NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016 and 2015
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.
Reclassifications
Certain
financial statement reclassifications have been made to prior
period balances to reflect the current period’s presentation
format; such reclassifications had no impact on the Company’s
consolidated statements of operations or consolidated statements of
cash flows and had no material impact on the Company’s
consolidated balance sheets.
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 20% 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 an
original 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.
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, 2016,
and 2015, 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, 2016 and December 31, 2015 are $1,083,364 and
$597,012, respectively.
Inventory
Inventories
are carried at the lower of cost or fair value and consist of mined
tonnage, and gravity and flotation concentrates, and gravity
tailings or flotation feed material. The inventories are $561,238
and $98,056 as of December 31, 2016 and December 31, 2015,
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, 2016, 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 on a
straight line method 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 on a straight line method over
estimated economic lives from 5 to 15 years. Buildings are
being depreciated on straight line method 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, 2016, 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, 2016, and 2015, 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 and 2016, 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, 2016 and December 31, 2015 (Mexican Pesos per one U.S.
dollar):
|
|
|
|
|
|
|
|
Current
exchange rate
|
Pesos
|
20.65
|
17.34
|
|
|
|
Weighted
average exchange rate for the period ended
|
Pesos
|
18.69
|
15.87
|
The
Company recorded currency transaction losses of $(20,218) for the
year ended December 31, 2016 and $(2,479,449) in 2015.
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,
2016 and December 31, 2015, 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.
The
Company accounts for stock options issued and vesting to
non-employees in accordance with ASC Topic 505-50
“
Equity -Based Payment to
Non-Employees”
and accordingly the value of the stock
compensation to non-employees is based upon the measurement date as
determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the
necessary performance to earn the equity instruments is complete.
Accordingly, the fair value of these options is being “marked
to market” quarterly until the measurement date is
determined.
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.
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 3,593,689 warrants outstanding at December 31, 2016
exercisable at $2.50 per share, which upon exercise, would result
in the issuance of 3,593,689 shares of common stock. The Company
also had convertible debt instruments as of December 31, 2016
which, upon conversion at a valuation of $2.50 per share, would
result in the issuance of 337,162 shares of stock.
The
Company had 4,345,497 warrants outstanding at December 31, 2015
exercisable at $2.50 per share. The Company also had convertible
debt instruments as of December 31, 2015 which, upon conversion,
would result in the issuance of 337,162 shares of stock. All
warrant are exercisable at $2.50 per share. 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.
|
|
|
|
|
Net
income
|
$
1,773,928
|
$
(14,504,553
)
|
Shares:
|
|
|
Weighted
average number of common shares outstanding, Basic
|
16,722,825
|
15,819,701
|
|
|
|
Diluted
weighted average number of common shares outstanding,
Diluted
|
18,560,464
|
15,819,701
|
|
|
|
Basic
earnings per share
|
$
0.11
|
$
(0.92
)
|
|
|
|
Diluted
earnings per share
|
$
0.09
|
$
(0.92
)
|
Related Party Transactions
FASB ASC 850, "Related Party Disclosures" requires companies to
include in their financial statements disclosures of material
related party transactions. The Company discloses all material
related party transactions. A party is considered to be related to
the Company if the party directly or indirectly or through one or
more intermediaries, controls, is controlled by, or is under common
control with the Company. Related parties also include principal
owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and
other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies
of the other to an extent that one of the transacting parties might
be prevented from fully pursuing its own separate interests. A
party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership
interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the
transacting parties might be prevented from fully pursuing its own
separate interests is also a related party.”
Recently Issued Accounting Pronouncements
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, 2016. 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 2016. 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, 2016 and December 31, 2015,
respectively, were as follows:
|
|
|
|
|
|
Mined
Tonnage, Gold-Silver Concentrates, and/or Gravity Tailings
(Flotation Feed Material)
|
$
561,238
|
$
98,056
|
Total Inventories
|
$
561,238
|
$
98,056
|
NOTE 3 – PROPERTY
Property
consists of the following at December 31, 2016 and December 31,
2015:
|
|
|
|
|
|
Mining
camp equipment
|
$
399,180
|
$
402,212
|
Transportation
equipment
|
282,379
|
301,074
|
Machinery
and equipment
|
470,741
|
509,298
|
Office
furniture and fixtures
|
75,829
|
75,829
|
Office
equipment
|
171,746
|
170,581
|
Sub-total
|
1,399,875
|
1,458,994
|
Less:
Accumulated depreciation
|
(821,132
)
|
(823,044
)
|
Total
Property
|
$
578,743
|
$
635,950
|
The
Company purchased equipment of $145,030 and $669,428 in the years
ended December 31, 2016 and 2015, respectively.
