NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022 AND 2021
NOTE 1 - NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Activities, History and Organization
DynaResource, Inc. (the “Company” or “DynaResource”) 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 9,920 hectares (24,513 acres) on the west side of the Sierra Madre mountain range. The Company currently owns 100% of the outstanding capital of DynaMéxico. A 20% minority interest in Dyna México was held by Goldgroup Resources Inc., a wholly owned subsidiary of Goldgroup Mining Inc. Vancouver BC (“Goldgroup”) until February 24, 2020.
In 2005, the Company formed DynaResource Operaciones de San José De Gracia S.A. de C.V. (“DynaOperaciones”) and acquired control of Mineras de DynaResource, S.A. de C.V. (formerly Minera Finesterre S.A. de C.V., “DynaMineras”). The Company owns 100% of DynaMineras.
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 reporting standard widely recognized in the mining industry.
Significant Accounting Policies
The Company’s management selects accounting principles generally accepted in the United States of America and adopts methods for their application. The application of accounting principles requires the estimating, matching and timing of revenues and expenses. 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 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 unaudited consolidated financial statements on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States.
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of DynaResource, Inc., as well as DynaResource de México, S.A. de C.V. (100% 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.
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. As of June 30, 2022 the Company had $19,076,828 of deposits in U.S. Banks in excess of the FDIC limit. Management does not believe that the Company is at risk of loss on cash.
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 June 30, 2022, and December 31, 2021, respectively, no allowance has been deemed necessary.
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 June 30, 2022, and December 31, 2021 are $7,039,194 and $4,742,180, respectively.
Inventory
Inventories are carried at the lower of cost or net realizable value and consist of mined tonnage, gravity and flotation concentrates, and gravity tailings or flotation feed material. The inventories are $2,853,937 and $2,110,203 as of June 30, 2022, and December 31, 2021, respectively.
Exploration Stage Issuer (No Reserves Disclosed)
The definitions of Measured Mineral Resource, Mineral Reserve and Mineral Resource are set forth in SEC Regulation S-K, Item 1300 (“Reg. S-K, Item 1300”).
Measured mineral resource is that part of a mineral resource for which quantity and grade or quality are estimated on the basis of conclusive geological evidence and sampling. The level of geological certainty associated with a measured mineral resource is sufficient to allow a qualified person to apply modifying factors in sufficient detail to support detailed mine planning and final evaluation of the economic viability of the deposit. Because a measured mineral resource has a higher level of confidence than the level of confidence of either an indicated mineral resource or an inferred mineral resource, a measured mineral resource may be converted to a proven mineral reserve or to a probable mineral reserve.
Mineral reserve is an estimate of tonnage and grade or quality of indicated and measured mineral resources that, in the opinion of the qualified person, can be the basis of an economically viable project. More specifically, it is the economically mineable part of a measured or indicated mineral resource, which includes diluting materials and allowances for losses that may occur when the material is mined or extracted.
Mineral resource is a concentration or occurrence of material of economic interest in or on the Earth’s crust in such form, grade or quality, and quantity that there are reasonable prospects for economic extraction. A mineral resource is a reasonable estimate of mineralization, taking into account relevant factors such as cut-off grade, likely mining dimensions, location or continuity, that, with the assumed and justifiable technical and economic conditions, is likely to, in whole or in part, become economically extractable. It is not merely an inventory of all mineralization drilled or sampled.
As of June 30, 2022, the Company fits the definition of an exploration stage issuer which is defined as an issuer that has no material property with mineral reserves disclosed. An exploration stage property is a property that has no mineral reserves disclosed.
