The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 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 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 and Adjustments
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 income 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 19.95% 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. The Company has significant influence over DynaNevada, but not control, due to the lack of a majority voting
interest in the entity. DynaNevada has been dormant for several years. DynaUSA has no plan or intention of future funding with
DynaNevada nor are any other transactions with DynaNevada contemplated at this time. The Company therefore accounts for this investment
using the cost basis. The investment was $70,000 and $70,000 at December 31, 2018 and 2017, respectively.
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, 2018, and 2017, 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, 2018 and December 31, 2017
are $845,564 and $732,341, respectively.
Inventory
Inventories are carried at the lower of cost
or net realizable value and consist of mined tonnage, and gravity and flotation concentrates, and gravity tailings or flotation
feed material. The inventories are $1,588,778 and $907,982 as of December 31, 2018 and December 31, 2017, 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 (2) 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, 2018, 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. In 2017 the Company entered the construction stage of the project. Under the construction
stage non-mining assets are capitalized once recoverability has been established through generating a proven revenue stream from
the mine.
Property
Substantially all mine development costs, including
design, engineering, mine 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 mining 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. Construction stage non-mining assets used in support activities such as ore processing,
transportation, security, warehouse and camp facilities are capitalized and depreciated over their estimated useful lives. 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.
Mineral 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, 2018,
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 9,919 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, 2018, and 2017,
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 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 prepared 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 translated from Mexican
Pesos into U.S. dollars using (i) year end exchange rates for balance sheet accounts, and (ii) the weighted average exchange rate
of the reporting period for all income statement accounts. Foreign currency translation gains and losses are reported as a separate
component of stockholders’ equity and 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 years ended December 31, 2018 and 2017 (Mexican Pesos per
one U.S. dollar):
|
|
|
Dec 31, 2018
|
|
|
Dec 31, 2017
|
|
|
|
|
|
|
|
|
|
Current exchange rate
|
Pesos
|
|
|
19.63
|
|
|
|
19.73
|
|
|
|
|
|
|
|
|
|
|
Weighted average exchange rate for the period ended
|
Pesos
|
|
|
19.23
|
|
|
|
18.12
|
|
The Company recorded currency transaction gains
of $51,325 for the year ended December 31, 2018 and $1,388,573 in 2017.
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.
On December 22, 2017, the 2017 Tax Cuts and
Jobs Act (the “Act”) was signed into law. Among other provisions, the Act reduced the highest corporate tax rate from
35% to 21%. With the passage of the Act, the Company‘s deferred tax assets and liabilities were restated as of the effective
date of the law to reflect the new applicable rate. The reduction to the net deferred tax asset was charged to tax expense in the
period of the change and offset by a valuation allowance stemming from historical net operating loss carryforwards.
Use of Estimates
In order to prepare financial statements 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.
Revenue Recognition
The Company adopted ASC 606 “
Revenue
from contracts with customers
” on January 1, 2018 using the modified retrospective approach. The Company generates revenue
by selling gold and silver produce from its mining operations. The Company recognizes revenue for gold and silver concentrate production,
net of treatment and refining costs, when it satisfies the performance obligation of transferring control of the concentrate to
the customer. This is generally when the material is delivered to the customer facility for treatment and processing as the customer
has the ability to direct the use of and obtain substantially all the remaining benefits from the material and the customer has
the risk of loss.
The amount of revenue recognized is initially recorded on a provisional
basis based on the contract price and the estimated metal quantities based on assay data. The revenue is adjusted upon final settlement
of the sale. The chief risk associated with the recognition of sales on a provisional basis is the fluctuations between the estimated
quantities of precious metals base on the initial assay and the actual recovery from treatment and processing.
During the year ended December 31, 2018 there was $0 of revenue
recognized during the period from customer deposit liabilities (deferred contract revenue), and $0 of customer deposits refunded
to the customer on order cancellation.
