The accompanying unaudited
notes are an integral part of these unaudited consolidated financial statements.
NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 2017
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 in the test mining and pilot
milling production of precious metals.
The interim consolidated financial
statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
has been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included
are adequate to make the information presented not misleading.
In management’s opinion,
the unaudited Consolidated Statements of Operations and Comprehensive Income for the six months ended June 30, 2017 and 2016,
the Consolidated Balance Sheets as at June 30, 2017 (unaudited) and December 31, 2016, and the unaudited Consolidated
Statements of Cash Flows for the six months ended June 30, 2017 and 2016, contained herein, reflect all adjustments, consisting
solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results
of operations and cash flows on a basis consistent with that of the Company’s prior audited annual consolidated financial
statements. However, the results of operations for the interim periods may not be indicative of results to be expected for
the full fiscal year. Therefore, these financial statements should be read in conjunction with the audited financial statements
and notes thereto and summary of significant accounting policies included in the Company’s Form 10-K for the year ended
December 31, 2016. Except as noted below, there have been no material changes in the footnotes from those accompanying
the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31,
2016. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company
accounts and transactions have been eliminated.
In the second quarter 2017, we
identified certain property taxes amounting to $541,245 from 2014, 2015, and $169,232 for 2016, which were not expensed as required
and an over accrual of $150,000 for legal expenses at December 31, 2016. Based on Staff Accounting Bulletin No. 108 (“SAB
108”), we have determined that these amounts are immaterial to each of the time periods affected and, therefore, we are not
required to amend our previously filed reports. However, if these adjustments were recorded in 2017, we believe the impact could
be material to this year. Therefore, we plan to adjust our previously reported results for 2014, 2015, and 2016 for these immaterial
amounts as required by SAB 108. Such previous periods will be restated upon the next filing of our quarterly and annual consolidated
financial statements. The balance sheet as of December 31, 2016 has been adjusted to reflect the cumulative impact of such
errors. As a result, Accounts payable has been increased by $541,245, accrued expenses increased by $169,232 and retained earnings
decreased by $710,477. For additional information, see Footnote 14.
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.
Computation of Profit (Loss)
per Share
Basic Income
(Loss) per share is computed by dividing the period Income (Loss) available to common shareholders by the weighted average number
of common shares outstanding. Diluted Profit (Loss) per share is computed by dividing the Income (Loss) available to common shareholders
by the weighted average number of common shares outstanding plus additional common shares that would have been outstanding if dilutive
potential common shares had been issued. For purposes of this calculation, convertible preferred stock, common stock dividends,
warrants and options to acquire common stock, are all considered common stock equivalents in periods in which they have a dilutive
effect and are excluded from this calculation in periods in which these are anti-dilutive or to the net loss. The securities for
the three month period ending June 30, 2017 and June 30, 2016 were deemed antidilutive.