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 Reg. S-K, Item 1300) 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, the design, construction and development costs are not capitalized at any of the Company’s properties, and accordingly, substantially all such costs are expensed as incurred, resulting in the Company reporting higher operating costs than if such expenditures had been capitalized. Additionally, the Company does not have a corresponding depreciation or amortization of these costs going forward since such costs 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 Property Interests
Mineral property interests include acquired interests in development and exploration stage properties, and 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 José de Gracia Property, capitalized costs and mineral property interests are amortized using the straight-line method once production begins. As of June 30, 2022, 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 9,920 hectares at the San José de Gracia property, 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, and silver, 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 June 30, 2022, and December 31, 2021, 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 expensed 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 unaudited 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 unaudited financial statements for the subsidiaries are as follows for the periods ended June 30, 2022, and December 31, 2021 (Mexican Pesos per one U.S. dollar):
| | June 30, 2022 | | | Dec 31, 2021 | |
Exchange Rate at Period End Pesos | | | 20.07 | | | | 20.48 | |
Relevant exchange rates used in the preparation of the income statement portion of unaudited financial statements for the subsidiaries are as follows for the periods ended June 30, 2022, and June 20, 2021 (Mexican Pesos per one U.S. dollar):
| | June 30, 2022 | | | June 30, 2021 | |
Weighted Average Exchange Rate for the Six Months Ended Pesos | | | 20.27 | | | | 20.19 | |
The Company recorded currency transaction gains (losses) of $37,790 and $136,281 for the six months ended June 30, 2022 and 2021, respectively.
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 is taxed is accordance with applicable Mexican tax law rates.
Use of Estimates
In order to prepare unaudited consolidated 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 unaudited consolidated financial statements and determines whether contingent assets and liabilities, if any, are disclosed in the unaudited consolidated 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 follows ASC 606 “Revenue from contracts with customers”. The Company generates revenue by selling gold and silver produced 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 (upon such delivery) 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 fluctuation (if any) between the estimated quantities of precious metals base on the initial assay and the actual recovery from treatment and processing.
As of June 30, 2022, there are $8,750,000 in customer deposit liabilities for payments received in advance, all of which are expected to be settled in 2022.
During the six months ended June 30, 2022, and the year ended December 31, 2021, there was $9,250,000 and $1,500,000 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 due to order cancellation.
We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the goods.
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 or where the average stock price was below the exercise price of the respective potentially dilutive common share, as their effect would be considered anti-dilutive.
The Company had warrants outstanding at June 30, 2022 which upon exercise, would result in the issuance of 892,165 shares of common stock. The warrants were exercisable at $.01 per share. The Company also had convertible debt instruments as of June 30, 2022 which, upon conversion at valuations of $2.50 per share, would result in the issuance of 217,312 shares of common stock.
The Company had warrants outstanding at December 31, 2021 which upon exercise, would result in the issuance of 3,060,998 shares of common stock. Of these warrants, 2,168,833 were exercisable at $2.04 per share and 892,615 were exercisable at $.01 per share. The Company also had convertible debt instruments as of December 31, 2021 which, upon conversion at valuations of $2.50 per share, would result in the issuance of 217,312 shares of common stock.
| | Six Months Ended June 30, 2022 | | | Six Months Ended June 30, 2021 | |
Net income (loss) attributable to common shareholders | | $ | 5,466,673 | | | $ | 4,665,704 | |
| | | | | | | | |
Weighted average number of common shares outstanding, Basic | | | 18,135,305 | | | | 17,722,825 | |
| | | | | | | | |
Diluted weighted average number of common shares outstanding, | | | 19,027,470 | | | | 18,945,827 | |
| | | | | | | | |
Basic earnings (loss) per share | | $ | 0.30 | | | $ | 0.26 | |
| | | | | | | | |
Diluted earnings (loss) per share | | $ | 0.30 | | | $ | 0.25 | |
At June 30, 2022, 217,312 shares of potentially dilutive common stock related to convertible debt were excluded from the diluted earnings per share calculation because the exercise and conversion prices exceeded the average stock price and therefore their effect would be anti-dilutive.
At June 30, 2021, 2,168,833 shares of potentially dilutive common stock related to outstanding stock warrants and 2,227,312 shares of potentially dilutive common stock related to convertible debt were excluded from the diluted earnings per share calculation because the exercise and conversion prices exceeded the average stock price and therefore their effect would be anti-dilutive. In addition, at June 30, 2021, 1,260,633 of potentially dilutive common stock related to outstanding warrants were excluded from the diluted earnings per share calculation because the ratio of expenses related to the shares to issuable shares exceeded the basic earnings per share and therefore their effect would be anti-dilutive.
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 is also a related party if it 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.
