynaMineras in January 2010, and now owns 100% of DynaMineras. The results of
these subsidiaries are consolidated with those of the Company.
From January 2008 through March 2011,
DynaMéxico issued 100 Variable Capital Series “B” shares to Goldgroup Resources, Inc., a wholly owned subsidiary
of Goldgroup Mining Inc. Vancouver BC (“Goldgroup”), in exchange for Goldgroup’s contribution of $18,000,000
to DynaMéxico. At March 14, 2011, Goldgroup owned 50% of the outstanding capital shares of DynaMéxico.
On June 21, 2013, DynaResource acquired
a Certificate for 300 Series “B” Variable Capital Shares of DynaMéxico, in exchange for the settlement of accounts
receivable from DynaMéxico in the amount of $31,090,710 Mexican Pesos (approximately $2.4 million USD). After the issuance
and receipt of the 300 Series B Shares, DynaUSA holds 80% of the total outstanding Capital of DynaMéxico.
The Company elected to become a voluntary
reporting issuer in Canada in order to avail itself of Canadian regulations regarding reporting for mining properties and, more
specifically, National Instrument 43-101 (“NI 43-101”). This regulation sets forth standards for reporting resources
in a mineral property and is a standard recognized in the mining industry.
Significant Accounting Policies
The Company’s management selects
accounting principles generally accepted in the United States of America and adopts methods for their application. The
application of accounting principles requires the estimating, matching and timing of revenue and expense. The accounting policies
used conform to generally accepted accounting principles which have been consistently applied in the preparation of these financial
statements.
The financial statements and notes are
representations of the Company’s management which is responsible for their integrity and objectivity. Management further
acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed
to assure, among other items that: 1) recorded transactions are valid; 2) valid transactions are
recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements
which present fairly the financial condition, results of operations and cash flows of the Company for
the respective periods presented.
Basis of Presentation
The Company prepares its financial statements
on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States.
Principles of Consolidation
The financial statements include the
accounts of DynaResource, Inc., as well as DynaResource de México, S.A. de C.V. (80% ownership), DynaResource Operaciones
S.A. de C.V. (100% ownership) and Mineras de DynaResource S.A. de C.V. (100% ownership). All significant inter-company
transactions have been eliminated. All amounts are presented in U.S. Dollars unless otherwise stated.
Non-Controlling Interest
The Company’s subsidiary, DynaResource
de México S.A. de C.V, is 20% owned by Goldgroup Mining, Inc. On May 17, 2013, the ownership changed from 50% to 20%. The
Company accounts for this outside interest as “non-controlling interest”.
Investments in Affiliates
The Company owns a 19.92% interest in
DynaResource Nevada, Inc., a Nevada Corporation (“DynaNevada”), with one operating subsidiary in México, DynaNevada
de México, S.A. de C.V. (“DynaNevada de México”), together “DynaNevada”. The Company accounts
for this investment using the cost basis.
Cash and Cash Equivalents
The Company considers all highly liquid
debt instruments with a maturity of three months or less to be cash equivalents. At times, cash balances may be in excess
of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2014, the Company
had no balances that were in excess of the FDIC insurance limit of $250,000. The carrying amount approximates fair market value.
Accounts Receivable and Allowances
for Doubtful Accounts
The allowance for accounts receivable
is recorded when receivables are considered to be doubtful of collection. As of December 31, 2015 and 2014, respectively, no allowance
has been made.
Foreign Tax Receivable
Foreign Tax Receivable is comprised of
recoverable value-added taxes (“IVA”) charged by the Mexican government on goods and services rendered. Under
certain circumstances, these taxes are recoverable by filing a tax return. Amounts paid for IVA are tracked and held
as receivables until the funds are remitted. The total amounts of the IVA receivable as of December 31, 2015 and December
31, 2014 are $597,012 and $209,061, respectively.
Inventory
The Company commenced test mining and
milling (pilot production) activities in the 2
nd
quarter, 2014. Inventories are carried at the lower of cost or fair
value and consist of mined tonnage, and gravity concentrates, and gravity tailings or flotation feed material. The inventories
are $98,056 and $100,000 as of December 31, 2015 and December 31, 2014, respectively.
Proven and Probable Reserves (No Known
Reserves)
The definition of proven and probable
reserves is set forth in SEC Industry Guide 7 (“Industry Guide 7”). Proven reserves for which (1) quantity is computed
from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of
detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geological character
is so well defined that size, shape, depth and mineral content of the reserves are well-established. Probable reserves are reserves
for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves,
but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of
assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observations.
As of December 31, 2015, none of
the Company's properties contain resources that satisfy the definition of proven and probable reserves. The Company classifies
the development of its properties, including the San Jose de Gracia Property, as exploration stage projects since no proven or
probable reserves have been established under Industry Guide 7.
Property
Substantially all costs, including design,
engineering, construction, and installation of equipment are expensed as incurred as the Company has not established proven and
probable reserves on any of its properties. Only certain types of equipment which has alternative uses or significant salvage value,
may be capitalized without proven and probable reserves. Depreciation is computed using the straight-line method with the exception
of mining equipment. Mining equipment is depreciated using the units-of-production method based on tonnes processed over the estimated
total mine life. Office furniture, equipment and light vehicles are being depreciated over estimated economic lives ranging from
3 to 5 years. Leasehold improvements, which relate to the Company's corporate office, are being amortized over the term of
the lease of 10 years. Trailers, heavy vehicles and other site equipment are being depreciated over estimated economic lives
from 5 to 15 years. Buildings are being depreciated over an estimated economic life of 20 years.
Design, Construction, and Development
Costs:
Mine development costs include engineering and metallurgical studies, drilling and other related
costs to delineate an ore body, the removal of overburden to initially expose an ore body at open pit surface mines and the building
of access ways, shafts, lateral access, drifts, ramps and other infrastructure at underground mines.
When proven and probable reserves as
defined by Industry Guide 7 exist, development costs are capitalized and the property is a commercially minable property. Mine
development costs incurred either to develop new ore deposits, expand the capacity of operating mines, or to develop mine areas
substantially in advance of current production would be capitalized. Costs of start-up activities and costs incurred to maintain
current production or to maintain assets on a standby basis are charged to operations as incurred. Costs of abandoned projects
are charged to operations upon abandonment. All capitalized costs would be amortized using the units of production method over
the estimated life of the ore body based on recoverable ounces to be mined from proven and probable reserves.
Certain costs to design and construct
mining and processing facilities may be incurred prior to establishing proven and probable reserves. As no proven and probable
reserves have been established on any of the Company's properties, design, construction and development costs are not capitalized
at any of the Company's properties, and accordingly, substantially all costs are expensed as incurred, resulting in the Company
reporting larger losses than if such expenditures had been capitalized. Additionally, the Company does not have a corresponding
depreciation or amortization of these costs going forward since these expenditures were expensed as incurred as opposed to being
capitalized. As a result of these and other differences, the Company's financial statements may not be comparable to the financial
statements of mining companies that have established reserves.
Mining Properties Interests
Mineral
property interests include acquired interests in development and exploration stage properties, which are considered tangible assets.
The amount capitalized relating to a mineral property interest represents its fair value at the time of acquisition. When a property
does not contain mineralized material that satisfies the definition of proven and probable reserves, such as with the San Jose
de Gracia Property, capitalized costs and mineral property interests are amortized using the straight line method once production
begins. As of December 31, 2015, the mining interests have been in the pilot production stage and therefore, no amortization has
been expensed.