As of December 31, 2018, there are $1,750,000 in customer deposit
liabilities for payments received during the period for contracts expected to ship in 2019. Under terms of the Company’s
sales contract this amount is to be applied as payment on the customer account at a rate of $250,000 per month throughout the year.
As of and for the year ended December 31, 2018, there are $0significant
contract deferred costs such as sales commissions or costs deferred.
We have elected to account for shipping and handling costs as fulfillment
costs after the customer obtains control of the goods.
Prior to the adoption of this standard
the Company recognized revenue in accordance with ASC 605-10, "
Revenue Recognition in Financial Statements
". Revenue
was 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” was calculated an adjustment was recorded when any remaining balance was paid.
The change in accounting principle from
ASC 605 to ASC 606 did not impact the amount of revenue recognized in the Company’s financial statements.
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 2,523,689 warrants outstanding
at December 31, 2018 exercisable at $2.50 per share, which upon exercise, would result in the issuance of 2,523,689 shares of common
stock. The Company also had convertible debt instruments as of December 31, 2018 which, upon conversion at a valuation of $2.50
per share, would result in the issuance of 335,250 shares of stock.
The Company had 2,523,689 warrants outstanding
at December 31, 2017 exercisable at $2.50 per share, which upon exercise, would result in the issuance of 2,523,689 shares of common
stock. The Company also had convertible debt instruments as of December 31, 2017 which, upon conversion at a valuation of $2.50
per share, would result in the issuance of 380,250 shares of stock.
|
|
Years ended December 31
|
|
|
|
2018
|
|
|
2017
|
|
Net income attributable to common shareholders
|
|
$
|
1,251
|
|
|
$
|
2,479,890
|
|
Shares:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, Basic
|
|
|
17,722,825
|
|
|
|
17,076,250
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, Diluted
|
|
|
17,722,825
|
|
|
|
18,943,790
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.00
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.00
|
|
|
$
|
0.14
|
|
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
Stock compensation
In May 2017, the FASB issued ASU 2017-09, Compensation
– Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09). ASU 2017-09 provides clarity and
reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock
Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this update provide guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting
in Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017. Early adoption is permitted. As such, The Company adopted these provisions as
of the fiscal year beginning on January 1, 2018. The amendments in this update should be applied prospectively to an award modified
on or after the adoption date.
Leases
In February 2016, FASB issued ASU 2016-02—
Leases (Topic 842). The update is intended to increase transparency and comparability among organizations by recognizing lease
assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in
this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Early application of the amendments in this update is permitted. As such, The Company is required to adopt these provisions as
of the fiscal year beginning on January 1, 2019. The Company is currently evaluating the impact of FASB ASU 2016-02 and expects
the adoption thereof will have a material effect on The Company’s presentation of balance sheet assets and liabilities based
on the present value of future lease payments but does not expect a material effect on the presentation of expenses and cash flows.
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, 2018 and December 31, 2017, respectively, were as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Mined Tonnage, Gold-Silver Concentrates, and/or Gravity Tailings (Flotation Feed Material)
|
|
$
|
1,588,778
|
|
|
$
|
907,982
|
|
Total Inventories
|
|
$
|
1,588,778
|
|
|
$
|
907,982
|
|
NOTE 3 – PROPERTY
Property consists of the following at December
31, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Camp buildings and improvements
|
|
$
|
470,974
|
|
|
$
|
418,639
|
|
Machinery and equipment
|
|
|
2,040,256
|
|
|
|
1,368,736
|
|
Transportation equipment
|
|
|
225,695
|
|
|
|
289,165
|
|
Office furniture and fixtures
|
|
|
78,802
|
|
|
|
78,802
|
|
Office equipment
|
|
|
164,113
|
|
|
|
152,805
|
|
Construction in progress
|
|
|
673,076
|
|
|
|
364,917
|
|
Sub-total
|
|
|
3,652,916
|
|
|
|
2,673,064
|
|
Less: Accumulated depreciation
|
|
|
(1,203,562
|
)
|
|
|
(974,994
|
)
|
Total Property
|
|
$
|
2,449,354
|
|
|
$
|
1,698,070
|
|
The Company purchased equipment of $1,043,322
and $1,273,189 in the years ended December 31, 2018 and 2017, respectively.