The following table
illustrates the computation of Profit (loss), for the three months and six months ended June 30, 2016 and 2017:
|
|
Three Months
June 30, 2017
|
|
Three Months
June 30, 2016
|
|
Six Months
June 30, 2017
|
|
Six Months
June 30, 2016
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit (Loss)
|
|
$
|
6,545
|
|
|
$
|
(533,370
|
)
|
|
$
|
2,252,979
|
|
|
$
|
132,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends accrued
|
|
|
—
|
|
|
|
—
|
|
|
|
85,474
|
|
|
|
80,000
|
|
Gain on Derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,703,437
|
)
|
|
|
(204,279
|
)
|
Net Profit (Loss) applicable to common shareholders
Denominator for basic and dilutive loss per share:
|
|
$
|
6,545
|
|
|
$
|
(533,370
|
)
|
|
$
|
635,016
|
|
|
$
|
8,491
|
|
Weighted average common stock
shares outstanding
|
|
|
16,722,825
|
|
|
|
16,722,825
|
|
|
|
16,722,825
|
|
|
|
16,722,825
|
|
Net effect of dilutive common stock equivalents
|
|
|
—
|
|
|
|
—
|
|
|
|
1,873,061
|
|
|
|
1,867,540
|
|
Weighted average shares outstanding – diluted
|
|
|
16,722,825
|
|
|
|
18,578,175
|
|
|
|
18,595,886
|
|
|
|
18,590,365
|
|
Income Profit (Loss) per share - basic
|
|
$
|
(.00
|
)
|
|
$
|
(.03
|
)
|
|
$
|
.13
|
|
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Profit (Loss) per share – diluted
|
|
$
|
(.00
|
)
|
|
|
(.03
|
)
|
|
|
.03
|
|
|
|
.00
|
|
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, and expansion of these activities commenced in second quarter 2017. 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 June 30, 2017 and December 31, 2016, respectively, were as follows:
|
|
2017
|
|
2016
|
Mined Tonnage Stockpiled
|
|
$
|
604,445
|
|
|
$
|
445,082
|
|
Mill Tonnage Stockpiled
|
|
|
269,117
|
|
|
|
116,156
|
|
Total Inventories
|
|
$
|
873,562
|
|
|
$
|
561,238
|
|
NOTE 3 – PROPERTY
Property consists of the following at
June 30, 2017 and December 31, 2016:
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
Mining camp equipment
|
|
$
|
630,335
|
|
|
$
|
399,180
|
|
Transportation equipment
|
|
|
282,379
|
|
|
|
282,379
|
|
Machinery and equipment
|
|
|
602,250
|
|
|
|
470,741
|
|
Office furniture and fixtures
|
|
|
78,709
|
|
|
|
75,829
|
|
Office equipment
|
|
|
174,314
|
|
|
|
171,746
|
|
Sub-total
|
|
|
1,767,987
|
|
|
|
1,399,875
|
|
Less: Accumulated depreciation
|
|
|
(913,599
|
)
|
|
|
(821,132
|
)
|
Total Property
|
|
$
|
854,388
|
|
|
$
|
578,743
|
|
The Company purchased equipment
of $301,667 and $37,572 in the six months ended June 30, 2017 and June 30, 2016, respectively.
Depreciation has been provided
over each asset’s estimated useful life. Depreciation expense was $92,467 and $48,130 for the six months ended
June 30, 2017 and 2016, respectively.
NOTE 4 – MINING CONCESSIONS
Mining properties consist of the following at June 30, 2017 and December 31, 2016:
|
|
2017
|
|
2016
|
San Jose de Gracia (“SJG”):
|
|
|
|
|
|
|
|
|
Total Mining Concessions
|
|
$
|
4,132,678
|
|
|
$
|
4,132,678
|
|
Depletion expense was $nil and
$nil for the six months ended June 30, 2017 and 2016 respectively, 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”). As of June 30, 2017, and December 31, 2016 the investment
was $70,000.
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 June 30, 2017, the principal
and capitalized interest balance on the remaining Series I Notes was $759,375, and the principal and capitalized interest on the
Series II Notes was $191,250, for a total Note balance of $950,625. The accrued interest for these notes was $29,613 and $29,883
as of June 30, 2017 and 2016, respectively.
Notes Payable
In June 2017, the Company entered
into financing agreements in the amount of $541,245 in order to retain the rights to, and maintain exploratory mineral concessions.
The Company paid twenty percent as an initial payment, $108,249, and financed the balance, payable over thirty-six months. In accordance
with the Company’s policy of treatment of exploratory mineral concessions or properties, the Company capitalized all costs
associated with the financing of the exploratory mineral concessions, including annual taxes or fees, and the Company expects to
prepare an annual impairment analysis.
During the first quarter of 2017
the Company purchased $5,625 of the Notes Payable.
