NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
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 Gracía 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. The 20% minority interest in Dyna México is
held by Goldgroup Resources Inc., a wholly owned subsidiary of
Goldgroup Mining Inc. Vancouver BC
(“Goldgroup”)
In
2005, the Company formed DynaResource Operaciones de San Jose De
Gracía 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 owns 100% of Dyna
Mineras.
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 Resources, Inc. 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, 2019 and 2018, 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, 2019,
and 2018, 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, 2019 and December 31, 2018 are $1,297,387 and
$845,564, 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 $523,089 and $1,588,778 as of December 31, 2019 and December
31, 2018, 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, 2019, 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 Gracía Property, as exploration
stage projects since no proven or probable reserves have been
established under Industry Guide 7.
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. Office
furniture and equipment 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.
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 Gracía Property, capitalized costs and mineral
property interests are amortized using the straight-line method
once production begins. As of December 31, 2019, 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 Gracía 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 considering 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, 2019, and 2018, 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.
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.
Transactions in and Translations of Foreign Currency
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) yearend 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, 2019 and 2018 (Mexican Pesos per one U.S. dollar):
|
|
|
|
Current
exchange rate
|
Pesos
|
18.86
|
19.63
|
Weighted
average exchange rate for the period ended
|
Pesos
|
19.25
|
19.23
|
The
Company recorded currency transaction gains (losses) of $397,161
for the year ended December 31, 2019 and $51,325 for the year ended
December 31, 2018.
Income Taxes
The
Company accounts for income taxes under ASC 740 “Income Taxes” using the
liability method, recognizing certain temporary differences between
the financial reporting basis of liabilities and assets and the
related income tax basis for such liabilities and assets. This
method generates either a net deferred income tax liability or
asset for the Company, as measured by the statutory tax rates in
effect. The Company derives the deferred income tax charge or
benefit by recording the change in either the net deferred income
tax liability or asset balance for the year. The Company records a
valuation allowance against any portion of those deferred income
tax assets when it believes, based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred income tax asset will not be realized.
Income
from the Company’s subsidiaries in México are taxed at
applicable Mexican tax law.
Use of Estimates
In
order to prepare financial 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.
As of
December 31, 2019, there are $1,000,000 in customer deposit
liabilities for payments received during the period for contracts
expected to be settled in 2020.
During
the years ended December 31, 2019 and December 31, 2018 there was
$1,750,000 and $0 of revenue recognized during the period from
customer deposit liabilities (deferred contract revenue) from prior
periods, and $0 of customer deposits refunded to the customer on
order cancellation.
As of
and for the year ended December 31, 2019 and December 31, 2018,
there are no contract costs or commissions deferred.
We have
elected to account for shipping and handling costs as fulfillment
costs after the customer obtains control of the goods.
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.
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 warrants, 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 2,166,527 warrants outstanding at December 31, 2019
exercisable at $2.50 per share, which upon exercise, would result
in the issuance of 2,166,527 shares of common stock. The Company
also had convertible debt instruments as of December 31, 2019
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 2,166,527 warrants outstanding at December 31, 2018
exercisable at $2.50 per share, which upon exercise, would result
in the issuance of 2,166,527 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.
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Net loss
attributable to common shareholders
|
$(971,655)
|
$(756,417)
|
Shares:
|
|
|
Weighted average
number of common shares outstanding, Basic
|
17,722,825
|
17,722,825
|
|
|
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Weighted average
number of common shares outstanding, Diluted
|
17,722,825
|
17,722,825
|
|
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Basic loss per
share
|
$(0.05)
|
$(0.04)
|
|
|
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Diluted loss per
share
|
$(0.05)
|
$(0.04)
|
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
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. As such, The Company is required to
adopt these provisions as of the fiscal year beginning on January
1, 2019. The Company elected the available practical expedients and
adopted ASC 842 effective January 1, 2019, prospectively. The
adoption of this standard resulted in the initial recognition of
right-to-use assets and lease liabilities of $878,605 and $891,023
with no material impact on the results of operations and cash
flows. See Note 10 for additional information regarding our
leases.
NOTE 2 – INVENTORIES
The
Company commenced underground test mining and pilot milling
activities (“pilot production”) in the 2nd 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, 2019 and December 31, 2018,
respectively, were as follows:
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|
|
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|
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Mined
Tonnage, Gold-Silver Concentrates, and/or Gravity Tailings
(Flotation Feed Material)
|
$523,089
|
$1,588,778
|
Total
Inventories
|
$523,089
|
$1,588,778
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NOTE 3 – PROPERTY
Property
consists of the following at December 31, 2019 and December 31,
2018:
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Leasehold
improvements
|
$9,340
|
$9,340
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Office
equipment
|
31,012
|
31,012
|
Office
furniture and fixtures
|
78,802
|
78,802
|
Sub-total
|
119,154
|
119,154
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Less:
Accumulated depreciation
|
(109,927)
|
(106,672)
|
Total
Property
|
$9,227
|
$12,482
|
The
Company purchased equipment of $0 and $3,931 in the years ended
December 31, 2019 and 2018, respectively.