Mining properties consist of 33 mining concessions covering approximately 69,121 hectares at the San Jose
de Gracia property (“SJG”), the basis of which are amortized on the unit of production method based on estimated recoverable
resources. If it is determined that the deferred costs related to a property are not recoverable over its productive life,
those costs will be written down to fair value as a charge to operations in the period in which the determination is made. The
amounts at which mineral properties and the related costs are recorded do not necessarily reflect present or future values.
Impairment of Assets:
The
Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. Mineral properties are monitored for impairment based on factors such as mineral prices,
government regulation and taxation, the Company's continued right to explore the area, exploration reports, assays, technical reports,
drill results and its continued plans to fund exploration programs on the property.
For operating mines, recoverability is
measured by comparing the undiscounted future net cash flows to the net book value. When the net book value exceeds future net
undiscounted cash flows, an impairment loss is measured and recorded based on the excess of the net book value over fair value.
Fair value for operating mines is determined using a combined approach, which uses a discounted cash flow model for the existing
operations and a market approach for the fair value assessment of exploration land claims. Future cash flows are estimated based
on quantities of recoverable mineralized material, expected gold and silver prices (considering current and historical prices,
trends and related factors), production levels, operating costs, capital requirements and reclamation costs, all based on life-of-mine
plans. The term "recoverable mineralized material" refers to the estimated amount of gold or other commodities that will
be obtained after taking into account losses during processing and treatment of mineralized material. In estimating future cash
flows, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of future
cash flows from other asset groups. The Company's estimates of future cash flows are based on numerous assumptions and it is possible
that actual future cash flows will be significantly different than the estimates, as actual future quantities of recoverable minerals,
gold, silver and other commodity prices, production levels and costs and capital are each subject to significant risks and uncertainties.
The recoverability of the book value
of each property will be assessed annually for indicators of impairment such as adverse changes to any of the following:
•
|
estimated recoverable ounces of gold, silver or other precious minerals;
|
•
|
estimated future commodity prices;
|
•
|
estimated expected future operating costs, capital expenditures and reclamation expenditures.
|
A write-down to fair value will be recorded
when the expected future cash flow is less than the net book value of the property or when events or changes in the property indicate
that carrying amounts are not recoverable. This analysis will be completed as needed, and at least annually. As of the date
of this filing, no events have occurred that would require write-down of any assets. As of December 31, 2015 and 2014,
no indications of impairment existed.
Asset Retirement Obligation:
As
the Company is not obligated to remediate the mining properties, no Asset Retirement Obligation (“ARO”) has been established.
Changes in regulations or laws, any instances of non-compliance with laws or regulations that result in fines, or any unforeseen
environmental contamination could result in a material impact to the amounts charged to operations for reclamation and remediation.
Significant judgments and estimates are made when estimating the fair value of AROs. Expected cash flows relating to AROs could
occur over long periods of time and the assessment of the extent of environmental remediation work is highly subjective. Considering
all of these factors that go into the determination of an ARO, the fair value of the AROs can materially change over time.
Pre Pilot-Production Costs
During 2015, the Company has conducted
rehabilitation activity at the San Pablo mine, and has refurbished the Pilot Mill Facility at San Jose de Gracia and, in general
is preparing for test mining and pilot milling (“Pilot Production”) Operations. The costs associated with the rehabilitation,
preparation, clean up and facilitation of this process are expensed as pre pilot-production costs.
Property Holding Costs
Holding costs to maintain a property
on a care and maintenance basis are expensed in the period they are incurred. These costs include security and maintenance expenses,
lease and claim fees and payments, and environmental monitoring and reporting costs.
Exploration Costs
Exploration costs are charged to operations
and expenses as incurred. Exploration, development, direct field costs and administrative costs are expensed in the period incurred.
Foreign Currency Translation
The functional currency for the subsidiaries
of the Company is the Mexican Peso. As a result, the financial statements of the subsidiaries have been re-measured
from Mexican Pesos into U.S. dollars using (i) current exchange rates for monetary asset and liability accounts, (ii) historical
exchange rates for nonmonetary asset and liability accounts, (iii) historical exchange rates for revenues and expenses associated
with nonmonetary assets and liabilities and (iv) the weighted average exchange rate of the reporting period for all other revenues
and expenses. In addition, foreign currency translation gains and losses are reported as a separate component of stockholders’
equity (comprehensive income (loss).
The financial statements of the subsidiaries
should not be construed as representations that Mexican Pesos have been, could have been or may in the future be converted into
U.S. dollars at such rates or any other rates.
Relevant exchange rates used in the preparation
of the financial statements for the subsidiaries are as follows for the periods ended December 31, 2015 and December 31, 2014 (Mexican
Pesos per one U.S. dollar):
|
|
|
|
|
|
|
|
|
|
|
|
Dec 31, 2015
|
|
|
|
Dec 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current exchange rate
|
|
|
Pesos
|
|
|
|
17.34
|
|
|
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exchange rate for the period ended
|
|
|
Pesos
|
|
|
|
15.87
|
|
|
|
13.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded currency transaction
losses of $(2,479,449) for the year ended December 31, 2015 and $(1,585,392) in 2014.
Income Taxes
The Company accounts for income taxes
under ASC 740
“Income Taxes”
using the liability method, recognizing certain temporary differences between
the financial reporting basis of liabilities and assets and the related income tax basis for such liabilities and assets. This
method generates either a net deferred income tax liability or asset for the Company, as measured by the statutory tax rates in
effect. The Company derives the deferred income tax charge or benefit by recording the change in either the net deferred income
tax liability or asset balance for the year. The Company records a valuation allowance against any portion of those deferred income
tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of
the deferred income tax asset will not be realized.
Income from the Company’s subsidiaries
in México are taxed at applicable Mexican tax law.
Use of Estimates
In order to prepare financial statement
in conformity with accounting principles generally accepted in the United States, management must make estimates, judgments and
assumptions that affect the amounts reported in the financial statements and determines whether contingent assets and liabilities,
if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions
could differ significantly from resolution currently anticipated by management and on which the financial statements are based.
Comprehensive Income (Loss)
ASC 220
“Comprehensive Income”
establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial
statements. The Company’s comprehensive income consists of net income and other comprehensive income
(loss), consisting of unrealized net gains and losses on the translation of the assets and liabilities of its foreign operations.
For the periods ended December 31, 2015 and December 31, 2014, the Company’s components of comprehensive income were foreign
currency translation adjustments.
Revenue Recognition
The Company recognizes revenue in accordance
with ASC 605-10, "
Revenue Recognition in Financial Statements
". Revenue is recognized when persuasive
evidence of an arrangement exists, delivery or service has occurred, the sale price is fixed or determinable and receipt of payment
is probable. Revenues earned from the sale of precious metal concentrates are recognized when both the buyer and seller agree on
the % of gold as determined by sample assays and when it is delivered to the Buyer. Subsequently, a “final settlement”
is calculated and any remaining balance is paid.
Stock-Based Compensation
The Company accounts for stock options
at fair value as prescribed in ASC 718. The Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model and provides for expense recognition over the service period, if any, of the stock option.
Per Share Amounts
Earnings per share are calculated in
accordance with ASC 260 “
Earnings per Share
”. The weighted average number of common shares outstanding
during each period is used to compute basic earnings (loss) per share. Diluted earnings per share are computed using
the weighted average number of shares and potentially dilutive common shares outstanding. Potentially dilutive
common shares are additional common shares assumed to be exercised. Potentially dilutive common shares consist of stock
options and convertible preferred shares and convertible notes and are excluded from the diluted earnings per share computation
in periods where the Company has incurred a net loss, as their effect would be considered anti-dilutive.