The following is a summary of
the Notes Payable at June 30, 2017 and December 31, 2016:
|
|
2017
|
|
2016
|
Convertible Promissory Notes Current Portion
|
|
$
|
956,250
|
|
|
$
|
956,250
|
|
Purchase of Note
|
|
|
(5,625
|
)
|
|
|
—
|
|
Total Notes Payable
|
|
$
|
950,625
|
|
|
|
956,250
|
|
NOTE 7 – L-T Accrued Expense
In June 2017, the Company entered
into financing agreements for unpaid mining concession taxes for the period July 1, 2014 through December 31, 2015 in the amount
of $541,245. The Company paid 20% as an initial payment, $108,249, and financed the balance over thirty six months
The following is a summary of
the transactions during the second quarter:
|
|
June 30, 2017
|
|
Property Holding Taxes June 1, 2014 – December 31, 2015
|
$
|
541,245
|
|
Initial payment of 20%
|
|
(108,249
|
)
|
June 2017 principal payment
|
|
(3,066
|
)
|
Balance at June 30, 2017
|
$
|
429,430
|
|
Short-Term Portion
|
$
|
120,361
|
|
Long-Term Portion
|
|
309,069
|
|
Total
|
$
|
429,430
|
|
NOTE 8 – STOCKHOLDERS’
EQUITY
There were no changes in our stockholders’
equity in the three and six months ended June 30, 2017.
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 June 30, 2017 and December 31, 2016, there were 1,000 shares 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. For the
three and six months ending June 30, 2017 and June 30, 2016, the Company accrued $42,737 and $37,263 respectively for the cumulative
dividends. For the six months ending June 30, 2017 and June 30, 2016, the Company accrued $85,474 and $80,000 respectively for
the cumulative dividends.
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 June 30, 2017 and December
31, 2016, there were 16,722,825 shares outstanding, respectively. No dividends were paid for the periods ended June 30, 2017.
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 June 30, 2017 and March 31, 2016, respectively.
Stock Issuances
2016 Activity – None.
2017 Activity – None.
Treasury Stock
At June 30, 2017 and 2016, 1,112,313
treasury shares were outstanding.
Warrants
There were no changes in the number of
warrants outstanding in the three or six months ended June 30, 2017.
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 $73,500 and $59,000
to Dynacap Group, Ltd. (“Dynacap”, an entity controlled by the CEO of the Company) for consulting and other fees during
the six months ended June 30, 2017 and 2016, respectively. Dynacap retains 2 individuals who are family members of the CEO, as
well as 2 consultants, as independent contractors who provide administrative and executive support services to the Company. Dynacap
has provided these services to the Company for recent years.
NOTE 10 – 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 for the six months ended June 30, 2017
and year ended December 31, 2016:
|
|
June 30, 2017
|
|
Dec 31, 2016
|
Annual volatility rate
|
|
|
105
|
%
|
|
|
123
|
%
|
Risk free rate
|
|
|
1.50
|
%
|
|
|
1.93
|
%
|
Holding Period
|
|
|
5 years
|
|
|
|
5 years
|
|
Fair Value of common stock
|
|
$
|
1.63
|
|
|
$
|
1.75
|
|
The below table represents the
change in the fair value of the derivative liability (Preferred Series C Stock) during the six months ending June 30, 2017 and
the year ending December 31, 2016:
Period Ended
|
|
June 30, 2017
|
|
Dec 31, 2016
|
Fair value of derivative (Preferred Series C Stock), beginning of year
|
|
$
|
2,592,452
|
|
|
$
|
2,419,359
|
|
Change in fair value of derivative (Preferred Series C Stock)
|
|
|
(1,213,672
|
)
|
|
|
173,093
|
|
Fair value of derivative (Preferred Series C Stock), end of period
|
|
$
|
1,378,780
|
|
|
$
|
2,592,452
|
|
Preferred Series C Warrants
As discussed in Note 9, 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 for the periods ended June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
Dec 31, 2016
|
Annual volatility rate
|
|
|
105
|
%
|
|
|
123
|
%
|
Risk free rate
|
|
|
1.50
|
%
|
|
|
1.93
|
%
|
Holding Period
|
|
|
5 years
|
|
|
|
5 years
|
|
Fair Value of common stock
|
|
$
|
1.63
|
|
|
$
|
1.75
|
|
The below table represents the
change in the fair value of the derivative liability (Preferred Series C Warrants) for the period ended June 30, 2017 and the year
ending December 31, 2016.