Depreciation has been provided over each asset’s
estimated useful life. Depreciation expense was $278,815 and $153,862 for the years ended December 31, 2018 and 2017,
respectively.
NOTE 4 – MINING CONCESSIONS
Mining properties consist of the following
at December 31, 2018 and December 31, 2017:
|
|
2018
|
|
|
2017
|
|
San Jose de Gracia (“SJG”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mining Concessions
|
|
$
|
4,132,678
|
|
|
$
|
4,132,678
|
|
|
|
|
|
|
|
|
|
|
Depletion expense was $0 and $0 for the years
ended December 31, 2018 and 2017, respectively.
NOTE 5 – INVESTMENT IN AFFILIATE/RECEIVABLES
FROM AFFILIATE/OTHER ASSETS
Through December 31, 2018, 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, 2018 and December 31, 2017 to be $70,000 and $70,000, respectively. The loss was taken to “other income (loss)
on the income statement in previous years.
In 2016 the Company deemed $159,143 of receivable
for funds, previously advanced to DynaNevada 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, to be uncollectable and wrote them off.
As of December 31, 2018, and December 31, 2017 the Company had no remaining receivable from DynaNevada.
At December 31, 2018 and December 31, 2017,
the Company had a receivable from DynaNevada de Mexico of $68,376 and $0, 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 extended the maturity date of the Series I Notes to December 31, 2016.
The Company paid $5,625 to one Series I debt holder during 2017. The remaining
eight of the Series I noteholders totaling $759,375 have subsequently been extended to December 30, 2019.
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, 2020.
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” 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 2018 The Company paid off one note for $112,500. The remaining two Series II Notes totaling $78,750 have been extended
to December 30, 2019.
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, 2020.
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, 2018, 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 $78,750, for a total Note balance of $838,125. At December 31, 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 $25,150 and $30,141 as of December 31, 2018 and 2017, respectively.
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 21%
and 34%, respectively (blended for U.S. and México) of significant items comprising the Company’s net deferred tax
amounts as of December 31, 2018 and December 31, 2017 are as follows:
Deferred Tax Asset Related to:
|
|
2018
|
|
2017
|
Prior Year
|
|
$
|
12,565,297
|
|
|
$
|
17,244,045
|
|
Tax Expense (Benefit) for Current Year
|
|
|
604,586
|
|
|
|
(114,148
|
)
|
Permanent Difference Due to Rate Change
|
|
|
—
|
|
|
|
(4,564,600
|
)
|
Total Deferred Tax Asset
|
|
|
13,169,883
|
|
|
|
12,565,297
|
|
Less: Valuation Allowance
|
|
|
(13,169,883
|
)
|
|
|
(12,565,297
|
)
|
Net Deferred Tax Asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The income tax provision for the Company as
of December 31, 2018 and 2017 differs from those computed using the statutory federal tax rates of 21% and 34% due to the following
differences:
|
|
2018
|
|
2017
|
Book Income
|
|
$
|
(211,518
|
)
|
|
$
|
2,527,709
|
|
Tax Expense at Statutory Rates
|
|
|
(44,419
|
)
|
|
|
859,421
|
|
Permanent Difference Due to Rate Change
|
|
|
—
|
|
|
|
4,860,392
|
|
Other Permanent Differences
|
|
|
(560,167
|
)
|
|
|
(653,180
|
)
|
Change in Valuation Allowance
|
|
|
604,586
|
|
|
|
(5,072,597
|
)
|
Other
|
|
|
—
|
|
|
|
5,964
|
|
Provision for (Benefit from) Income Taxes, Net
|
|
$
|
—
|
|
|
$
|
—
|
|
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 $51,100,000
at December 31, 2018 and will expire in the years 2027 through 2033.