The Company had 4,161,189 warrants outstanding
at December 31, 2015, which upon exercise, would result in the issuance of 4,161,189 shares of common stock. As the Company incurred
a net loss during the period ended December 31, 2015, the basic and diluted loss per common share is the same amount, as any common
stock equivalents would be considered anti-dilutive and, therefore, have been excluded from the computation.
Fair value of financial instruments
The Company’s
financial instruments consist of cash, receivables, payables and long-term debt. The carrying amount of cash, receivable and payables
approximates fair value because of the short-term nature of these items. The carrying amount of long-term debt approximates fair
value due to the relationship between the interest rate on long-term debt and the Company’s incremental risk adjusted borrowing
rate.
Recently Issued Accounting Pronouncements
Presentation of an Unrecognized Tax
Benefit:
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting
Standard Update ("ASU") 2013-11 related to the presentation of an unrecognized tax benefit when a net operating loss
carryforward, a similar tax loss or a tax credit carryforward exists. The updated guidance requires an entity to net its unrecognized
tax benefits against the deferred tax assets for the same jurisdiction's net operating loss carryforward, a similar tax loss, or
tax credit carryforwards. A gross presentation will be required only if such carryforwards are not available or would not be used
by the entity to settle any additional income taxes resulting from disallowance of the uncertain tax position. The update was effective
prospectively for the Company's fiscal year beginning January 1, 2014. The new guidance affects disclosures only and the adoption
had no impact on the Company's consolidated financial position, results of operations or cash flows.
Foreign Currency Matters:
In
March 2013, the FASB issued ASU 2013-05 related to Foreign Currency Matters to clarify the treatment of cumulative translation
adjustments when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial
interest in a subsidiary or group of assets that is a business within a foreign entity. The updated guidance also resolves the
diversity in practice for the treatment of business combinations achieved in stages in a foreign entity. The update was effective
prospectively for the Company's fiscal year beginning January 1, 2014. The updated guidance had no impact on the Company's
consolidated financial position, results of operations or cash flows.
Presentation of Financial Statements—Going
Concern—Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern:
In
August 2014, ASC 205-40 guidance was amended to provide guidance about management's responsibility to evaluate whether there
is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The
amendments require management to assess an entity's ability to continue as a going concern by incorporating and expanding upon
certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of
the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles
for considering the mitigating effect of management's plans, (4) require certain disclosures when substantial doubt is alleviated
as a result of consideration of management's plans, (5) require an express statement and other disclosures when substantial
doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements
are issued (or available to be issued). The amendments in this update are effective for the Company's fiscal year ending December
31, 2016 and interim periods in the fiscal year ending December 31, 2017, with early application permitted. The new guidance is
not expected to have an impact on the Company's consolidated financial statements.
Presentation of Financial Statements
and Property, Plant and Equipment—Reporting Discontinued Operations and Disclosures of Components of an Entity:
In
April 2014, ASC 205 and ASC 360 guidance was amended to change the requirements for reporting discontinued operations
in ASC 205-20. A disposal of a component of an entity or a group of components of an entity is required to be reported in
discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity's
operations and financial results when any of the following occurs: (1) the component of an entity or group of components of
an entity meets the criteria in ASC 205-20-45-1E to be classified as held for sale; (2) the component of an entity or
group of components of an entity is disposed of by sale; or (3) the component of an entity or group of components of an entity
is disposed of other than by sale. The update is effective prospectively for the Company's fiscal year beginning January 1,
2015. The new guidance is not expected to have an impact on the Company's consolidated financial statements.
Revenue from Contracts with Customers:
In
May 2014, ASC 606 was issued related to revenue from contracts with customers. Under this guidance, revenue is recognized
when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be
received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when
it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is
not permitted. The standard will be effective for the Company's fiscal year beginning January 1, 2017, including interim reporting
periods within that year. The new guidance is not expected to have an impact on the Company's consolidated financial statements.
NOTE 2 – INVENTORIES
The Company commenced underground test
mining and pilot milling activities (“pilot production”) in the 2
nd
quarter of 2014. Rehabilitation of the
San Pablo Mine and refurbishing of the Pilot Mill Facility and construction of the adjacent tailings pond continued through 2015.
Inventories are carried at the lower of cost or fair value and consist of mined tonnage, gravity-flotation concentrates, and gravity
tailings (or, flotation feed material). Inventory balances of December 31, 2015 and December 31, 2014, respectively, were as follows:
|
|
2015
|
|
2014
|
|
|
|
|
|
Gravity Tailings (Flotation Feed Material)
|
|
$
|
98,056
|
|
|
$
|
100,000
|
|
Total Inventories
|
|
$
|
98,056
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
NOTE 3 – PROPERTY
Property consists of the following at
December 31, 2015 and December 31, 2014:
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
Mining camp equipment
|
|
$
|
402,212
|
|
|
$
|
702,543
|
|
Transportation equipment
|
|
|
301,074
|
|
|
|
222,988
|
|
Machinery and equipment
|
|
|
509,298
|
|
|
|
106,189
|
|
Office furniture and fixtures
|
|
|
75,829
|
|
|
|
75,829
|
|
Office equipment
|
|
|
170,581
|
|
|
|
65,032
|
|
Sub-total
|
|
|
1,458,994
|
|
|
|
1,172,581
|
|
Less: Accumulated depreciation
|
|
|
(823,044
|
)
|
|
|
(967,207
|
)
|
Total Property
|
|
$
|
635,950
|
|
|
$
|
205,374
|
|
|
|
|
|
|
|
|
|
|
Depreciation has been provided over
each asset’s estimated useful life. Depreciation expense was $128,513 and $56,468for the years ended December
31, 2015 and 2014, respectively.
NOTE 4 – MINING CONCESSIONS
Mining properties consist of the following
at December 31, 2015 and December 31, 2014:
|
|
2015
|
|
2014
|
San Jose de Gracia (“SJG”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mining Concessions
|
|
$
|
4,132,678
|
|
|
$
|
4,194,439
|
|
Amortization expense was $nil and
$nil for the years ended December 31, 2015 and 2014, respectively.
NOTE 5 – INVESTMENT IN AFFILIATE/RECEIVABLES
FROM AFFILIATE/OTHER ASSETS
Through December 31, 2015, the Company
loaned a total of $805,760 to DynaResource Nevada, Inc. (“DynaNevada”), a Nevada Corporation, which owns 100% of one
operating subsidiary in México, DynaNevada de México, S.A. de C.V. (“DynaNevada de México”).
The terms of the Note Receivable provided for a “Convertible Loan”, repayable at 5% interest over a 3-year period,
and convertible at the Company’s option into common stock of DynaNevada at $.25 / Share. DynaNevada is a related
entity (affiliate), and through its subsidiary, DynaNevada de México has entered into an Option agreement with Grupo México
(IMMSA) in México, for the exploration and development of approximately 3,000 hectares in the State of San Luis Potosi (“The
Santa Gertrudis Property”). DynaNevada de México exercised the Option with IMMSA in March 2010, so that DynaNevada
de México now owns 100% of the Santa Gertrudis Property. In June 2010, DynaNevada de México acquired an additional
6,000 hectares in the State of Sinaloa (the “San Juan Property”).
On December 31, 2010, the Company exercised
its option to convert the note receivable and other receivable from DynaNevada into shares of common stock at a rate of $.25 /
Share. The Company received 3,223,040 shares, which represents approximately 19.95% of the outstanding shares of DynaNevada. At
the time of the exchange, DynaNevada’s net book value was approximately $695,000, consisting of $30,000 cash and the remainder
unproven mining properties. Based upon the above, Management estimated the value of the Company’s DynaNevada shares as of
December 31, 2015 and December 31, 2014 to be $70,000 and $70,000, respectively. The loss was taken to “other income (loss)”
on the income statement in previous years.