NOTE 2 - INVENTORIES
Inventories are carried at the lower of cost or fair value and consist of mined tonnage, gravity-flotation concentrates, and gravity tailings (or flotation feed material). Inventory balances of June 30, 2022, and December 31, 2021, respectively, were as follows:
| | 2022 | | | 2021 | |
Mined Tonnage | | $ | 2,743,912 | | | $ | 2,042,633 | |
Gold-Silver Concentrates | | | 110,025 | | | | 67,570 | |
Total Inventories | | $ | 2,853,937 | | | $ | 2,110,203 | |
NOTE 3 - PROPERTY
Property consists of the following at June 30, 2022 and December 31, 2021:
| | 2022 | | | 2021 | |
Leasehold improvements | | $ | 9,340 | | | $ | 9,340 | |
Office equipment | | | 31,012 | | | | 31,012 | |
Office furniture and fixtures | | | 78,802 | | | | 78,802 | |
Sub-total | | | 119,154 | | | | 119,154 | |
Less: Accumulated depreciation | | | (118,050 | ) | | | (116,425 | ) |
Total Property | | $ | 1,104 | | | $ | 2,729 | |
Depreciation and amortization has been provided over each asset’s estimated useful life. Depreciation and amortization expense was $1,625 and $1,625 for the six months ended June 30, 2022 and 2021, respectively.
NOTE 4 - MINING CONCESSIONS
Mining properties consist of the San José de Gracia concessions. Mining Concessions were $4,132,678 and $4,132,678 at June 20, 2022 and December 31, 2021, respectively. There was no depletion expense during the six months ended June 30, 2022 and 2021.
NOTE 5 - 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 (the “Series I Notes”), of which $340,000 was then converted to preferred shares within the same year, netting proceeds of $1,155,000. 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.
Each Series I Note holder retained the option, at any time prior to maturity or prepayment, to convert any unpaid principal and accrued interest into Common Stock at $2.50 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.
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 notes of $681,152 until December 31, 2020.
On March 31, 2020, the Company entered into agreements to extend the seven outstanding notes totaling $681,152 plus accrued interest totaling $21,286 for a new total of $702,438 until June 30, 2022. At December 31, 2020 one note for $246,533 was paid off leaving six Series I Notes remaining outstanding with a total balance of $455,905.
As of June 30, 2022 and December 31, 2021, six Series I Notes remained outstanding with a total balance of $455,905. The Series I Notes were paid off in July 2022.
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.
Each Series II 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 $2.50 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 the conversion date.
The Series II Notes originally matured on December 31, 2015. 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 was past due as of December 31, 2019. At December 31, 2019 three Series II Notes remained outstanding for $197,226.
On March 31, 2020, the Company entered into agreements to extend the two notes totaling $84,726 plus accrued interest of $2,648 for total new notes of $87,374 to June 30, 2022. One note for $112,500 was not extended and was paid off in May 2020. At December 31, 2020, two Series II Notes remained outstanding for $87,374.
As of June 30, 2022 and December 31, 2021, two Series II Notes remained outstanding with a balance of $87,374. The Series II Notes were paid off in July 2022.
NOTE 6 - 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 Company’s effective tax rate for the period ended June 30, 2022 and for the period ended June 30, 2021 varies from the statutory rate of 21% due to a valuation allowance which creates a near zero effective tax rate. The Company intends to continue maintaining a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the valuation allowance. However, given our current earnings and anticipated future earnings, it is reasonably possible that in the near future sufficient positive evidence may become available to support the conclusion that no valuation allowance is necessary.
NOTE 7- STOCKHOLDERS’ EQUITY
The total number of shares of all classes of capital stock which the corporation has the authority to issue is 60,001,000 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 1,000 shares are designated as Series A Preferred Stock, 1,734,992 are designated as Series C Preferred Stock, and 3,000,000 shares are designated as Series D Preferred Stock and (ii) forty million (40,000,000) shares of Common Stock, par value $0.01 per share (“Common Stock”). As of June 30, 2022, 15,265,008 shares of Preferred Stock remain undesignated.
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, June 30, 2022 and December 31, 2021, there were 1,000 shares of Series A Preferred Stock outstanding.
Series C Senior Convertible Preferred Stock
At June 30, 2022 and December 31, 2021 there were 1,734,992 and 1,734,992 Series C Preferred shares outstanding. As of June 30, 2022, these Series C Preferred Shares are convertible to common shares at $2.04 per share or redeemable in cash at the shareholder’s option, and include anti-dilution protection. The Series C Preferred Shares may receive a 4% per annum dividend, payable if available, and in arrears. The dividend is calculated at 4.0% of $4,337,480 payable annually on June 30. At June 30, 2022, dividends for the years 2016 to 2021 totaling $1,053,777 were in arrears.