The realization of deferred tax benefits is
contingent upon future earnings and is fully reserved at December 31, 2018.
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 years ended December 31, 2018 and 2017, 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: 2015 to 2018
México:
2014 to 2018
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 $0.01 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, 2018 and December 31, 2017, 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. The Dividend is calculated at 4.0% of $4,333,053 payable annually on June 30. At December 31, 2017 and 2018
dividends of $173,320 per year were in arrears.
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 $1,531,789
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. At December 31, 2018 the total Derivative Liability was $974,683 which
included $402,909 for the Series C Preferred Shares, and $571,774 in connection with the Golden Post Warrant. The Deemed Dividend
for 2018 and 2017 was $173,320, and $173,320 respectively.
Due to the nature of this transaction as mandatorily
redeemable, the preferred shares are classified as “temporary equity” on the balance sheet.
|
|
Preferred Series C
|
|
|
|
|
|
Carrying Value, December 31, 2016
|
|
$
|
4,333,053
|
|
Issuances at Fair Value, Net of Issuance Costs
|
|
|
-
|
|
Bifurcation of Derivative Liability
|
|
|
-
|
|
Relative Fair Value of Warrants – Preferred Stock Discount
|
|
|
-
|
|
Accretion of Preferred Stock to Redemption Value
|
|
|
-
|
|
Carrying Value, December 31, 2017
|
|
|
4,333,053
|
|
|
|
|
|
|
Issuances at Fair Value, Net of Issuance Costs
|
|
|
-
|
|
Bifurcation of Derivative Liability
|
|
|
-
|
|
Relative Fair Value of Warrants – Preferred Stock Discount
|
|
|
-
|
|
Accretion of Preferred Stock to Redemption Value
|
|
|
-
|
|
Carrying Value, December 31, 2018
|
|
|
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, 2018 and December 31, 2017,
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, 2018 and December 31, 2017,
there were 17,722,825 and 17,722,825 shares outstanding, respectively. No dividends were paid for the years ended December
31, 2018 and 2017, 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, 2018 and December 31, 2017, respectively.
Stock Issuances
2018 Activity
None.
2017 Activity
During the year
ended December 31, 2017, the Company issued 1,000,000 common shares for the exercise of stock warrants at $2.50 a share for total
proceeds of $2,500,000. In addition, the Company issued 333,333 shares of treasury stock as additional compensation for exercise
of the warrants at above market price.
Treasury Stock
During the year ended December 31, 2017
the Company issued 333,333 treasury shares as additional compensation for the exercise of stock warrants at an above market price
as discussed above. No treasury stock was issued during the year ended December 31, 2018. At December 31, 2018 and 2017, 778,980
and 778,790 treasury shares were outstanding.
Warrants
2018 activity
The Company had 2,523,689 warrants outstanding
at December 31, 2018. There were no warrants issued or exercised in 2018 and no warrants expired in 2018.
2017 activity
The Company had 2,523,689 warrants outstanding
at December 31, 2018. 1,000,000 warrants were exercised at $2.50 a share during the year and 70,000 warrants expired.
The Company recorded no expense related to
the issuance of these warrants since these warrants were issued in common stock for cash sales and note conversions.
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Intrinsic Value
|
|
Balance at December 31, 2016
|
|
|
3,593,689
|
|
|
$
|
2.45
|
|
|
|
2.51
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Exercised
|
|
|
(1,000,000
|
)
|
|
$
|
2.50
|
|
|
|
|
|
|
$
|
-
|
|
Forfeited
|
|
|
(70,000
|
)
|
|
$
|
2.50
|
|
|
|
|
|
|
$
|
-
|
|
Balance at December 31, 2017
|
|
|
2,523,689
|
|
|
$
|
2.45
|
|
|
|
1.51
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Balance at December 31, 2018
|
|
|
2,523,689
|
|
|
$
|
2.45
|
|
|
|
0.51
|
|
|
$
|
-
|
|
Exercisable at December 31, 2018
|
|
|
2,523,689
|
|
|
$
|
2.45
|
|
|
|
0.51
|
|
|
$
|
-
|
|
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 $113,750 and $165,250 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, 2018 and 2017, respectively.