The Company has advanced funds to DynaNevada
on a regular basis in order for DynaNevada to meets its basis filing and reporting obligations with the Mexican authorities relating
to tax returns and paying taxes on its mining concessions. As of December 31, 2015 and December 31, 2014, the advances totaled
$159,143 and $172,968, respectively.
NOTE 6 – CONVERTIBLE PROMISSORY
NOTES
Notes Payable – Series I
In April and May, 2013, the Company entered
into note agreements with shareholders in the principal amount of $1,495,000, of which $340,000 was then converted to preferred
shares within the same year, netting to proceeds of $1,155,000 (the “Series I Notes” Series I). The Series I Notes
bear simple interest at twelve and a half percent (12.5%), accrued for twelve months, and with the accrued interest to be
added to the principal, and then interest will be paid by the Company, quarterly in arrears. The holders of the Series
I Notes (in aggregate) are also entitled to receive ten percent (10%) of the net profits received by the Company, and generated
from the bulk sampling material (if any, and up to fifty thousand tonnes) processed through the existing, or improved mill
facilities at San Jose de Gracia. Such net profits (if any) are to be calculated after deducting all expenses related to the
processing of the bulk sample material, and after a prior deduction of thirty-three percent (33%) from the profits,
to be deposited in a sinking fund cash reserve. This net profit percentage (if any) would be paid quarterly in arrears based
on the profits generated (if any) for the prior quarter. At the time of the Series I Notes, there were no proven or probable
reserves and the Company had not produced any net profits. Consequently, the fair value of the net profits interest on the date
of the Series I Note was deemed to be zero. Further, no payments have been made under the terms of this codicil. The Notes originally
matured on December 31, 2015. In April, 2015, the notes were extended to December 31, 2016.
The Company has the right to prepay the
Series I Notes with a ten percent (10%) penalty. The notes are secured by the Company’s stock at $5 per share.
The Series I Note holder retains the
option, at any time prior to maturity or prepayment, to convert any unpaid principal and accrued interest into Common Stock at
$5.00 per share. If the Series I Note is converted into Common Stock, at the time of conversion, the holder would also receive
warrants, in the same number as the number of common shares received upon conversion, to purchase additional common shares of the
Company for $7.50 per share, with such warrants expiring on December 31, 2015.
In 2013, the Company offered an inducement
to all Series I Note holders to convert their Series I Notes and accrued interest into Series B Preferred Stock (“Series
B”), $5/Share, which Series B was convertible into common stock on a 2 for 1 basis (i.e., $2.50 stock). This conversion into
Series B created $197,771 in inducement expense, with an offset to additional paid in capital. In 2013, $340,000 principal and
$22,734 of capitalized accrued interest of the Series I Notes were converted into Preferred Stock, Series B and 72,546 shares were
issued. At June 30, 2014, these 72,546 Series B shares were converted into 145,092 common shares.
In April, 2015, the Company received
note extensions (allonges) from all Series I note holders to ensure that all Series I Notes were in good standing and also extended
the maturity date of the Series I Notes to December 31, 2016.
Notes Payable – Series II
In 2013 and 2014, the Company entered
into additional note agreements of $199,808 and $250,000, respectively (the “Series II Notes”) with similar terms as
the Series I notes. The Series II Notes bear simple interest at twelve and a half percent (12.5%), accrued for twelve months, and
with the accrued interest to be added to the principal, and then interest will be paid by the Company, quarterly
in arrears. The holders of the Series II Notes (in aggregate) are also entitled to receive ten percent (10%) of the net profits
received by the Company, and generated from the bulk sampling material (if any, on the second fifty thousand tonnes) processed
through the existing, or improved mill facilities at San Jose de Gracia. Such net profits (if any) are to be calculated after
deducting all expenses related to the processing of the bulk sample material, and after a prior deduction of thirty-three
percent (33%) from the profits, to be deposited in a sinking fund cash reserve. This net profit percentage (if any) would be
paid quarterly in arrears based on the profits generated (if any) for the prior quarter. At the time of the Series II notes,
there were no proven or probable reserves and the Company had not produced any net profits. Consequently, the fair value of the
net profits interest on the date of the Series II note was deemed to be zero. Further, no payments have been made under the terms
of this codicil. The Notes mature on December 31, 2016.
The Company has the right to prepay the
Notes with a ten percent (10%) penalty. The notes are secured by the Company’s stock at $5 per share.
The Note holder may, at any time prior
to maturity or prepayment, convert any unpaid principal and accrued interest into common stock of the Company at $5.00 per share.
At the time of conversion, the holder would receive a warrant to purchase additional common shares of the Company for $7.50 per
share, such warrant expiring on December 31, 2016.
In April, 2015, the Company received
allonges (note extensions) from all noteholders to ensure that all notes were in good standing and also confirmed the maturity
of the Series II notes to be December 31, 2016.
On June 30, 2015, the Company entered
into conversion agreements with six (6) note holders. Principal and interest in the amount of $809,784 plus $33,120 of accrued
interest (total of $842,904) was contracted to convert into 337,162 common shares. In addition, 337,162 warrants are to be issued
which provide the option to purchase common shares at $2.50, with all warrants expiring December 31, 2017. The Company recorded
$826,347 inducement expense related to these conversion transactions. On August 17, 2015, these common shares and warrants were
issued.
The company evaluated the application
of ASC 470-50 and ASC 470-60 and determined that the Notes were not substantially different. As a result, it was concluded that
the revised terms constituted a debt modification rather than a debt extinguishment.
At December 31, 2015, the principal and
capitalized interest balance on the remaining Series I Notes was $793,125, and the principal and capitalized interest on the Series
II Notes was $191,250, for a total Note balance of $956,250. The principal balance on the Note—Related Party was $0 and $250,000
for the years ended December 31, 2015 and 2014, respectively. The accrued interest for these notes was $29,883 and $109,292 as
of December 31, 2015 and 2014, respectively.
Other Notes Payable
The Company received proceeds from a
short term convertible note in the amount of $203,500 on September 5, 2014. Interest is accrued at 8% annually and interest payments
are deferred until conversion or payoff of note. The note provisions allow payoff in the first 180 days subsequent to funding,
with additional premium of 10% of the note amount in the 1
st
30 days; 12% if paid in the next 30 days; 15% in the next
60 days; and 19% if paid before the end of 180 days. After 180 days, the note is convertible to common stock at a “variable
conversion price” of 70% of the market price (average of the lowest three trading prices for the common stock during the
ten trading day period ending on the latest complete trading day prior to the conversion date). This note was guaranteed by the
CEO of the Company.
This Note was retired in full in February,
2015. Because the note was repaid within the 180 days, the option to convert was never available. Consequently, the embedded conversion
feature was not bifurcated and no derivative was recorded.
NOTE 7 – INCOME TAXES
The Company has adopted ASC 740-10, “
Income
Taxes”
, which requires the use of the liability method in the computation of income tax expense and the current and deferred
income taxes payable (deferred tax liability) or benefit (deferred tax asset). Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized.