Depreciation
has been provided over each asset’s estimated useful
life. Depreciation expense was $3,255 and $7,856 for the
years ended December 31, 2019 and 2018 respectively.
NOTE 4 – MINING CONCESSIONS
Mining
properties consist of the following at December 31, 2019 and
December 31, 2018:
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San
Jose de Gracia (“SJG”):
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Total
Mining Concessions
|
$4,132,678
|
$4,132,678
|
Depletion
expense was $0 and $0 for the years ended December 31, 2019 and
2018, respectively.
NOTE 5 – INVESTMENT IN AFFILIATE/RECEIVABLES FROM
AFFILIATE/OTHER ASSETS
The
Company owns 19.95% 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”). 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 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, 2019 and December 31, 2018 to be $70,000
and $70,000, respectively.
At
December 31, 2019 and December 31, 2018, the Company had a
receivable from DynaNevada de México of $71,156 and $68,376,
respectively for working capital advances.
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 Gracía. 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. As of December 31,
2018, seven of the Series I Notes totaling $646,875 had
subsequently been extended to December 30, 2019. On December 31,
2019 the Company entered into agreements to extend seven
outstanding notes totaling $646,875 plus accrued interest totaling
$34,277 for new total of $691,152 until December 31, 2020. At
December 31, 2019 Series I Notes remained outstanding with a total
balance of $691,152. Subsequent to year end the notes were extended
to June 30, 2022.
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 one year from their conversion
date.
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 Gracía. 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. At December 31, 2018
three the Series II notes totaling $191,250 had been extended to
December 30, 2019. On December 31, 2019 the Company entered into
agreements to extend the two notes totaling $78,750 plus accrued
interest of $5,977 for total new notes of $84,757 to December 31,
2020. One note for $112,500 was not extended and is past due as of
December 31, 2019. At December 31, 2019 three Series II notes
remained outstanding for $197,226. Subsequent to year end two of
the notes totaling $84,757 were extended to June 30,
2022.
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 one year
from their conversion date.
At
December 31, 2019 the principal and capitalized interest balance on
the remaining Series I Notes was $681,152, and the principal and
capitalized interest on the Series II Notes was $197,227, for a
total Note balance of $878,379.
At
December 31, 2018, the principal and capitalized interest balance
on the remaining Series I Notes was $646,875, and the principal and
capitalized interest on the Series II Notes was $191,250, for a
total Note balance of $838,125. The accrued interest for these
notes was $3,516 and $43,769 as of December 31, 2019 and 2018,
respectively.
Subsequent
to year end the Company reached agreement with six of the seven
Series I note holders and two of the three Series II Note holders
to extend the notes to June 30, 2022 with certain modifications.
See Note 16 for details.
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 25% (blended for U.S. and
México) of significant items comprising the Company’s
net deferred tax amounts as of December 31, 2019 and December 31,
2018 are as follows:
Deferred
Tax Asset Related to:
|
|
|
|
|
|
Prior
Year
|
$13,343,134
|
$12,549,746
|
Tax
(Expense) Benefit for Current Year
|
437,596
|
793,388
|
Total
Deferred Tax Asset
|
13,780,730
|
13,343,134
|
Less:
Valuation Allowance
|
(13,780,730)
|
(13,343,134)
|
Net
Deferred Tax Asset
|
$—
|
$—
|
The
income tax provision for the Company as of December 31, 2019 and
2018 differ from those computed using the statutory rates of 25%
due to the following:
|
|
|
Tax
Expense (Benefit) at Statutory Rates
|
$(215,211)
|
$(241,682)
|
Other
Permanent Differences
|
(222,145)
|
(551,706)
|
Change
in Valuation Allowance
|
437,596
|
793,388
|
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 $54,720,000 at December 31, 2019 and will
expire in the years 2028 through 2034.
The
realization of deferred tax benefits is contingent upon future
earnings and is fully reserved at December 31, 2019.
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, 2019 and
2018, 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: 2016 to 2019
México:
2015 to 2019
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. The Company issued 1,000
shares of Series A Preferred Stock to its CEO. At December 31, 2019
and December 31, 2018, there were 1,000 shares of Series A
Preferred Stock outstanding.