Depreciation
has been provided over each asset’s estimated useful
life. Depreciation expense was $77,638 and $128,513 for
the years ended December 31, 2016 and 2015,
respectively.
NOTE 4 – MINING CONCESSIONS
Mining
properties consist of the following at December 31, 2016 and
December 31, 2015:
|
|
|
San
Jose de Gracia (“SJG”):
|
|
|
|
|
|
Total
Mining Concessions
|
$
4,132,678
|
$
4,132,678
|
Depletion
expense was $nil and $nil for the years ended December 31, 2016 and
2015, respectively.
NOTE 5 – INVESTMENT IN AFFILIATE/RECEIVABLES FROM
AFFILIATE/OTHER ASSETS
Through
December 31, 2016, 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, 2016 and
December 31, 2015 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. During 2016, the
Company determined that the notes were uncollectable due to the
lack of operations in the entity and wrote off the advanced funds.
As of December 31, 2016, and December 31, 2015, the advances
totaled $nil and $159,143, 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”). 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, on the first fifty thousand tons processed
through the mill facilities at San Jose de Gracia. Such net profits
(if any) are to be calculated after deducting
“all expenses related to the production”
, and after a prior deduction
of thirty-three percent (33%) from the net profits, to be
deposited into a sinking fund cash reserve. To date, the Company
has not produced any net profits as calculated in accordance with
the Series I Notes.
The Notes originally matured on December 31, 2015.
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.
At
December 31, 2016, one of the Series I Notes remained outstanding
for a total of $5,800.78 and was paid in 2017, one of the Series I
Notes was further extended to June 30, 2017, and the remaining
Series I Notes were further extended to December 31,
2017.
The Company has the right to prepay the Series I Notes with a ten
percent (10%) penalty.
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, 2018.
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, on the second fifty thousand tons processed through
the mill facilities at San Jose de Gracia. Such net profits (if
any) are to be calculated after deducting
“all
expenses related to the production”
l, and after a prior deduction
of thirty-three percent (33%) from the net profits, to be
deposited into a sinking fund cash reserve. To date, the Company
has not produced any net profits as calculated in accordance with
the Series II Notes.
The Notes originally matured on December 31, 2015.
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.
At December 31, 2016, the
remaining Series II Notes were further extended to December 31,
2017.
The Company has the right to prepay the Series II Notes 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 $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, 2018.
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 $842,903) was contracted
to convert into 337,162 common shares. In addition, 337,162
warrants were 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.
At December 31, 2016, the principal and capitalized interest
balance on the remaining Series I Notes was $765,000, and the
principal and capitalized interest on the Series II Notes was
$191,250, for a total Note balance of $956,250. The accrued
interest for these notes was $29,883 and $29,883 as of December 31,
2016 and 2015, respectively.
The
Company paid $203,500 to KBM and $25,070 to Series I debt holders
for a total of $228,570 during 2015.
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, 2016
and December 31, 2015 are as follows:
Deferred
Tax Asset Related to:
|
|
|
Prior
Year
|
$
17,535,800
|
$
13,652,086
|
Tax
Benefit for Current Year
|
(533,317
)
|
3,883,714
|
Total
Deferred Tax Asset
|
17,002,483
|
17,535,800
|
Less:
Valuation Allowance
|
(17,002,483
)
|
(17,535,800
)
|
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 $49,300,000 at December 31, 2016, 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, 2016.
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, 2016 and December 31, 2015, there were 1,000 and
1,000 shares of Series A Preferred Stock outstanding,
respectively.
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 are convertible to common
shares at $2.50 per share, through February 20, 2020. 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. During 2016, the company paid Dividends of $160,000 to the
holder of Series C Convertible Preferred Stock. The Dividend is
calculated at 4.0% of $4,000,000 payable annually on June
30.
Financing Agreement with Golden Post Rail, LLC, a Texas Limited
Liability Company
1.
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 is convertible into Common
Stock of the Company at the price of $2.41 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”). 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,
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.