The cumulative tax effect at the expected
tax rate of 34% (blended for U.S. and México) of significant items comprising the Company’s net deferred tax amounts
as of December 31, 2015 and December 31, 2014 are as follows:
Deferred Tax Asset Related to:
|
|
2015
|
|
2014
|
Prior Year
|
|
$
|
13,652,086
|
|
|
$
|
11,626,008
|
|
Tax Benefit for Current Year
|
|
|
3,883,714
|
|
|
|
2,026,078
|
|
Total Deferred Tax Asset
|
|
|
17,535,800
|
|
|
|
13,652,086
|
|
Less: Valuation Allowance
|
|
|
(17,535,800
|
)
|
|
|
(13,652,086
|
)
|
Net Deferred Tax Asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The net deferred tax asset and benefit
for the current year is generated primarily from the cumulative net operating loss carry-forward which is approximately $50,159,000
at December 31, 2015, and will expire in the years 2025 through 2031.
The realization of deferred tax benefits
is contingent upon future earnings and is fully reserved at December 31, 2015.
On December 11, 2013, the Mexican
government enacted a tax reform that increased the effective tax rate applicable to the Company's Mexican operations. The law,
effective January 1, 2014, increased the future corporate income tax rate to 30%, created a 10% withholding tax on dividends
paid to non-resident shareholders and created a new Extraordinary Mining duty which is equal to 0.5% of gross revenues from the
sale of gold, silver and platinum. Furthermore, the reform introduced a Special Mining Duty of 7.5%. The Special Mining Duty is
deductible for income tax purposes. The Special Mining Duty is generally applicable to earnings before income tax, depreciation,
depletion, amortization and interest. There will be no deductions related to development type costs but exploration and prospecting
costs are deductible when incurred. Certain non-deducted exploration expenditures incurred prior to January 1, 2014 are also
deductible in the calculation of the Special Mining Duty. For the year ended December 31, 2014, the Company had no taxes payable
under the 7.5% Special Mining Duty.
The Company or its subsidiaries file
income tax returns in the United States and México. These tax returns are subject to examination by local taxation authorities
provided the tax years remain open to audit under the relevant statute of limitations. The following summarizes the open tax years
by major jurisdiction:
|
United States:
|
2012 to 2015
|
|
México:
|
2011 to 2015
|
|
|
|
The Company does not have any other
material items of temporary or permanent differences, which give rise to deferred tax assets or liabilities.
NOTE 8 – STOCKHOLDERS’
EQUITY
Authorized Capital
. The
total number of shares of all classes of capital stock which the corporation shall have the authority to issue is 45,001,000 shares,
consisting of (i) twenty million and one thousand (20,001,000) shares of Preferred Stock, par value $0.0001 per share (“
Preferred
Stock
”), of which one thousand (1,000) shares shall be designated as Series A Preferred Stock and (ii) twenty-five million
(25,000,000) shares of Common Stock, par value $.01 per share (“
Common Stock
”).
Series A Preferred Stock
The Company has designated 1,000 shares
of its Preferred Stock as Series A, having a par value of $0.0001 per share. Holders of the Series A Preferred Stock have the right
to elect a majority of the Board of Directors of the Company. In October 2007, the Company issued 1,000 shares of Series A
Preferred Stock to its CEO. At December 31, 2015 and December 31, 2014, there were 1,000 and 1,000 shares of Series A Preferred
Stock outstanding, respectively. The par value changed from $1.00 to $0.0001 in 2012.
Series B Preferred Stock
The Company designated 1,000,000 shares
of its Preferred Stock as Series B, having a par value of $0.0001 per share. Holders of the Series B Preferred Shares held
the right to convert into Common Stock of the Company on the following schedule:
Date of Conversion
|
# of Common Shares
Received on Conversion
For Each Preferred Share
|
# of Common Stock
Warrants Received
On Conversion for
Each Preferred Share
|
Company
Can Force the
Option?
|
April 1 to December 31, 2014
|
2
|
0
|
N
|
July 1 to Dec 31, 2014
|
1.5
|
.75
|
N
|
January 1 to June 30, 2015
|
1
|
1
|
N
|
July 1 to December 31, 2015
|
1
|
0
|
Y
|
The holders of Series B Preferred Shares
did not have voting rights and were not entitled to receive a dividend.
During the years ended December 31, 2015
and 2014, the Company issued 0 and 266,200 shares, respectively of Series B preferred shares for $1,331,000 cash. In the year 2014,
each share is convertible into 2 common shares at the option of the holder. The Company evaluated the convertible preferred stock
under FASB ASC 470-20-30 and determined it contained a beneficial conversion feature. The intrinsic value of the beneficial conversion
feature was determined to be $668,952. The beneficial conversion feature was fully amortized and recorded as a deemed dividend
in 2014.
At June 30, 2014, all Series B Preferred
Shares were converted to common shares: 726,646 shares of Preferred B converted to 1,453,292 common shares.
On May 4, 2015, the Company filed a certificate
of elimination of the Series B convertible preferred shares, and thereby eliminating the Series B preferred shares. Therefore,
as of December 31, 2015, no Series B Preferred Shares were outstanding.
Series C Senior Convertible Preferred
Shares
On June 30, 2015, the Company issued
1,600,000 Series C Senior Convertible Preferred Shares (the “Series C Preferred Shares”) at $2.50 per share for gross
proceeds of $ 4,000,000, as well as issuing 133,221 additional Series C Preferred Shares due to anti-dilution provisions (with
no cash remuneration). Legal fees of $45,000 were deducted from the proceeds of this transaction at closing. These Series C Preferred
Shares were originally convertible to common shares at $2.50 per share, through February 20, 2020. As of December 31, 2015, the
share exercise price was reset to $2.41 per share due to anti-dilution provisions. The Series C Preferred Shares may receive a
4% per annum dividend, payable if available, and in arrears. A description of the transaction which included the issuance of the
Series C Preferred Shares is included below.
Financing Agreement with Golden Post
Rail, LLC, a Texas Limited Liability Company
-
On May 6, 2015, the Company, Golden Post Rail,
LLC, a Texas limited liability company (“Golden Post”), and Mr. Koy W. (“K.D.”) Diepholz, Chairman-CEO
of the Company entered into a Securities Purchase Agreement (the “SPA”). Pursuant to the SPA, Golden Post acquired
the following securities:
|
a)
|
1,600,000 shares of Series C Senior Convertible Preferred Stock (the “Series C Preferred”)
at a purchase price of $2.50 per share ($4M USD), plus an additional 133,221 shares of Series C Preferred pursuant to anti-dilution
provisions. The Series C Preferred is entitled to receive dividends at the per share rate of four percent (4%) per annum, ranks
senior (in priority) to the Common Stock, the Series A Preferred Stock, and each other class or series of equity security of the
Company. The Series C Preferred was originally convertible into Common Stock of the Company at the price of $2.50 per share, and
is entitled to anti-dilution protection for (i) subsequent equity issuances by the Company and (ii) changes in the Company’s
ownership of DynaResource de México SA de CV (“DynaMéxico”). Due to reset provisions at December 31,
2015, the price has been adjusted to $2.41 per share. The Series C Preferred is also entitled to preemptive rights, and the holder
has the right to designate one person to the Company’s Board of Directors as a Class III director.
|
|
b)
|
A Common Stock Purchase Warrant (the “Golden Post Warrant”) for the purchase of 2,166,527
shares of the Company’s Common Stock, originally at an exercise price of $2.50 per share, and expiring June 30, 2020. The
anti-dilution protections contained in the terms of the Series C Preferred are essentially replicated in the Golden Post Warrant.