Series C Senior Convertible Preferred Shares
On June
30, 2015, the Company issued 1,600,000 Series C Senior Convertible
Preferred Shares (the “Series C Preferred Shares”) at
$2.50 per share for gross proceeds of $ 4,000,000, as well as
issuing 133,221 additional Series C Preferred Shares due to
anti-dilution provisions (with no cash remuneration). Legal fees of
$45,000 were deducted from the proceeds of this transaction at
closing. These Series C Preferred Shares are convertible to common
shares at $2.50 per share, through June 30, 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 2019
dividends for the years 2017 to 2019 totaling $519,360 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.
Due to
underlying anti-dilutive provisions contained in the Series C
Preferred Shares and the Golden Post Warrant, the Company incurred
derivative liabilities. At December 31, 2019 the total Derivative
Liability was $86,104 which included $37,038 for the Series C
Preferred Shares, and $49,066 in connection with the Golden Post
Warrant. The Deemed Dividend for the 4% Golden Post Preferred
Dividend terms for 2019 and 2018 was $173,320, and $173,320
respectively. As the Company has not declared these dividends, it
is required only as an item “below” the net income
(loss) amount.
Due to
the nature of this transaction as mandatorily redeemable, the
preferred shares are classified as “temporary equity”
on the balance sheet.
|
|
|
|
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
|
|
|
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, 2019
|
$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, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, there were 17,722,825 and
17,722,825 shares outstanding, respectively. No dividends were
paid for the years ended December 31, 2019 and 2018,
respectively.
Preferred Rights
The
Company issued “Preferred Rights” for the rights to
percentages of revenues generated from the San Jose de Gracía
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, 2019 and December 31, 2018, respectively.
Stock Issuances
There
were no issuances of common stock during the years ending December
31, 2019 and December 31, 2018.
Treasury Stock
No
treasury stock was issued during the years ended December 31, 2019
and December 31, 2018. At December 31, 2019 and 2018, 778,980
treasury shares were outstanding.
Warrants
2019 activity
The
Company had 2,166,527 warrants outstanding at December 31, 2019.
There were no warrants issued or exercised in 2019 and no warrants
expired in 2019.
2018 activity
The
Company had 2,166,527 warrants outstanding at December 31, 2018.
There were no warrants issued or exercised in 2018 and no warrants
expired in 2018.
The
Company recorded no expense related to the issuance of these
warrants since these warrants were issued in common stock for cash
sales and note conversions.
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (Years)
|
|
Balance at
December 31, 2017
|
2,166,527
|
$2.45
|
2.51
|
$-
|
Granted
|
-
|
$-
|
|
$-
|
Exercised
|
-
|
$-
|
|
$-
|
Forfeited
|
-
|
$-
|
|
$-
|
Balance at
December 31, 2018
|
2,166,527
|
$2.45
|
1.51
|
$-
|
Granted
|
-
|
$-
|
|
$-
|
Exercised
|
-
|
$-
|
|
$-
|
Forfeited
|
-
|
$-
|
|
$-
|
Balance at
December 31, 2019
|
2,166,527
|
$2.45
|
0.51
|
$-
|
Exercisable at
December 31, 2019
|
2,166,527
|
$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 $146,125 and $113,750 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, 2019 and 2018, respectively.
Advances from Goldgroup Mining Inc. (“Goldgroup”) to
DynaMéxico
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
Concession Taxes
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%).
Leases
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 Gracía 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 on January
1st
each year 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 makes tiered lease payments on the 1st of each
month.
Effective
January 1, 2019, the Company adopted ASC 842, which requires
recognition of a right-of-use asset and lease liability for all
leases at the commencement date based on the present value of lease
payments over the lease term. Additional qualitative and
quantitative disclosures regarding the Company's leasing
arrangements are also required. The Company adopted ASC 842
prospectively and elected the package of transition practical
expedients that does not require reassessment of (1) whether any
existing or expired contracts are or contain leases, (2) lease
classification and (3) initial direct costs. In addition, the
Company has elected other available practical expedients to not
separate lease and non-lease components, which consist principally
of common area maintenance charges, for all classes of underlying
assets and to exclude leases with an initial term of 12 months or
less.
The
Company determines if a contract is or contains a lease at
inception. As of December 31, 2019, the Company has two operating
leases - a six- and one-half year lease for office space with a
remaining term of thirty-six months and a twenty-year ground lease
in association with its México mining operations with a
remaining term of fourteen years. Variable lease costs consist
primarily of variable common area maintenance, storage parking and
utilities. The Company’s leases do not have any residual
value guarantees or restrictive covenants.