2.
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.
In
2015, 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 Warrant. Additionally, the Company fully accreted
the discount related to the Series C Preferred Shares and the
Golden Post Warrant in the amount of $4,637,179, which is reflected
“below” the net income (loss) amount. Also in 2015, the
Company reported $87,374 deemed 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. In 2016, the total Derivative
Liability was $5,106,090 which included $2,592,452 for the Series C
Preferred Shares, and $2,513,638 in connection with the Golden Post
Warrant. The Deemed Dividend for 2016 and 2015 was $173,797, and
$87,374 respectively.
Due to
the nature of this transaction as mandatorily redeemable, the
preferred shares are classified as “temporary equity”
on the balance sheet.
|
|
|
|
Carrying
Value, December 31, 2014
|
$
-
|
Issuances
at Fair Value, net of issuance costs
|
3,955,000
|
Bifurcation
of Derivative Liability
|
(2,152,700
)
|
Relative
Fair Value of Warrants – Preferred Stock
Discount
|
(2,106,426
)
|
Accretion
of Preferred Stock to Redemption Value
|
4,637,179
|
Carrying
Value, December 31, 2015
|
4,333,053
|
|
|
Issuances
at Fair Value, net of issuance costs
|
0
|
Bifurcation
of Derivative Liability
|
0
|
Relative
Fair Value of Warrants – Preferred Stock
Discount
|
0
|
Accretion
of Preferred Stock to Redemption Value
|
0
|
Carrying
Value, December 31, 2016
|
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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, there were 16,722,825
shares outstanding, respectively. No dividends were paid for
the years ended December 31, 2016 and 2015,
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, 2016 and December 31, 2015, respectively.
Stock Issuances
2016 Activity
None.
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 total cash received of, $2,917,750 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,
2016 and 149,500 warrants exercisable at $7.50 per share, expiring
December 31, 2016. The Company issued 2,166,527 warrants related
the Preferred Series C shares issued in the current year. These
warrants are exercisable at $2.50 per share and expire June 30,
2020.
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. The shares are carried in Treasury 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 for services rendered and recognized $791,400
expense related to same. The Company distributed 600,000 treasury
shares for services rendered and recognized $924,000 expense for
such distribution. Company recognized $51,135 in expense for the
distribution of 20,000 treasury shares. At December 31, 2016 and
2015, 1,112,313 treasury shares were outstanding.
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 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.
Warrants
2016 activity
The
Company had 3,593,689 warrants outstanding at December 31, 2016.
There were no warrants issued or exercised in 2016 and 567,500
warrants expired in 2016.
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 1,020,000
warrants at $2.50/share, expiring December 31, 2017. The Company
also issued 2,166,527 warrants with anti-dilution provisions at
$2.50/share, subsequently reset to $2.41/share and expiring June
30, 2020. The Company also issued 407,162 warrants at $2.50/share,
expiring December 31, 2017. Expiration of 991,150 warrants occurred
during the year.
During
the years ended December 31, 2016 and 2015, 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.
|
|
Weighted
Average
Exercise
Price
|
Weighted Average
Remaining Contractual
Life
(Years)
|
|
|
|
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
|
$
3.07
|
3.17
|
$
-
|
Granted
|
-
|
$
-
|
|
$
-
|
Exercised
|
-
|
$
-
|
|
$
-
|
Forfeited
|
(567,500
)
|
$
7.02
|
|
$
-
|
Balance at
December 31, 2016
|
3,593,689
|
$
2.45
|
2.51
|
$
-
|
Exercisable at
December 31, 2016
|
3,593,689
|
2.45
|
2.51
|
$
-
|
NOTE 9
–
RELATED PARTY TRANSACTIONS
Related Party Transactions
The
Company follows FASB ASC subtopic 850-10, Related Party
Disclosures, for the identification of related parties and
disclosure of related party transactions. Pursuant to ASC
850-10-20, related parties include: a) affiliates of the Company;
b) entities for which investments in their equity securities would
be required, absent the election of the fair value option under the
Fair Value Option Subsection of Section 825–10–15, to
be accounted for by the equity method by the investing entity; c)
trusts for the benefit of employees, such as pension and
profit-sharing trusts that are managed by or under the trusteeship
of management; d) principal owners of the Company; e) management of
the Company; f) other parties with which the Company may deal if
one party controls or can significantly influence the management or
operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own
separate interests; and g) other parties that can significantly
influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the
transacting parties and can significantly influence the other to an
extent that one or more of the transacting parties might be
prevented from fully pursuing its own separate
interests.