Period Ended
|
|
June 30, 2017
|
|
Dec 31, 2016
|
Fair value of derivative liability (Warrants), beginning of year
|
|
$
|
2,513,638
|
|
|
$
|
2,963,378
|
|
Change in fair value of derivative liability (Warrants)
|
|
|
(489,765
|
)
|
|
|
(449,740
|
)
|
Fair value of derivative liability (Warrants), end of period
|
|
$
|
2,023,873
|
|
|
|
2,513,638
|
|
Total (Gain) Loss on Derivative
Liability (Preferred Series C Stock and Warrants)
The below table represents the
total (gain) or loss, of the derivative liability (Preferred Series C Stock and Warrants) for the period ended June 30, 2017 and
the year ending December 31, 2016.
Period Ended
|
|
June 30, 2017
|
|
Dec 31, 2016
|
Fair value of derivative liability (Preferred C Stock and Warrants), beginning of year
|
|
$
|
5,106,090
|
|
|
$
|
5,382,737
|
|
Change in fair value of derivative liability (Stock and Warrants)
|
|
|
(1,703,437
|
)
|
|
|
(276,647
|
)
|
Fair value of derivative liability (Stock and Warrants), end of period
|
|
$
|
3,402,653
|
|
|
|
5,106,090
|
|
NOTE 11 – 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 periods ended June 30, 2017 and December
31, 2016, respectively were as follows:
|
|
Qtr. Ended
June 30, 2017
|
|
Year Ended
December 31, 2016
|
Beginning balance
|
|
$
|
(5,984,537
|
)
|
|
$
|
(6,498,190
|
)
|
Operating income (loss)
|
|
|
(202,435
|
)
|
|
|
(317,179
|
)
|
Share of Other Comprehensive Income
|
|
|
1,092,778
|
|
|
|
830,832
|
|
Ending balance
|
|
$
|
(5,094,194
|
)
|
|
$
|
(5,984,537
|
)
|
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 12 – 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 June 30, 2017 and December
31, 2016, the Company’s financial assets were measured at fair value using Level 3 inputs, except for 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 June 30, 2017 using
:
|
|
Total Fair
Market Value
|
|
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
|
|
$
|
3,402,653
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
3,402,653
|
|
Totals
|
|
$
|
3,402,653
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,402,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2016 Using:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Totals
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
5,106,090
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
5,106,090
|
|
Totals
|
|
$
|
5,106,090
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,106,090
|
|
NOTE 13 – REVENUE
CONCENTRATION
The Company receives revenues
from certain customers who individually represented 10% or more of the Company’s total revenue, and the Company’s accounts
receivable balances are represented by customers who individually represented 10% or more of the Company’s total accounts
receivable, as described below:
For the three months ended June
30, 2017 one customer accounted for 100% of revenue and for the three months ended June 30, 2016, one customer accounted for 100%
of revenue.
For the six months ended June
30, 2017 two customers accounted for 100% of revenue and for the six months ended June 30, 2016, two customers accounted for 100%
of revenue.
At June 30, 2017, one customer accounted
for 100% of accounts receivable. At December 31, 2016, one customer accounted for 100% of accounts receivable.
NOTE 14 – ADJUSTMENT OF PRIOR PERIODS
In the second quarter 2017, we identified
certain property taxes amounting to $541,245 from 2014 and 2015, and $169,232 from 2016, which were not expensed as required, and
an over accrual of $150,000 for legal expenses at December 31, 2016. The Company assessed the materiality of this misstatement
in the 2016 and 2015 periods financial statements in accordance with the SEC’s Staff Accounting Bulletin (SAB) No. 99, codified
in ASC No. 250, Presentation of Financial Statements, and concluded that the misstatement was not material to any prior periods.