As the
implicit rate is not readily determinable for most of the
Company’s lease agreements, the Company uses an estimated
incremental borrowing rate to determine the initial present value
of lease payments. These discount rates for leases are calculated
using the Company's interest rate of promissory notes.
The
Company’s components of lease cost are as
follows:
|
Year
Ended
December
31,
2019
|
Operating Lease
– Office Lease
|
$82,625
|
Operating Lease
– Ground Lease
|
86,091
|
Short Term Lease
Costs
|
10,071
|
Variable Lease
Costs
|
—
|
TOTAL
|
$178,787
|
Weighted
average remaining lease term and weighted average discount rate are
as follows:
Weighted Average
Remaining Lease Term (Years) – Operating Leases
|
11.00
|
Weighted Average
Discount Rate – Operating Leases
|
12.50%
|
Estimated
future minimum lease obligations are as follow for the years ending
December 31:
YEAR
|
|
2020
|
$156,280
|
2021
|
158,086
|
2022
|
145,043
|
2023
|
79,425
|
2024
|
72,000
|
Thereafter
|
792,000
|
Total
|
$1,402,834
|
Less Imputed
Interest
|
(565,004)
|
RIGHT
OF USE LIABILITY
|
$837,830
|
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”).
On
October 5, 2016, the Thirty-Sixth Civil Court of the Superior Court
of Justice of the Federal District of México (Tribunal
Superior de Justicia del Distrito Federal) approved a Lien
(referred to by the court as an “Embargo”), in favor of
DynaMéxico, upon Stock Certificates in the name of Goldgroup
Resources Inc. (“Goldgroup”). The Stock Certificates
subject to the Lien (“Embargo”) constitute Shares of
DynaMéxico (“the Goldgroup DynaMéxico
Shares”).
On
August 24, 2017 a Federal Amparo Judge (“Juzgado de
Distrito”) in the State of Vera Cruz, México, dismissed
Goldgroup Resources Inc’s Amparo Trial Challenge to the $48 M
USD damages award previously granted in favor of DynaMéxico.
Pursuant to the dismissal ruling, the $48M USD damages award,
previously granted to DynaMéxico by the Thirty-Sixth Civil
Court of the Superior Court of Justice of the Federal District of
México on October 5, 2015, was effectively
confirmed.
On May
27, 2019, The Eleventh Collegiate Court in Civil Matters of the
First Circuit (“México Circuit Court”, and the
Court of Final Appeal for Goldgroup Resources Inc.) issued a
written notice confirming it was ruling against the Amparo Appeal
filed by Goldgroup Resources Inc. and in Favor of DynaResource de
México, S.A. de C.V. In an effort to stay the issuance of the
Ruling by the México Circuit Court, Goldgroup Resources Inc.
filed a request to The Supreme Court of México to review the
Amparo Appeal decision.
On July
3, 2019 an Official Ruling from The Supreme Court of México
was issued to Reject the Request of Goldgroup Resources Inc. (the
“México Supreme Court Rejection to Goldgroup”).
The Justices of the First Chamber of the Supreme Court of Justice
of México issued a Rejection Notice to Goldgroup Resources
Inc., “due to the lack of legitimacy presented by
Goldgroup”; and in issuing the Rejection Notice to Goldgroup,
the Supreme court thereby reverted the Amparo Appeal back to the
México Circuit Court where the Official and Final Ruling from
the México Circuit Court is expected to be
issued.
On
December 6, 2019 the 11th Federal Circuit
Collegiate Court in México issued its Final Ruling (“the
DynaMéxico Final México Legal
Ruling”).
The
DynaMéxico Final México Legal Ruling is Favorable to
DynaMéxico, and denies the Amparo challenge of Goldgroup
Resources Inc., the subsidiary of Goldgroup Mining Inc.
(“GGA.TO”). The DynaMéxico Final México Legal
Ruling constitutes the Final Appeal of Goldgroup Resources Inc.;
and is Not subject to further appeal.
The
DynaMéxico Final Legal Ruling is the result and culmination of
7 years of legal action performed by DynaMéxico and is the
Final Ruling of the 11th Federal Circuit
Collegiate Court. With this DynaMéxico Final Legal Ruling
issued, all matters before the Court in México with respect to
DynaMéxico and Goldgroup Resources Inc. in México are
fully resolved and are no longer subject to appeal or
reconsideration.
Legal Summary - Consequence of the DynaMéxico Final
México Legal Ruling :
1.
The
$48,280,808.34 USD damages award (dated October 05, 2015) in favor
of DynaMéxico and against Goldgroup Resources Inc. is now
Final. Goldgroup Resources’ challenge(s) to that award have
been fully denied and the damages award is Final.
2.