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.
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 2002-2017 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 – $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 2017 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).
The Company leases office space for its corporate
headquarters in Irving, Texas. In September 2017, the Company entered into a sixty-six-month extension of the lease through 2023.
As part of the agreement the Company received six months free rent as a finish out allowance. The Company capitalized the leasehold
improvement costs and amortized them over the rent abatement period as rent expense The Company incurred rent expense of $86,011
and $71,399 for the office lease in the years ended December 31, 2018 and 2017, respectively.
Future minimum lease obligations are as follow
for the years ending December 31:
YEAR
|
|
AMOUNT
|
|
2019
|
|
$
|
82,474
|
|
2020
|
|
$
|
84,280
|
|
2021
|
|
$
|
86,086
|
|
2022
|
|
$
|
87,892
|
|
2023
|
|
$
|
14,849
|
|
TOTAL
|
|
$
|
355,581
|
|
Other Contingencies
The Company's mining and exploration activities
are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually
changing and generally becoming more restrictive. The Company conducts its operations so as to protect public health and the environment,
and believes its operations are materially in compliance with all applicable laws and regulations. The Company has made, and expects
to make in the future, expenditures to comply with such laws and regulations.
Damages Awarded to DynaMéxico in
México Litigation
On October 5, 2015, DynaResource de México
SA de C.V. (“DynaMéxico”), was awarded in excess of $48 M USD (Forty-Eight Million Dollars) in damages from
Goldgroup Resources, Inc. (the “Goldgroup Damages”) by virtue of a Sentencia Definitiva (the “Definitive Sentence”)
issued by the Thirty Sixth Civil Court of the Superior Court of Justice of the Federal District of México (Tribunal Superior
de Justicia del Distrito Federal), File number 1120/2014. The Definitive Sentence included the considerations and resolutions by
the Court, and additional Resolutions were also ordered in favor of DynaMéxico (together the Goldgroup Damages and the additional
Resolutions are referred to as, the “Oct. 5, 2015 Resolution”). The October 5, 2015 Resolution is described in Part
II, Item 1. Legal Proceedings. As of December 31, 2018, the decision remains under appeal.
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:
|
2018
|
|
2017
|
Annual volatility rate
|
86%
|
|
153%
|
Risk free rate
|
2.48%
|
|
2.20%
|
Holding Period
|
5 years
|
|
5 years
|
Fair Value of common stock
|
$1.13
|
|
$1.11
|
For the year ended December 31, 2018, 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, 2018 and 2017:
Year Ended
|
|
2018
|
|
|
2017
|
|
Fair value of derivative (stock), beginning of year
|
|
$
|
1,531,789
|
|
|
$
|
2,592,492
|
|
Change in fair value of derivative
|
|
|
(1,128,880
|
)
|
|
|
(1,060,703
|
)
|
Fair value of derivative on the date of issuance
|
|
|
-
|
|
|
|
-
|
|
Fair value of derivative(stock), end of year
|
|
$
|
402,909
|
|
|
$
|
1,531,789
|
|
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:
|
|
2018
|
|
2017
|
Annual volatility rate
|
|
|
86
|
%
|
|
|
153
|
%
|
Risk free rate
|
|
|
2.48
|
%
|
|
|
2.20
|
%
|
Holding Period
|
|
|
5 years
|
|
|
|
5 years
|
|
Fair Value of common stock
|
|
$
|
1.20
|
|
|
$
|
1.11
|
|
For the year ended December 31, 2018, 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, 2018 and 2017:
Year Ended
|
|
2018
|
|
2017
|
Fair value of derivative (warrants), beginning of year
|
|
$
|
1,649,719
|
|
|
$
|
2,513,638
|
|
Change in fair value of derivative
|
|
|
(1,077,945
|
)
|
|
|
(863,919
|
)
|
Fair value of derivative on the date of issuance
|
|
|
—
|
|
|
|
—
|
|
Fair value of derivative(warrants), end of year
|
|
$
|
571,774
|
|
|
$
|
1,649,719
|
|
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, 2018 and December
31, 2017, respectively were as follows:
|
|
Year
Ended
December
31,
2018
|
|
Year
Ended
December
31,
2017
|
|
|
|
|
|
Beginning
balance
|
|
$
|
(5,416,168
|
)
|
|
$
|
(6,014,573
|
)
|
Operating
income (loss)
|
|
|
(197,128
|
)
|
|
|
(125,501
|
)
|
Share
of Other Comprehensive Income (loss)
|
|
|
386,089
|
|
|
|
723,906
|
|
Ending
balance
|
|
$
|
(5,605,129
|
)
|
|
$
|
(5,416,168
|
)
|
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.