Due to the nature of the Series C Preferred Shares as mandatorily redeemable, the Series C Preferred Shares are classified as “temporary equity” on the balance sheet.
Series D Senior Convertible Preferred Stock
Financing Agreement with Golden Post Rail, LLC, a Texas Limited Liability Company, and with Shareholders of DynaResource, Inc.
On May 14, 2020, the Company closed an additional financing agreement with Golden Post, and with certain individual shareholders, and related agreements. A summary of the transactions and related agreements 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”): |
| · | 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. 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. |
| · | 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 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 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 matured June 30, 2020 (the “Termination Date”). The amendment to the 2015 Warrant provides that, following the expiration of the 2015 Warrant, the Company will issue to the Lead Purchaser a new warrant (the “New Warrant”), substantially in the same form of the 2015 Warrant, representing the right to purchase the number of shares of the Company’s common stock that were still subject to purchase upon exercise of the 2015 Warrant, if any. The New Warrant has a maturity date of June 30, 2022. |
| 3. | 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 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, 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. |
| | |
| 4. | Pursuant to the transaction contemplated by the NPA, the Company held a special meeting of Company stockholders, 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. The special meeting was held on July 13, 2020, and Company stockholders approved each item referenced above. |
| 5. | 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) 1,771 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. |
| | |
| 6. | In order to accommodate the issuance of the additional 1,771 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. |
| | |
| 7 | 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. |
On October 11, 2021. the Company filed an amended designation of Series D Preferred with the State of Delaware.
Retirement of Convertible Debt
On October 7, 2021, the Company paid $2,500,000 to repurchase one note that was convertible into Series D Preferred.
The remaining ten noteholders of notes convertible into Series D Preferred elected to convert their notes totaling $1,520,000 into Series D Preferred at $2.00 per share. On October 18, 2021, the Company issued 760,000 shares of Series D Preferred for these notes.
In addition, the redemption of the notes trigged an acceleration of the amortization of the original loan discount booked at the issuance of the notes (see discussion below), which discount (in the amount of $287,508 in October 2021) was being amortized over the 24 month life of the notes.
All Series D noteholders agreed to waive the non-dilution rights contained in their original notes.
At June 30, 2022 and December 31, 2021, there were 760,000 and 760,000 Series D Preferred shares outstanding, respectively. The Series D Preferred shares are convertible to common shares at $2.00 per share, through October 18, 2026. The Series D Preferred Shares are entitled to receive a 4% per annum dividend, payable when declared by the Board of Directors. At June 30, 2022, no dividends had been declared by the Board.
Due to the nature of the Series D Preferred as mandatorily redeemable by the Company at the election of the Series D Preferred stock holder at any time following maturity, the Series D Preferred shares are classified as “temporary equity” on the balance sheet.
Due to the anti-dilutive provisions contained in the May 6, 2015, Securities Purchase Agreement, the Series C Preferred and the 2015 Warrant, the Company incurred derivative liabilities upon issuance of these securities. On May 14, 2020, in connection with the Series D Convertible Note financing, the expiration dates for the Series C Preferred and the 2015 Warrant were extended to June 30, 2022. In addition, a new derivative liability was incurred due to the issuance of additional warrants. At December 31, 2021, the total derivative liability was $3,898,914, which included $1,019,431 for the Series C Preferred, $1,320,380 in connection with the 2015 Warrant, and $1,559,103 in connection with the additional warrants. As of June 30, 2022, only the additional warrants derivative liability remained, for a total derivative liability of $1,735,633. The 2015 Warrant was exercised on June 28, 2022 at an above market price, resulting in no derivative liability. The Series C Preferred shares are convertible at an above market price or redeemable by the holder on demand. The accrued dividends on the Series C Preferred for the six months ending June 30, 2022, and June 30, 2021, were $117,160 and $86,750, respectively. As the Company has not declared these dividends, it is required only as an item “below” the net income (loss) amount on the accompanying consolidated statements of income (loss).
Preferred Stock (Undesignated)
In addition to the 1,000 shares designated as Series A Preferred Stock and the 1,734,992 shares designated as Series C Preferred Shares and the 3,000,000 shares designated as Series D Preferred, the Company is authorized to issue an additional 15,265,008 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 June 30, 2022 and December 31, 2021, there were no other shares of Preferred Stock outstanding.