The Lien against the Shares of DynaMéxico
owned by Goldgroup Resources Inc. (established October 5, 2016, the
“Lien against Goldgroup Shares”) is now fully
confirmed, Final, and enforceable.
3.
Ownership
of the shares of DynaMéxico held by Goldgroup Resources
(currently representing 20% of the outstanding shares of
DynaMéxico) are subject to the Lien against Goldgroup
Shares.
The
October 5, 2015 Resolution, The October 5, 2016 Embargo on the
Goldgroup Shares, The August 24, 2017 Denial of Goldgroup Amparo
Appeal, The May 27, 2019 Notice of Final Ruling, The July 3, 2019
México Supreme Court Rejection to Goldgroup, and the December
6, 2019 DynaMéxico Final México Legal Ruling, are
described in Part II, Item 1., Legal Proceedings.
Litigation
The
Company believes that no material adverse change will occur as a
result of the legal actions taken, and the Company further believes
that there is little to no potential for the assessment of a
material monetary judgment against the Company for legal actions it
has filed in México. Further, the Company believes there is no
legal basis for which to conduct arbitration proceedings. (See Item
3. Legal Proceedings. And, see Item 7. Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations).
NOTE 11 – DERIVATIVE LIABILITIES
Preferred Series C Stock
As
discussed in Note 8, the Company analyzed the embedded conversion
features of the Series C Preferred Stock and determined that the
stock qualified as a derivative liability and is required to be
bifurcated and accounted for as such since the host and the
embedded instrument are not clearly and closely related. The
Company performed a valuation of the conversion feature. In
performing the valuation, the Company applied the guidance in ASC
820, “Fair Value
Measurements”, to nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring
basis. ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). To measure fair value, the Company incorporates
assumptions that market participants would use in pricing the asset
or liability and utilizes market data to the maximum extent
possible.
In
instances where the determination of the fair value measurement is
based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or
liability.
The
Company considered the inputs in this valuation to be level 3 in
the fair value hierarchy under ASC 820 and used an equity
simulation model to determine the value of conversion feature of
the Series C Preferred Stock based on the assumptions
below:
|
2019
|
|
2018
|
Annual
volatility rate
|
144%
|
|
86%
|
Risk
free rate
|
1.58%
|
|
2.48%
|
Remaining
Term
|
0.5 years
|
|
1.5 years
|
Fair
Value of common stock
|
$0.47
|
|
$1.20
|
For the
year ended December 31, 2019, 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, 2019 and
2018:
|
|
|
Fair value of
derivative (stock), beginning of year
|
$402,909
|
$1,531,789
|
Change in fair
value of derivative
|
(365,871)
|
(1,128,880)
|
Fair value of
derivative on the date of issuance
|
-
|
-
|
Fair value of
derivative(stock), end of year
|
$37,038
|
$402,909
|
Preferred Series C Warrants
As
discussed in Note 8, the Company analyzed the embedded conversion
features of the Series C Preferred Stock and determined that the
Warrants qualified as a derivative liability and is required to be
bifurcated and accounted for as such since the host and the
embedded instrument are not clearly and closely related. The
Company performed a valuation of the conversion feature. In
performing the valuation, the Company applied the guidance in ASC
820, “Fair Value
Measurements”, to nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring
basis. ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). To measure fair value, the Company incorporates
assumptions that market participants would use in pricing the asset
or liability and utilizes market data to the maximum extent
possible.
In
instances where the determination of the fair value measurement is
based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or
liability.
The
Company considered the inputs in this valuation to be level 3 in
the fair value hierarchy under ASC 820 and used an equity
simulation model to determine the value of conversion feature of
the Warrants based on the assumptions below:
|
|
|
Annual volatility
rate
|
144%
|
86%
|
Risk free
rate
|
1.58%
|
2.48%
|
Remaining Term
|
0.5
|
1.5
|
Fair Value of
common stock
|
$0.47
|
$1.20
|
For the
year ended December 31, 2019, 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, 2019 and
2018:
Year
Ended
|
|
|
Fair value of
derivative (warrants), beginning of year
|
$571,774
|
$1,649,719
|
Change in fair
value of derivative
|
(522,708)
|
(1,077,945)
|
Fair value of
derivative on the date of issuance
|
—
|
—
|
Fair value of
derivative(warrants), end of year
|
$49,066
|
$571,774
|
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, 2019 and December 31, 2018,
respectively were as follows:
|
Year
Ended
December
31,
2019
|
Year
Ended
December
31,
2018
|
Beginning
balance
|
$(5,611,528)
|
$(5,425,026)
|
Operating
income (loss)
|
(62,511)
|
(383,630)
|
Share
of Other Comprehensive Income (loss)
|
(49,624)
|
197,128
|
Ending
balance
|
$(5,723,663)
|
$(5,611,528)
|
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, 2019, and December 31, 2018, 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, 2019 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
|
$86,104
|
-
|
-
|
86,104
|
Totals
|
$86,104
|
$-
|
$-
|
$86,104
|
Fair
Value Measurement at December 31, 2018 Using:
|
|
|
|
|
Assets:
|
|
|
|
|
None
|
-
|
-
|
-
|
-
|
Totals
|
$-
|
$-
|
$-
|
$-
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Liabilities
|
$974,683
|
-
|
-
|
974,683
|
Totals
|
$974,683
|
$-
|
$-
|
$974,683
|
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, 2019 and 2018, two and
one customers accounted for 100% of revenue,
respectively.