As of December 31, 2015, the pricing of the warrants was reset to $2.41 per share due to anti-dilution provisions.
|
|
2.
|
On May 6, 2015, the Company executed a Promissory Note (the “Golden Post Note”) payable
to Golden Post in the principal amount of $500,000, and bearing interest at 8%. The principal amount of the Golden Post Note and
accrued interest to June 30, 2015 of $6,000 were credited against amounts payable to the Company pursuant to the Securities Purchase
Agreement described above.
|
|
3.
|
Pursuant to the SPA, the Company executed a Registration Rights Agreement pursuant to which Golden
Post may require the Company to register the shares of Common Stock which may be issued upon the conversion of the Series C Preferred
and the shares of Common Stock issuable upon the exercise of the Warrant, including any additional shares of Common Stock issuable
pursuant to anti-dilution provisions.
|
Due to underlying anti-dilutive provisions
contained in the Series C Preferred Shares and the Golden Post Warrant, the Company incurred derivative liabilities of $2,419,359
in connection with the Series C Preferred Shares, and $2,963,378 in connection with the Golden Post warrants. Additionally, the
Company fully accreted the discount related to the Series C Preferred Shares and the Golden Post warrants in the amount of $4,637,179,
which is reflected “below” the net income (loss) amount. Also in the current year, the Company reported $87,374 for
redemption of dividend for Golden Post Rail related to its 4% dividend terms. As the Company has not declared these dividends,
it is required only as an item “below” the net income (loss) amount.
Due to the nature of this transaction
as mandatorily redeemable, the preferred shares are classified as “temporary equity” on the balance sheet.
Cumulative dividends on the Preferred
C shares amounted to $87,374 in 2015.
|
|
Preferred Series C
|
Carrying Value, December 31, 2014
|
|
$
|
–
|
|
Issuances at Fair Value, net of issuance costs
|
|
|
3,955,000
|
|
Bifurcation of Derivative Liability
|
|
|
2,152,704
|
|
Relative Fair Value of Warrants-Preferred Stock Discount
|
|
|
(2,106,422
|
)
|
Accretion of Preferred Stock to Redemption Value
|
|
|
(4,637,179
|
)
|
Carrying Value, December 31, 2015
|
|
|
4,333,053
|
|
Preferred Stock (Undesignated)
In addition to the 1,000 shares designated
as Series A Preferred Stock and the 1,733,221 shares designated as Series C Preferred Shares, the Company is authorized to issue
an additional 16,266,779 shares of Preferred Stock, having a par value of $0.0001 per share. The Board of Directors of the Company
has authority to issue the Preferred Stock from time to time in one or more series, and with respect to each series of the Preferred
Stock, to fix and state by the resolution the terms attached to the Preferred Stock. At December 31, 2015 and December 31, 2014,
there were no other shares of Preferred Stock outstanding.
Separate Series; Increase or Decrease
in Authorized Shares
. The shares of each series of Preferred Stock may vary from the shares of any other series thereof in
any or all of the foregoing respects and in any other manner. The Board of Directors may increase the number of shares of Preferred
Stock designated for any existing series by a resolution adding to such series authorized and unissued shares of Preferred Stock
not designated for any other series. Unless otherwise provided in the Preferred Stock Designation, the Board of Directors may decrease
the number of shares of Preferred Stock designated for any existing series by a resolution subtracting from such series authorized
and unissued shares of Preferred Stock designated for such existing series, and the shares so subtracted shall become authorized,
unissued and undesignated shares of Preferred Stock.
Common Stock
The Company is authorized to issue 25,000,000
common shares at a par value of $0.01 per share. These shares have full voting rights. At December 31, 2015 and December 31, 2014,
there were 16,722,825 and 14,146,024 shares outstanding, respectively. No dividends were paid for the years ended December
31, 2015 and 2014, respectively.
Preferred Rights
The Company issued “Preferred Rights”
for the rights to percentages of revenues generated from the San Jose de Gracia Pilot Production Plant, and received $158,500 in
2003 and $626,000 in 2002. This has been reflected as “Preferred Rights” in stockholders’ equity. As of December
31, 2004, $558,312 was repaid and as of December 31, 2005, an additional $186,188 was repaid, leaving a current balance of $40,000
and $40,000 as of December 31, 2015 and December 31, 2014, respectively.
Stock Issuances
2015 Activity
During the year ended December 31, 2015,
the Company issued 407,162 common shares for the conversion of notes, accrued interest and advances at $2.50 per share. These stock
issuances also included the issuance of 407,162 warrants exercisable at $2.50 per share, expiring December 31, 2017. The Company
issued 1,169,500 common shares for cash at $2.50 per share, and the Company also issued 1,319,000 Warrants, with 1,020,000 of these
warrants exercisable at $2.50 per share expiring December 31, 2017 and 149,500 warrants exercisable at $5 per share through December
31, 2015 and 149,500 warrants exercisable at $7.50 per share, expiring December 31, 2016.
The Company issued 2,166,527 warrants
related to the Series C Convertible Preferred shares in the current year. These warrants were exercisable at $2.50 per share, and
expire June 30, 2020. The exercise price has been reset to $2.41 per share due to anti-dilution provisions.
During 2015, the Company issued 750,000
common shares to Mineras de DynaResource S.A. de C.V. (“DynaMineras”, a wholly owned subsidiary) in exchange for services
at a fair value of $1.74 per share. These shares are carried as Treasury Shares for consolidation purposes.
During 2015, the Company issued 250,000
shares to Dynacap Group Ltd., a related party, for services rendered at a fair value of $1.74 per share and recognized $435,000
in expense.
Treasury Stock
During the year ended December 31, 2015,
the Company distributed 395,700 treasury shares to stockholders and recognized $1,187,100 expense related to same. The Company
distributed 600,000 treasury shares for services rendered and recognized $1,044,000 expense for such distribution. Company recognized
$51,135 in expense for the distribution of 20,000 treasury shares.
Note Conversions
As described in Note 6, Six (6) Noteholders
converted principal and interest in the amount of $809,784 plus $33,120 of accrued interest (total of $842,904) into 337,162 shares
of common stock ($2.50 per share). In addition, 337,162 warrants were issued, exercisable at $2.50 per share, expiring December
31, 2017.
Conversion of Advances—Related
Party
The Company converted $175,000 of advances
from its CEO for the issuance of 70,000 shares of common (at $2.50 per share) as well as issuing 70,000 warrants, exercisable at
$2.50 per share, expiring December 31, 2017.
2014 Activity
During the year ended December 31, 2014,
the Company issued 266,200 Series B preferred shares for cash at $5.00 per share.
During the year ended December 31, 2014,
the Company issued 1,453,292 common shares for the conversion of 726,646 Series B Preferred Shares, at a conversion ratio of 2
common shares issued for 1 preferred series B share redeemed. The Company also issued 4,391 common shares for the conversion of
an advance to the Company at $2.50 per share.
During the year ended December 31, 2014,
the Company issued 1,333,333 shares to Mineras de DynaResource (wholly owned subsidiary) in exchange for the receivable it held
from DynaResource de México of $4,000,000 at a fair value cost of $2.50 per share. The shares are carried in Treasury for
consolidation purposes.
During 2014, $757,500 was received for
the issuance of 303,000 shares at $2.50 per share.
During 2014, 250,000 shares were issued
for services rendered at a cost basis of $2.75 per share.
Treasury Stock
In 2014, the Company issued 1,333,333
shares to Mineras de DynaResource SA de CV (“DynaMineras”) in exchange for $4,000,000 in receivables owed by DynaMéxico
to DynaMineras and these shares are held in treasury. Also in 2014, Mineras redistributed 250,000 shares of common for services
and the Company recognized $687,500 in expense related to this transaction.
In 2014, the Company repurchased 3,000
Common Shares for $7,500.