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 a particular 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 40,000,000 common shares at a par value of $0.01 per share. These shares have full voting rights. At June 30, 2022 and December 31, 2021, there were 20,746,654 and 18,091,293 shares outstanding, respectively. No dividends were paid for the periods ended June 30, 2022 and 2021, respectively.
Preferred Rights
The Company issued “Preferred Rights” for the rights to percentages of revenues generated from the San José de Gracia Pilot Production Plant and received $784,500 for these rights. The “Preferred Rights” are reflected in stockholders’ equity. As of June 30, 2022, $744,500 had been repaid, leaving a current balance of $40,000 and $40,000 as of June 30, 2022 and December 31, 2021, respectively.
Stock Issuances
On June 28, 2022, the Company issued 2,655,361 shares of common stock upon the exercise of a warrant to purchase 2,655,361 shares, by one warrant holder for $2.04 a share.
On October 18, 2021, the Company issued 368,468 shares of common stock upon the exercise of warrants to purchase 368,468 shares, by five warrant holders for $.01 a share.
Treasury Stock
During the six months ended June 30, 2022 no shares of common stock held in treasury (treasury stock) were issued.
During the year ending December 31, 2021, 504,300 treasury shares were issued, in consideration of services provided to the Company.
Outstanding treasury shares total 12,180 and 12,180 at June 30, 2022 and December 31, 2021, respectively.
Warrants
2022 activity
At June 30, 2022, the Company had outstanding warrants to purchase 892,165 shares of common stock. On June 28, 2022 one warrant holder exercised a warrant to purchase a total of 2,655,361 shares of common stock for $2.04 a share.
2021 activity
At December 31, 2021, the Company had outstanding warrants to purchase 3,060,998 shares of common stock. On October 18, 2021, five warrant holders exercised warrants to purchase 368,468 shares of common stock for $0.01 a share.
| | Number of Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | | | Intrinsic Value | |
Balance at December 31, 2020 | | | 3,429,466 | | | $ | 1.30 | | | | 4.40 | | | | - | |
Granted | | | - | | | $ | - | | | | - | | | | - | |
Exercised | | | 368,468 | | | $ | 0.01 | | | | - | | | | - | |
Forfeited | | | - | | | $ | - | | | | - | | | | - | |
Balance at December 31, 2021 | | | 3,060,998 | | | $ | 1.46 | | | | 2.79 | | | | - | |
Granted | | | - | | | $ | - | | | | - | | | | - | |
Exercised | | | 2,166,775 | | | $ | 2.04 | | | | - | | | | - | |
Forfeited | | | 2,058 | | | $ | 2.04 | | | | - | | | | - | |
Balance at June 30, 2022 | | | 892,165 | | | $ | 0.01 | | | | 7.88 | | | | - | |
Exercisable at June 30, 2022 | | | 892,165 | | | $ | 0.01 | | | | 7.88 | | | | - | |
NOTE 8 - RELATED PARTY TRANSACTIONS
Dynacap Group Ltd.
The Company paid $87,500 and $33,750 to Dynacap Group, Ltd. (an entity controlled by the CEO of the Company) for consulting and other fees during the periods ended June 30, 2022, and 2021, respectively.
NOTE 9 - 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 annual 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 Actof México and its Regulations (Ley Minera y su Reglamento), DynaMineras maintains access and surface rights to the SJG Project pursuant to a 20-year Land Lease Agreement with the Santa Maria Ejido Community, the owners of the surface rights. The Land Lease Agreement was dated January 6, 2014 and continues through January 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, in the amount of $1,359,443 pesos adjusted for inflation based on the Mexico minimum wage increase. Rent was $3,015,112 Pesos (approx. $149,000 USD) for the year ended December 31, 2021. 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.