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, 2018, and December 31, 2017,
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, 2018
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
|
|
$
|
974,683
|
|
|
|
-
|
|
|
|
-
|
|
|
|
974,683
|
|
Totals
|
|
$
|
974,683
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
974,683
|
|
Fair Value Measurement at December
31, 2017 Using:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
3,181,508
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,181,508
|
|
Totals
|
|
$
|
3,181,508
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,181,508
|
|
NOTE 14 – 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 each of the twelve months ended December
31, 2018 and 2017, one and two customers accounted for 100% of revenue, respectively.
At both December 31, 2018 and 2017, one customer
accounted for 100% of accounts receivable.
NOTE 15 – NOTES PAYABLE
In June 2017, the Company entered into financing
agreements for unpaid mining concession taxes for the period July 1, 2014 to December 31, 2015 in the amount of $533,580. The Company
paid an initial 20% payment in the amount of $106,716 and financed the balance over 36 months at 18% interest.
In February 2018 the Company entered into a
financing agreement for unpaid mining concessions taxes for the year ended December 31, 2016 in the amount of $552,990. The Company
paid an initial payment of $110,598 and financed the balance over 36 months at 18%.
In June 2018
the Company entered into financing agreements for the unpaid mining concession taxes for the year ended December 31, 2017 and the
period ending June 30, 2018 in the amount of $1,739,392. The Company paid an initial 20% payment of $347,826 and financed the balance
over 36 months at 21.84%
The following is a summary of the transaction
during the years ended December 31, 2018 and 2017:
Property Holding Taxes June 1, 2014 – December 31, 2015
|
|
$
|
533,580
|
|
Initial payment of 20%
|
|
|
(106,716
|
)
|
2017 principal payments
|
|
|
(59,553
|
)
|
Balance at December 31, 2017
|
|
|
367,311
|
|
Exchange Rate Adjustment
|
|
|
1,861
|
|
Property Holding Taxes January 1, 2016 – June 30, 2018
|
|
|
2,292,122
|
|
Initial payment of 20%
|
|
|
(458,423
|
)
|
2018 principal payments
|
|
|
(399,636
|
)
|
Balance at December 31, 2018
|
|
|
1,803,235
|
|
At December 31, 2018 future maturities of
notes payable are as follows
Year Ending December 31:
|
|
|
|
2019
|
|
$
|
705,320
|
|
2020
|
|
|
766,298
|
|
2021
|
|
|
331,617
|
|
Total
|
|
$
|
1,803,235
|
|
NOTE 16 – SUBSEQUENT EVENTS
On February 18, 2019 the Company entered into
a financing agreement for unpaid mining concession taxes for the year ended December 31, 2018 in the amount of $382,286. The Company
paid an initial 20% payment of $65,667 and financed the balance over 36 months at an interest rate of 21%.