In 2014, The Company redistributed 20,454
shares of treasury stock.
In August, 2014, the Company distributed
20,000 treasury shares.
Treasury stock is accounted for by the
cost method.
Warrants
2015 Activity
The Company had 4,161,189 warrants outstanding
at December 31, 2015. During 2015, the Company issued 149,500 warrants at $5/share, expiring December 31, 2016 and 149,500 warrants
at $7.50/share expiring December 31, 2017. The Company also issued 1,001,150 warrants at $2.50/share, expiring December 31, 2017.
The Company also issued 2,166,527 warrants with anti-dilution provisions originally priced at $2.50/share and expiring June 30,
2020. These warrants have been reset to $2.41 per share pricing due to anti-dilution provisions. The Company also issued 407,162
warrants at $2.50/share, expiring December 31, 2017. Expiration of 991,150 warrants occurred during the year.
2014 Activity
During 2014, the Company issued 790,000
Warrants to purchasers of 395,000 common shares at $2.50 per share: (a) 395,000 warrants, exercisable at $5 per share, and expiring
December 31, 2015, and (b) 395,000 warrants, exercisable at $7.50 per share, and expiring December 31, 2016. Also during the year
ended December 31, 2014, 212,500 warrants expired on January 1, 2014, and 469,650 warrants expired at June 30, 2014.
During the years ended December 31, 2015
and 2014, no warrants were exercised.
The Company recorded no expense related to
the issuance of these warrants since these warrants were issued in common stock for cash sales and note conversions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining Contractual
Life (Years)
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
1,151,800
|
|
$
|
5.83
|
|
|
.90
|
|
$
|
-
|
|
Granted
|
|
|
790,000
|
|
$
|
6.25
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
-
|
|
$
|
0.00
|
|
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(682,150)
|
|
$
|
4.69
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
|
|
1,259,650
|
|
$
|
5.80
|
|
|
.96
|
|
$
|
-
|
|
Granted
|
|
|
3,892,689
|
|
$
|
6.25
|
|
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(991,150)
|
|
$
|
4.69
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
4,161,189
|
|
$
|
5.80
|
|
|
.96
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2015
|
|
|
4,161,189
|
|
|
5.80
|
|
|
.96
|
|
$
|
-
|
|
|
|
|
|
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NOTE
9 – RELATED PARTY TRANSACTIONS
Dynacap Group Ltd.
The Company paid $81,500 and $86,250
to Dynacap Group, Ltd. (an entity controlled by an officer of the Company) for consulting and other fees during the years ended
December 31, 2015 and 2014, respectively.
The Company also issued 250,000 shares
of common stock in February, 2015 to Dynacap for services performed at $1.74 per share and recognized expense $435,000.
Cash Advances by Management
Company Chairman/CEO contributed $175,000
and Company CFO contributed $150,000 as advances to the Company in 2015.
The Company converted $175,000 of advances
from the CEO for the issuance of 70,000 shares of common (at $2.50 per share) as well as 70,000 warrants, exercisable at $2.50
per share, expiring December 31, 2017 during 2015. These shares were issued in August, 2015.
Note Agreement with Management
The Company entered into a note agreement
with its CFO for the receipt of $250,000 on April 24, 2014. The agreement calls for simple interest at an annual rate of 12.5%.
Interest for the first year is to be capitalized and added to the note. After one year, the Company is to make quarterly payments
in arrears. The Note matures on December 31, 2016.
The Company has the right to prepay the
Note with a ten percent (10%) penalty. The Note holder may, at any time prior to maturity or prepayment, convert any unpaid principal
and accrued interest into common stock of the Company at $3.75 until December 31, 2015, and at 5.00 per share after December 31,
2015, but prior to December 31, 2016. At the time of conversion, the holder would receive a warrant to purchase additional common
shares of the Company for $7.50 per share, such warrant expiring 2 years from the date of issue.
On April 24, 2015 the CFO agreed to convert
$250,000 principal plus $30,555 accrued interest into 115,222 common shares at $2.50/Share, with 115,222 warrants, exercisable
at $2.50 per share, expiring December 31, 2017. These shares and warrants were issued on August 24, 2015.
Stock Purchases by Management
The Company issued shares at $2.50/Share
for the receipt of $425,000 by the Company Chairman/CEO in 2014.
The Company CEO also received 20,000
treasury shares during the year.
DynaResource Nevada, Inc. and DynaNevada
de México S.A. de C.V. (together “DynaNevada”)
The Company advanced DynaNevada $0 and
$0 in the years ended December 31, 2015 and 2014, respectively, for maintenance of its corporate obligations and mining concessions.
The balance for the years ended December 31, 2015 and 2014 are $159,143 and $172,968, respectively.
NOTE 10 – COMMITMENTS AND
CONTINGENCIES
The Company is required to pay taxes
in México in order to maintain mining concessions owned by DynaMéxico. Additionally, the Company is required
to incur a minimum amount of expenditures each year for all concessions held. The minimum expenditures are calculated
based upon the land area, as well as the age of the concessions. Amounts spent in excess of the minimum may be carried
forward indefinitely over the life of the concessions, and are adjusted annually for inflation. Based on Management’s
business plans, the Company does not anticipate that DynaMéxico will have any issues in meeting the minimum annual expenditures
for the concessions, and DynaMéxico retains sufficient carry-forward amounts to cover over 20 years of the minimum expenditure
(as calculated at the 2012 minimum, adjusted for annual inflation of 4%).
In
addition to the surface rights held by DynaMéxico pursuant to the
Mining Act
of México and its Regulations
(
Ley Minera y su Reglamento
), DynaMineras maintains access and surface rights to the SJG Project pursuant to the 20-year
Land Lease Agreement.
The
20 Year Land Lease Agreement with the Santa Maria Ejido
Community surrounding San Jose de Gracia was dated January 6, 2014 and continues through 2033. It covers an area of 4,399 hectares
surrounding the main mineral resource areas of SJG, and provides for annual lease payments by DynaMineras of $1,359,443 Pesos (approx.
$104,250 USD), commencing in 2014.
The Land Lease Agreement provides DynaMineras with surface access to the core resource
areas of SJG (4,399 hectares), and allows for all permitted mining and exploration activities from the owners of the surface rights
(Santa Maria Ejido community).
In September 2008, the Company entered
into a 37-month lease agreement for its corporate office. In August, 2011 and then in August 2012, the Company entered
into a one-year extension of the lease through August 31, 2016. The Company paid rent expense of $55,764 and $49,600 related to
this lease for the years ended December 31, 2015 and 2014, respectively.
Other Contingencies
The Company's mining and exploration
activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations
are continually changing and generally becoming more restrictive. The Company conducts its operations so as to protect public health
and the environment, and believes its operations are materially in compliance with all applicable laws and regulations. The Company
has made, and expects to make in the future, expenditures to comply with such laws and regulations.
Damages Awarded to DynaMéxico
in México Litigation
On October 5, 2015, DynaResource de México
SA de C.V. (“DynaMéxico”), was awarded in excess of $48 M USD (Forty-Eight Million Dollars) in damages from
Goldgroup Resources, Inc. (the “Goldgroup Damages”) by virtue of a Sentencia Definitiva (the “Definitive Sentence”)
issued by the Thirty Sixth Civil Court of the Superior Court of Justice of the Federal District of México (Tribunal Superior
de Justicia del Distrito Federal), File number 1120/2014. The Definitive Sentence included the considerations and resolutions by
the Court, and additional Resolutions were also ordered in favor of DynaMéxico (together the Goldgroup Damages and the additional
Resolutions are referred to as, the “Oct. 5, 2015 Resolution”). The October 5, 2015 Resolution is described below;
See Part II, Item 1., Legal Proceedings.