At
December 31, 2019 and 2018, two and one customer accounted for 100%
of accounts receivable, respectively.
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%
In February 2019 the Company entered into a financing agreement for
unpaid mining concession taxes for the year ended December 31, 2018
in the amount of $335,350. The Company paid an initial 20% payment
of $67,070 and financed the balance over 36 months at an interest
rate of 21%.
In October 2019 the Company entered into a financing agreement for
unpaid mining concession taxes in the amount of $299,474. The
Company paid an initial 20% payment of $59,895 and financed the
balance over 36 months at an interest rate of 22%.
The
following is a summary of the transaction during the years ended
December 31, 2019 and 2018:
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
|
|
|
Exchange
Rate Adjustment
|
73,314
|
Property
Holding Taxes – July 1, 2018 – Dec 31, 2018 & Core
Concessions
|
634,824
|
Initial
payment of 20%
|
(126,965)
|
2019
principal payments
|
(111,977)
|
Balance
at December 31, 2019
|
$2,272,431
|
At
December 31, 2019 future maturities of notes payable are as follows
Year Ending December 31:
|
|
2020
|
$1,637,509
|
2021
|
532,069
|
2022
|
102,853
|
Total
|
$2,272,432
|
NOTE 16 – SUBSEQUENT EVENTS
The Company has evaluated events from December 31, 2019, through
the date whereupon the financial statements were issued, and has
determined the below described events subsequent to the end of the
period.
DynaMéxico Foreclosure and Recovery of All Remaining Shares of
Goldgroup Resources
On
February 20, 2020, a México City court issued its Final
Judgment, effectively foreclosing on all of the remaining shares in
DynaMéxico held by Goldgroup Resources Inc. and awarding the
shares to DynaMéxico (the “DynaMéxico Foreclosure
Judgment”).
The
DynaMéxico Foreclosure Judgment awarded to DynaMéxico
100% of the Shares of DynaMéxico previously owned by Goldgroup
Resources Inc. (a Subsidiary Company in México owned 100% by
Goldgroup Mining Inc., Vancouver, BC., “GGA.TO”). Prior
to the DynaMéxico Foreclosure Judgment, Goldgroup Resources
Inc. owned shares of DynaMéxico constituting 20% of the total
outstanding shares of DynaMéxico (the “Goldgroup Shares
of DynaMéxico”). The Goldgroup Shares of DynaMéxico
were held under Lien by DynaMéxico since October 2016. DynaUSA
previously owned 80% of the outstanding shares of
DynaMéxico.
Previously, On December 20, 2019 DynaMéxico and DynaUSA
announced that the 11th
Federal Circuit Collegiate Court in México issued its Final
Ruling on Friday, December 6, 2019; which Ruled in Finality that
Goldgroup Resources Inc.’s Amparo challenge was denied
(“the DynaMéxico Final Legal Ruling”). The
DynaMéxico Foreclosure Judgment, and, the DynaMéxico
Final Legal Ruling are not subject to further appeal.
The
DynaMéxico Foreclosure Judgment, and The DynaMéxico Final
Legal Ruling are the Final Legal results and culmination of 7 years
of legal action performed by DynaMéxico. With the
DynaMéxico Foreclosure Judgment, and the DynaMéxico Final
Legal Ruling, all matters before the Court in México with
respect to DynaMéxico and Goldgroup Resources Inc. are fully
resolved and are no longer subject to appeal or
reconsideration.
Summary of the DynaMéxico Foreclosure Judgment and the
DynaMéxico Final México Legal Ruling:
1.
Goldgroup
Resources Inc. retains No Shares of DynaMéxico;
2.
Goldgroup
Resources Inc. retains No Shareholder Rights in
DynaMéxico;
3.
Goldgroup
Resources Inc. owes $48,280,808.34 USD in damages awarded to
DynaMéxico;
4.
DynaMéxico
owns 100% of the San Jose de Gracía Project.