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 January 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 June 30, 2022, the Company has two operating leases: a six and one-half year lease for office space with a remaining term of seven months, and a twenty-year ground lease in association with its México mining operations with a remaining term of thirteen 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:
| | Period Ended | |
| | June 30, 2022 | |
Operating Lease - Office Lease | | $ | 43,645 | |
Operating Lease - Ground Lease | | | 45,567 | |
Short Term Lease Costs | | | 7,544 | |
Variable Lease Costs | | | - | |
TOTAL | | $ | 96,756 | |
| | | | |
Weighted average remaining lease term and weighted average discount rate are as follows: | | | | |
| | | | |
Weighted Average Remaining Lease Term (Years) - Operating Leases | | | 10.12 | |
Weighted Average Discount Rate - Operating Leases | | | 12.50 | % |
| | | | |
Estimated future minimum lease obligations are as follow for the years ending June 30: | | | | |
| | | | |
YEAR | | | | |
2022 | | $ | 143,156 | |
2023 | | | 94,074 | |
2024 | | | 96,896 | |
2025 | | | 99,803 | |
2026 | | | 102,797 | |
Thereafter | | | 684,885 | |
Total | | $ | 1,221,611 | |
Less Imputed Interest | | | (591,453 | ) |
OPERATING LEASE PAYABLE | | $ | 630,158 | |
NOTE 10 - DERIVATIVE LIABILITIES
Series C Preferred Stock
As discussed in Note 7, 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:
| | 2022 | | | 2021 | |
Annual volatility rate | | | 0 | % | | | 147 | % |
Risk free rate | | | 2.92 | % | | | 0.73 | % |
Remaining Term | | 0.00 years | | | 0.50 years | |
Fair Value of common stock | | $ | 1.95 | | | $ | 1.75 | |
For the six and twelve months ended June 30, 2022 and December 31, 2021, 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 six and twelve months ended June 30, 2022 and December 31, 2021.
Period Ended | | 2022 | | | 2021 | |
Fair value of derivative (stock), beginning of period | | $ | 1,019,431 | | | $ | 601,313 | |
Change in fair value of derivative | | | (1,019,431 | ) | | | 418,118 | |
Fair value of derivative on the date of issuance | | | - | | | | - | |
Fair value of derivative (stock), end of period | | $ | - | | | $ | 1,019,431 | |
2015 Warrant
As discussed in Note 7, the Company analyzed the embedded conversion features of the Series C Preferred Stock and determined that the 2015 Warrant (acquired at the same time as the Series C Preferred 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 2015 Warrant based on the assumptions below:
| | 2022 | | | 2021 | |
Annual volatility rate | | | 0 | % | | | 147 | % |
Risk free rate | | | 2.92 | % | | | 0.73 | % |
Remaining Term | | 0.00 years | | | 0.50 years | |
Fair Value of common stock | | $ | 1.95 | | | $ | 1.75 | |
For the six and twelve months ended June 30, 2022, and December 31, 2021, 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 periods ended June 30, 2022, and December 31, 2021.
Period Ended | | 2022 | | | 2021 | |
Fair value of derivative (warrant), beginning of period | | $ | 1,320,380 | | | $ | 817,613 | |
Change in fair value of derivative | | | (1,320,380 | ) | | | 502,767 | |
Fair value of derivative on the date of issuance | | | - | | | | - | |
Fair value of derivative (warrant), end of period | | $ | - | | | $ | 1,320,380 | |
Warrants issued with the Notes convertible into Series D Preferred
As discussed in Note 7, the Company analyzed the conversion features of the promissory notes convertible into Series D Preferred and determined that the Warrants issued with such notes qualified as a derivative liability. The fair value was required to be allocated among the notes, the notes’ conversion features, and the warrants, and then remeasured at each reporting date. 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 issued with the notes convertible into Series D Preferred based on the assumptions below:
| | 2022 | | | 2021 | |
Annual volatility rate | | | 121 | % | | | 147 | % |
Risk free rate | | | 2.92 | % | | | 0.73 | % |
Remaining Term | | 7.88 years | | | 8.37 years | |
Fair Value of common stock | | $ | 1.95 | | | $ | 1.75 | |
For the six and twelve months ended June 30, 2022 and December 31, 2021, 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 six and twelve months ended June 30, 2022 and December 31, 2021.
Period Ended | | 2022 | | | 2021 | |
Fair value of derivative (warrants), beginning of period | | $ | 1,559,103 | | | $ | 952,634 | |
Fair value of derivative on the date of issuance | | | - | | | | - | |
Exercise of warrants | | | - | | | | (659,558 | ) |
Change in fair value of derivative | | | 176,530 | | | | 1,266,027 | |
Fair value of derivative (warrants), end of period | | $ | 1,735,633 | | | $ | 1,559,103 | |
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The ASC guidance for fair value measurements and disclosure establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 Inputs - Quoted prices for identical instruments in active markets.