In accordance with SAB 108, the Company has adjusted the three and six months ended June 30, 2016 and the balance sheet as of December
31, 2016. The following presents these adjustments in detail:
BALANCE SHEET
|
|
|
Previously
Reported
Dec
31, 2016
|
|
|
|
Adjustments
|
|
|
|
Adjusted
Balance
Dec,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
309,952
|
|
|
$
|
541,245
|
|
|
$
|
951,197
|
|
Accrued Expenses
|
|
|
1,198,278
|
|
|
|
169,232
|
|
|
|
1,367,510
|
|
Total Liabilities
|
|
|
7,802,070
|
|
|
|
710,477
|
|
|
|
8,512,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit
|
|
|
(53,013,185
|
)
|
|
|
(568,382
|
)
|
|
|
(53,581,567
|
)
|
Total Equity (Deficit)
|
|
|
2,873,844
|
|
|
|
(568,382
|
)
|
|
|
2,305,462
|
|
Non-Controlling Interest
|
|
|
(5,842,478
|
)
|
|
|
(142,095
|
)
|
|
|
(5,984,573
|
)
|
Total Equity (Deficit)
|
|
|
(2,968,634
|
)
|
|
|
(710,477
|
)
|
|
|
(3,679,111
|
)
|
Total Liabilities and Equity
|
|
$
|
9,166,489
|
)
|
|
$
|
—
|
|
|
$
|
9,166,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME STATEMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Six Months Ended June 30, 2016
|
|
|
|
Previously
Reported
|
|
|
|
Adjustments
|
|
|
|
Adjusted
|
|
|
|
Previously
Reported
|
|
|
|
Adjustments
|
|
|
|
Adjusted
|
|
COSTS AND EXPENSES OF MINING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Holding Costs
|
|
$
|
—
|
|
|
$
|
42,308
|
|
|
$
|
42,308
|
|
|
|
133,084
|
|
|
$
|
84,616
|
|
|
$
|
217,700
|
|
Total Operating Expenses
|
|
|
2,466,663
|
|
|
|
42,308
|
|
|
|
2,508,941
|
|
|
|
4,034,319
|
|
|
|
84,616
|
|
|
|
4,118,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET OPERATING INCOME (LOSS)
|
|
|
690,113
|
|
|
|
(42,308
|
)
|
|
|
647,805
|
|
|
|
1,130,616
|
|
|
|
(84,616
|
)
|
|
|
1,045,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE TAXES
|
|
|
(582,336
|
)
|
|
|
(42,308
|
)
|
|
|
(624,644
|
)
|
|
|
132,606
|
|
|
|
(84,616
|
)
|
|
|
47,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
(582,336
|
)
|
|
|
(42,308
|
)
|
|
|
(624,644
|
)
|
|
|
132,606
|
|
|
|
(84,616
|
)
|
|
|
47,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATTRIBUTABLE TO NON-CONTROLLING INTERESST
|
|
|
120,076
|
|
|
|
8,461
|
|
|
|
128,537
|
|
|
|
147,857
|
|
|
|
16,923
|
|
|
|
164,780
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
|
(499,532
|
)
|
|
|
(33,847
|
)
|
|
|
(533,370
|
)
|
|
$
|
200,463
|
|
|
$
|
(67,693
|
)
|
|
$
|
132,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Loss Per Common Share
|
|
|
(0.03
|
)
|
|
$
|
0.00
|
|
|
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Loss Per Common Share
|
|
$
|
(0.03
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENT of CASH FLOWS
|
|
|
Previously
Reported
June 30, 2016
|
|
|
|
Adjustments
|
|
|
|
Adjusted
Balance
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
132,606
|
|
|
$
|
(84,616
|
)
|
|
$
|
47,990
|
|
Accrued Liabilities
|
|
|
66,020
|
|
|
|
84,616
|
|
|
|
150,636
|
|
Cash Flows Used in Operating
|
|
$
|
(520,688
|
)
|
|
$
|
—
|
|
|
$
|
(520,688
|
)
|