Material
related party transactions are required to be disclosed in the
consolidated financial statements, other than compensation
arrangements, expense allowances, and other similar items in the
ordinary course of business. However, disclosure of transactions
that are eliminated in the preparation of consolidated or combined
financial statements is not required in those statements. The
disclosures shall include: a) the nature of the relationship(s)
involved; b) a description of the transactions, including
transactions to which no amounts or nominal amounts were ascribed,
for each of the periods for which statements of operation are
presented, and such other information deemed necessary to an
understanding of the effects of the transactions on the financial
statements; c) the dollar amounts of transactions for each of the
periods for which statements of operations are presented and the
effects of any change in the method of establishing the terms from
that used in the preceding period; and d) amounts due from or to
related parties as of the date of each balance sheet presented and,
if not otherwise apparent, the terms and manner of
settlement.
Dynacap Group Ltd.
The
Company paid $116,750 and $81,500 to Dynacap Group, Ltd.
(“Dynacap”, an entity controlled by the CEO of the
Company) for consulting and other fees during the years ended
December 31, 2016 and 2015, respectively. Dynacap retains 2
individuals, who are family members of the CEO, as independent
contractors who provide administrative and executive support
services to the Company. Dynacap has provided these services to the
Company for recent years.
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 loaned $75,000 and a former Company CFO loaned
$150,000 as advances to the Company in 2015.
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. These shares were issued in August 2015. The
Company repaid the $150,000 advance to the former CFO in
2016.
Stock Issued to Management
In
2015, the Company CEO received 20,000 treasury shares for
services.
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 matured on December 31,
2015.
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, 2016,
and at 5.00 per share after December 31, 2016, 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.
Advances from Goldgroup Mining Inc. (“Goldgroup”) to
Dyna
México
In
2014, Goldgroup advanced $111,500 to DynaMéxico and in 2013
Goldgroup advanced $120,000 USD to DynaMéxico. This total
$231,500 is being carried by DynaMéxico as a Due to
Non-Controlling Interest.
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, 2016 and 2015, respectively, for maintenance of its corporate
obligations and mining concessions. The advances were written off
in 2016. The balance for the years ended December 31, 2016 and 2015
are $0 and $159,143, 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 recent business activities and current and forward
plans, and considering expenditures on mining concessions since
2002-2016 and continuing expenditures in current and forward
activities, the Company does not anticipate that DynaMéxico
will have any difficulties meeting the minimum annual expenditures
for the concessions ($388 ñ $2,400 Mexican Pesos per hectare).
DynaMéxico retains sufficient carry-forward amounts to cover
over 10 years of the minimum expenditure (as calculated at the 2016
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. $72,000 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
August 2016, the Company entered into a sixty-six month extension
of the lease through 2021. The Company paid rent expense of $67,746
and $55,764 related to this lease for the years ended December 31,
2016 and 2015, respectively.
YEAR
|
AMOUNT
|
2017
|
$68,881
|
2018
|
$80,969
|
2019
|
$82,775
|
2020
|
$84,581
|
2021
|
$86,387
|
|
|
TOTAL
|
$403,593
|
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, 2016, 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 in
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
|
123
%
|
134
%
|
Risk free
rate
|
1.93
%
|
1.76
%
|
Holding
Period
|
5
years
|
5
years
|
Fair Value of
common stock
|
$
1.75
|
$
1.65
|
For the
year ended December 31, 2016, 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, 2016 and
2015:
Year
Ended
|
|
|
Fair value of
derivative (stock), beginning of year
|
$
2,419,359
|
$
-
|
Change in fair
value of derivative
|
173,093
|
266,659
|
Fair value of
derivative on the date of issuance
|
-
|
2,152,700
|
Fair value of
derivative(stock), end of year
|
$
2,592,452
|
$
2,419,359
|
Preferred Series C Warrants
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
|
123
%
|
134
%
|
Risk free
rate
|
1.93
%
|
1.76
%
|
Holding
Period
|
5
years
|
5
years
|
Fair Value of
common stock
|
$
1.75
|
$
1.65
|
For the
year ended December 31, 2016, 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, 2016 and
2015:
Year
Ended
|
|
|
Fair value of
derivative (warrants), beginning of year
|
$
2,963,378
|
$
-
|
Change in fair
value of derivative
|
(449,740
)
|
(62,380
)
|
Fair value of
derivative on the date of issuance
|
-
|
3,025,758
|
Fair value of
derivative(warrants), end of year
|
$
2,513,638
|
$
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, 2016 and December 31, 2015,
respectively were as follows:
|
Year
Ended
December 31,
2016
|
Year
Ended
December 31,
2015
|
|
|
|
Beginning
balance
|
$
(6,461,950
)
|
$
(6,181,229
)
|
Operating
income (loss)
|
(283,333
)
|
(560,643
)
|
Share
of Other Comprehensive Income (loss)
|
902,805
|
279,922
|
Ending
balance
|
$
(5,842,478
)
|
$
(6,461,950
)
|
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, 2016, and December 31, 2015, 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 11.