United States District Court Denial of DynaUSA and DynaMéxico
Motion to Alter or Amend Judgment
On
March 25, 2020, the United States District Court for the District
of Colorado denied the motion to alter or amend its judgment
(confirming the August 2016 arbitration award), and denied DynaUSA
and DynaMéxico’s motions for stay and judgment pending
appeal and to waive or reduce supersedeas bond.
Previously, on
February 13, 2018, United States Magistrate Judge Kathleen M.
Tafoya issued a thoughtful and well-reasoned formal
Recommendation.
o
In the formal
Recommendation, Magistrate Judge Tafoya had recommended that the
district court rule in favor of DynaResource and DynaResource de
México, and the Recommendation requested the court to vacate
the arbitration award.
On
April 10, 2020, DynaUSA and DynaMéxico appealed the March 25,
2020 ruling to the Tenth Circuit Court of Appeals.
On
April 28, 2020 DynaUSA and DynaMéxico agreed to a forbearance
agreement with Goldgroup Resources Inc. (“Goldgroup”).
According to the forbearance agreement, DynaUSA, DynaMéxico,
and Goldgroup have agreed to stay current litigation matters, and
to attend mediation proceedings in Dallas, Texas on May 18, 2020,
or such other date as may be subsequently agreed, in front of
mediator Mr. Chris Nolland.
Mediation Agreement with Goldgroup
On May
18, 2020 DynaUSA and DynaMexico reached the following agreement in
Mediation with Goldgroup:
The
parties agree that they have not reached a binding agreement, but
they will work in good faith to prepare a final settlement
agreement and release and related documents. The high-level
agreement in principle is that DynaResource will pay Goldgroup a 2%
NSR for the life of the San Jose de Gracía mine. This
agreement in principle is based on certain information presented
during the mediation, as to which Goldgroup will be given the
opportunity to conduct some independent and reasonable due
diligence. All lawsuits, judgments, claims and disputes
between the parties will be dismissed and released. This will
become a binding agreement only upon execution of formal settlement
documents. The parties’ “gentlemen’s
agreement” concerning standstill of litigation proceedings
will remain in effect pending execution of the formal
agreement.
Mercuria Energy Trading, S.A. – Failure to
Perform
On
April 13, 2020, Mineras de DynaResource S.A. de C.V.
(“DynaMineras”) filed a response to Mercuria Energy
Trading, S.A., claiming that Mercuria failed to perform numerous
promises made to advance funds to DynaMineras in the amount of
$1.5M USD.; and further challenging amounts payable by Mineras
claimed by Mercuria.
DynaResource, Inc. (“DynaUSA”) Closes $3.9M Convertible
Promissory Note Financing and Related Events
On May
14, 2020, DynaUSA (the “Company”) closed a financing
agreement with Golden Post Rail, LLC, a Texas limited liability
company and certain individual investors. A summary of the
transaction is set forth below:
1.
Pursuant to the May
14, 2020 Note Purchase Agreement (the “NPA”) among the
Company, Golden Post Rail, LLC (the “Lead Purchaser”),
and the other parties listed on Exhibit A thereto (the
“Remaining Purchasers”):
o
Golden Post acquired the following
securities:
(a)
A
convertible promissory note (the “Golden Post Note”)
payable to Golden Post in the principal amount of $2,500,000,
bearing interest at 10%, and maturing two years from the date of
execution. One half of the principal amount of Golden Post Note, or
$1,250,000, has been fully funded in accordance with an agreed-upon
draw summary and budget. The balance of the principal amount will
also be funded in accordance with agreed-upon draw summaries and
the budget. The Golden Post Note is convertible, at the option of
Golden Post, into shares of Series D Senior Convertible Preferred
Stock (the “Series D Preferred”) at a conversion price
of $2.00 per share; and
(b)
A
common stock purchase warrant (the “2020 Warrant”) for
the purchase of 783,976 shares of the Company’s common stock,
at an exercise price of $0.01 per share, and maturing on the
10-year anniversary of the date of issuance. The 2020 Warrant
contains anti-dilution provisions; and
o
The Remaining Purchasers acquired the
following securities:
a)
Convertible
promissory notes (the “Remaining Notes”) in the
aggregate principal amount of $1,400,000, bearing interest at 10%,
and maturing two years from the date of issuance. The Remaining
Notes have been fully funded. The Remaining Notes are convertible,
at the option of each individual Remaining Purchaser, into shares
of Series D Preferred at a conversion price of $2.00 per share;
and
b)
Common
stock purchase warrants (the “Remaining Purchasers
Warrants”) for the purchase of an aggregate of 439,026 shares
of the Company’s common stock, at an exercise price of $0.01
per share, and maturing on the 10-year anniversary of the date of
issuance. The Remaining Purchasers Warrants contain anti-dilution
provisions.