Litigation
The Company believes that no material
adverse change will occur as a result of the legal actions taken, and the Company further believes that there is little to no potential
for the assessment of a material monetary judgment against the Company for legal actions it has filed in México. Further,
the Company believes there is no legal basis for which to conduct arbitration proceedings. (See Item 3. Legal Proceedings. And,
see Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations).
NOTE 11 – DERIVATIVE LIABILITIES
Preferred Series C Stock
As discussed in Note 8, the Company analyzed
the embedded conversion features of the Series C Preferred Stock and determined that the stock qualified as a derivative liability
and is required to be bifurcated and accounted for as such since the host and the embedded instrument are not clearly and closely
related. The Company performed a valuation of the conversion feature. In performing the valuation, the Company applied the guidance
in ASC 820,
“Fair Value Measurements”,
to nonfinancial assets and liabilities that are recognized or disclosed
at fair value on a nonrecurring basis. ASC 820 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). To measure
fair value, the Company incorporates assumptions that market participants would use in pricing the asset or liability, and utilizes
market data to the maximum extent possible.
In instances where the determination
of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair
value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment and considers factors specific to the asset or liability.
The Company considered the inputs in
this valuation to be level 3 in the fair value hierarchy under ASC 820 and used an equity simulation model to determine the value
of conversion feature of the Series C Preferred Stock based on the assumptions below:
Annual volatility rate
|
|
|
134
|
%
|
Risk free rate
|
|
|
1.76
|
%
|
Holding Period
|
|
|
5 years
|
|
Fair Value of common stock
|
|
$
|
1.65
|
|
|
|
|
|
|
For the year ended December 31, 2015,
an active market for the Company’s common stock did not exist. Accordingly, the fair value of the Company’s common
stock was estimated using a valuation model with level 3 inputs.
The below table represents the change
in the fair value of the derivative liability during the years ended December 31, 2015 and 2014:
Year Ended
|
|
2015
|
|
2014
|
Fair value of derivative (stock), beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain on change in
fair value of derivative
|
|
|
266
,659
|
|
|
|
—
|
|
Fair value of derivative on the date of issuance
|
|
|
2,152,700
|
|
|
|
—
|
|
Fair value of derivative, December 31, 2015
|
|
$
|
2,419,
359
|
|
|
$
|
—
|
|
Preferred Series C Warrants
In addition, as discussed in Note 8,
the Company analyzed the embedded conversion features of the Series C Preferred Stock and determined that the Warrants qualified
as a derivative liability and is required to be bifurcated and accounted for as such since the host and the embedded instrument
are not clearly and closely related. The Company performed a valuation of the conversion feature. In performing the valuation,
the Company applied the guidance in ASC 820,
“Fair Value Measurements”,
to nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring basis. ASC 820 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
(exit price). To measure fair value, the Company incorporates assumptions that market participants would use in pricing the asset
or liability, and utilizes market data to the maximum extent possible.
In instances where the determination
of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair
value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment and considers factors specific to the asset or liability.
The Company considered the inputs in
this valuation to be level 3 in the fair value hierarchy under ASC 820 and used an equity simulation model to determine the value
of conversion feature of the Warrants based on the assumptions below:
Annual volatility rate
|
|
|
134
|
%
|
Risk free rate
|
|
|
1.76
|
%
|
Holding Period
|
|
|
5 years
|
|
Fair Value of common stock
|
|
$
|
1.65
|
|
For the year ended December 31, 2015,
an active market for the Company’s common stock did not exist. Accordingly, the fair value of the Company’s common
stock was estimated using a valuation model with level 3 inputs.
The below table represents the change
in the fair value of the derivative liability during the years ended December 31, 2015 and 2014:
Year Ended
|
|
2015
|
|
2014
|
Fair value of derivative (warrants), beginning of
the year
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain on change in fair value of derivative
|
|
|
(62,380
|
)
|
|
|
—
|
|
Fair value of derivative on the date of issuance
|
|
|
3,025,758
|
|
|
|
—
|
|
Fair value of derivative, December 31, 2015
|
|
$
|
2,963,378
|
|
|
|
—
|
|
NOTE 12 – NON-CONTROLLING
INTEREST
The Company’s Non-Controlling
Interest recorded in the consolidated financial statements relates to an interest in DynaResource de México, S.A. de C.V.
of 50% through May 13, 2013, and 20% thereafter. Changes in Non-Controlling Interest for the years ended December 31, 2015 and
2014, respectively were as follows:
|
|
|
|
|
|
Year Ended
December 31, 2015
|
|
|
|
Year Ended
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(6,181,229
|
)
|
|
$
|
(5,680,107
|
)
|
Operating income (loss)
|
|
|
(560,643
|
)
|
|
|
(536,357
|
)
|
Share of Other Comprehensive Income (loss)
|
|
|
279,922
|
|
|
|
35,235
|
|
Ending balance
|
|
$
|
(6,461,950
|
)
|
|
$
|
(6,181,229
|
)
|
|
|
|
|
|
|
|
|
|
The Company began allocating a portion
of other comprehensive income (loss) to the non-controlling interest with the adoption of ASC 160 as of January 1, 2009. However,
this amount is only reflected in the income statement.
NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The ASC guidance for fair value measurements
and disclosure establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair
value hierarchy are described below:
Level 1 Inputs
– Quoted
prices for identical instruments in active markets.
Level 2 Inputs
– Quoted
prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active;
and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs
– Instruments
with primarily unobservable value drivers.
As of December 31, 2014 and December
31, 2013, the Company’s financial assets were measured at fair value using Level 3 inputs, with the exception of cash, which
was valued using Level 1 inputs. A description of the valuation of the Level 3 inputs is discussed in Note 4.
Fair Value
Measurement at December 31, 2015 Using:
|
|
December
31, 2015
|
|
Quoted
Prices in Active
Markets
For Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
None
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities
|
|
$
|
5,382,737
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,382,737
|
|
Totals
|
|
$
|
5,382,737
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,382,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurement at December 31, 2014 Using:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Totals
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 14 – SUBSEQUENT EVENTS
Revenues from Previous Delivery and
Sale of Gold Concentrates (2015)
On January 11 and January 13, 2016, DynaMineras
reported the receipt of a total of $141,106 USD as payment for the sale of gold concentrates delivered December 31, 2015. This
amount was recorded as accounts receivable at December 31, 2015.
Gold Concentrate Deliveries for Sale
(2016)
On January 28, 2016, DynaMineras reported
the delivery for sale of 300 gross Oz gold concentrates (exact weights in gold and silver oz. to be determined at final settlement);
On February 5, 2016, DynaMineras reported
the delivery for sale of 440 gross Oz gold concentrates (exact weights in gold and silver oz. to be determined at final settlement);
On February 19, 2016, DynaMineras reported
the delivery for sale of 600 gross Oz gold concentrates (exact weights in gold and silver oz. to be determined at final settlement);
On March 4, 2016, DynaMineras reported
the delivery for sale of 625 gross Oz gold concentrates (exact weights in gold and silver oz. to be determined at final settlement);
On March 21, 2016, DynaMineras reported
the delivery for sale of 350 gross Oz gold concentrates (exact weights in gold and silver Oz to be determined at final settlement);
Revenues from the Delivery and Sale
of Gold Concentrates (2016)
DynaMineras reports receipts in the
total amount of $1,650,831 USD as payment for the delivery and sale of gold concentrates in 2016, through April 2, 2016.