Fair Value Measurement at December 31, 2016 Using:
|
|
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
|
$
5,106,090
|
-
|
-
|
5,106,090
|
Totals
|
$
5,106,090
|
$
-
|
$
-
|
$
5,106,090
|
Fair
Value Measurement at December 31, 2015 Using:
|
|
|
|
|
Assets:
|
|
|
|
|
None
|
-
|
-
|
-
|
-
|
Totals
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Liabilities
|
$
5,382,737
|
-
|
-
|
5,382,737
|
Totals
|
$
-
|
$
-
|
$
-
|
$
-
|
NOTE 14 – SUBSEQUENT EVENTS
On
January 28, February 9, March 10, March 17, March 25, April 3, and
April 10, DynaMineras reported the delivery for sale of an
approximate total of 1,773 gross Oz gold concentrates (exact
weights in gold and silver Oz to be determined at final
settlement).
Cash Receipts in 2017 from the Delivery / Sale of Gold Concentrates
in 2016.
DynaMineras
reports receipts in the total amount of $454,140 USD as payment for
the delivery and sale of gold concentrates in 2016, through March
30, 2017.
Appointment of Eduardo Luna to the Board of Directors of DynaUSA,
and as Advisor to President of DynaMineras
On March 6, 2017
DynaUSA appointed Mr. Eduardo Luna to the
Company’s Board of Directors, effective March 1, 2017. Mr.
Luna’s appointment was formalized by Mr. K.D. Diepholz,
Chairman/CEO of the Company, utilizing the shares of Series A
Preferred Stock held by Mr. Diepholz.
Concurrently,
DynaMineras, appointed Mr. Luna as Special Advisor to the President
of DynaMineras.
Mr.
Luna currently serves as a member of the Board of Directors of
Silver Wheaton Corp., which is the largest pure precious metals
streaming company in the world. Mr. Luna has also served as a
Member of the Board of Directors of Goldcorp Inc., Alamos Gold
Inc., and Primero Mining Corp.
During
his distinguished career, Mr. Luna has received several mining
industry recognitions and appointments, which include:
●
National Mining
Award, Mexico, 1997;
●
President of the
Mexican Chamber of Mines;
●
President of the
Consulting Board for the School of Mines, Universidad de
Guanajuato;
●
Member of the
Advisory Boards of the School of Mines of National University of
Mexico and University of Zacatecas;
●
President of The
Silver Institute 2002 – 2003.
Mr.
Luna received a Bachelor’s degree in Mining Engineering from
Universidad de Guanajuato, 1971; an MBA from Tecnológico de
Monterrey, 1979; and an Advanced Management degree from Harvard
Business School.
In 1997
Mr. Luna was appointed Trustee of Fundación Pro Niños de
la Calle, a charity that works with children living on the streets
of Mexico City.
NOTE 15 – REVENUE CONCENTRATION
The
Company had certain customers whose revenue individually
represented 10% or more of the Company’s total revenue, or
whose accounts receivable balances individually represented 10% or
more of the Company’s total accounts receivable, as
follows:
For the
twelve months ended December 31, 2016 and 2015, two customers
accounted for 100% and three customers accounted for 100% of
revenue, respectively.
At December 31, 2016,
one
customer accounted for 100% of accounts receivable. At
December 31, 2015, one customer accounted for 100% of accounts
receivable.