2.
Also
pursuant to the NPA, the Company and the Lead Purchaser have agreed
to amend the common stock purchase warrant dated June 30, 2015 (the
“2015 Warrant”), issued to the Lead Purchaser in
connection with that certain Securities Purchase Agreement dated as
of May 6, 2015. The 2015 Warrant contemplates the purchase, upon
exercise, of 2,166,527 shares (subject to adjustment) of the
Company’s common stock and matures June 30, 2020 (the
“Termination Date”). The amendment to the 2015 Warrant
provides that, if not exercised in full by the Termination Date,
the Company will issue to the Lead Purchaser a new warrant (the
“New Warrant”), substantially in the same form of the
2015 Warrant, for the number of shares of the Company’s
common stock that went unexercised on the Termination Date. The New
Warrant would have a maturity date of June 30, 2022.
As part
of the transaction contemplated by the NPA, the Company executed an
Amended and Restated Registration Rights Agreement pursuant to
which Golden Post may require the Company to register the shares of
common stock which may be issued upon (i) the conversion of the
Series C Senior Convertible Preferred Stock (“Series C
Preferred”), (ii) the conversion of the Series D Preferred,
and (iii) the shares of common stock issuable upon the exercise of
the 2015 Warrant, the 2020 Warrant, the New Warrant, and a
compensatory warrant issued to the Lead Purchaser on May 13, 2020
(described below under the heading “Compensatory
Issuances”), including any additional shares of common stock
issuable pursuant to anti-dilution provisions of such
securities.
Pursuant to the
transaction contemplated by the NPA, the Company has agreed to call
a special meeting of Company stockholders, to be held not later
than July 14, 2020, to solicit stockholder approval of (a) an
amendment of the Company’s certificate of incorporation to
increase the number of authorized shares of common stock from
25,000,000 shares to 40,000,000 shares, and (b) an amendment of the
Certificate of Designations of the Series C Preferred, in order to
(a) extend the maturity date of the Series C Preferred by an
additional two (2) years, (ii) add an equity cap in respect of the
conversion of Series C Preferred into common stock of the Company,
and (iii) add certain restrictions on the ability of the Company to
issue Series C Preferred.
Compensatory Issuances. On May 13, 2020, one business day
prior to the NPA, the Company issued to the Lead Purchaser the
following: (i) a common stock purchase warrant for 2,306 shares, at
an exercise price of $0.01 per share, and maturing on the 7-year
anniversary of the date of issuance (the “Compensatory
Warrant”); and (ii) 1,845 shares of Series C Preferred. These
issuances were occasioned by the Company’s obligations under
the Securities Purchase Agreement dated as of May 6,
2015.
In
order to accommodate the issuance of the additional 1,845 shares of
Series C Preferred, on May 13, 2020 the Company filed with the
Secretary of State of Delaware a Certificate of Increase of Series
C Senior Convertible Preferred Stock, to increase the number of
shares of preferred stock designated as Series C Preferred from
1,733,221 shares to 1,734,992 shares (“Certificate of
Increase”).
Also on
May 13, 2020, the Company filed with the Secretary of State of
Delaware a Certificate of Designations of the Powers, Preferences
and Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions
thereof of Series D Senior Convertible Preferred Stock,
contemplating the authorization of 3,000,000 shares of Series D
Preferred (“Certificate of Designation”).
The
sale of the Golden Post Note, the Remaining Purchasers Notes, the
2020 Warrant, the Remaining Purchasers Warrants, the Compensatory
Warrant, and the Series C Preferred was made pursuant to a
privately negotiated transaction that did not involve a public
offering of securities and, accordingly, the Company believes that
the transaction was exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof. Each investor
represented that it (A) is an “accredited investor” and
(B) has such knowledge and experience in financial and business
matters that the investor is capable of evaluating the merits and
risks of acquiring the securities acquired by such investor.
All of the foregoing securities are
deemed restricted securities for purposes of the Securities
Act.
Coronavirus Pandemic
In March 2020, the World Health Organization declared the outbreak
of a novel coronavirus (COVID-19) as a pandemic, which continues to
spread
throughout the United States of America. Efforts implemented by
local and national governments, as well as businesses, including
temporary closures,
are expected to have adverse impacts on local, national and the
global economies. Although the disruption is currently expected to
be temporary, there
is uncertainty around the duration and the related economic impact.
Therefore, while we expect this matter to have an impact our
business, the impact
to our results of operations and financial position cannot be
reasonably estimated at this time.