Level 2 Inputs - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs - Instruments with primarily unobservable value drivers.
As of June 30, 2022, and December 31, 2021, 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 10.
| | | | | Quoted Prices in Active Markets For Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Fair Value Measurement at June 30, 2022 Using: | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Derivative Liabilities | | $ | 1,735,633 | | | $ | - | | | $ | - | | | $ | 1,735,633 | |
Totals | | $ | 1,735,633 | | | $ | - | | | $ | - | | | $ | 1,735,633 | |
Fair Value Measurement at December 31, 2021 | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Derivative Liabilities | | $ | 3,898,914 | | | $ | - | | | $ | - | | | $ | 3,898,914 | |
Totals | | $ | 3,898,914 | | | $ | - | | | $ | - | | | $ | 3,898,914 | |
NOTE 12 - 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 six months ended June 30, 2022, and 2021, one and three customers accounted for 100% of revenue, respectively.
At June 30, 2022 and December 31, 2021, one and one customer accounted for 100% of accounts receivable, respectively.
NOTE 13 - NOTES PAYABLE
In June 2018, the Company entered into financing agreements for the unpaid mining concession taxes on the Francisco Arturo mining concession 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 on the Francisco Arturo mining concession 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 22%.
In June 2018, the Company applied for a reduction of the Francisco Arturo mining concession, from 69,121 hectares to 3,280 hectares. On July 31, 2018, the application for reduction was approved and the Company paid an initial amount of 985,116 MNP (Pesos), for the second semester 2018 mining concessions taxes on the reduced Francisco Arturo mining concession. The Company continues to accrue an amount of $22,500 (USD) per semester on the reduced Francisco Arturo mining concession.
As of June 2019, the Company ceased making monthly payments on the above noted Francisco Arturo concession notes and has petitioned the Hacienda (Mexican federal tax authority) for a reduction in the liability which is pro-rata to the reduction in the Francisco Arturo concession above. For financial reporting purposes the Company continues to carry all notes (to finance unpaid mining concession taxes) at unpaid principal amount and accrues interest on a monthly basis. At June 30, 2022, $1,281,760 of accrued interest on the notes was included in accrued liabilities on the consolidated balance sheet.
In October 2019, the Company entered into a financing agreement for unpaid mining concession taxes on the core mining concessions 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 six and twelve months ended June 30, 2022 and December 31, 2021:
Balance December 31, 2020 | | $ | 2,081,435 | |
Exchange Rate Adjustment | | | (57,504 | ) |
2021 Principal Payments | | | (61,406 | ) |
Balance December 31, 2021 | | | 1,962,525 | |
Exchange Rate Adjustment | | | 39,643 | |
2022 Principal Payments | | | (59,015 | ) |
Balance June 30, 2022 | | $ | 1,943,153 | |
NOTE 14 - REVOLVING CREDIT LINE FACILITY
On February 4, 2021, the Company (through DynaMineras) entered into a Revolving Credit Line Facility and Commercial Offtake Agreement (the “RCL”), with a commercial buyer. Under the terms of the RCL:
| · | The Company will deliver 100% of its produced concentrates to the buyer and provider of the RCL, through December 31, 2022; unless extended by the Company; |
| · | An initial RCL was established by buyer in the amount of $3.75M USD; |
| · | On May 1, 2021, the RCL increased to an amount equal to 80% of the prior 3 months’ revenue; |
| · | Each successive month, the RCL shall be adjusted according to the Company’s prior 3 months’ revenue; |
| · | The RCL shall never be less than $3.75M USD; |
| · | The RCL will be interest free for 45 days; |
| · | The RCL is to be repaid through deliveries of concentrates or cash within 120 days; |
The RCL is included under Customer Advances on the unaudited consolidated balance sheet.
Deposits under Revolving Credit Line Facility
Under the terms of the RCL, DynaMineras received the following advances from the buyer:
(1) | $2.5M advance on February 4, 2021. Settled on March 26, 2021 |
(2) | $3.75M advance on March 30, 2021. Settled on May 12, 2021 |
(3) | $3.75M advance on May 12, 2021. Settled on June 16, 2021 |
(4) | $6.75M advance on June 18, 2021. Settled on August 5, 2021 |
(5) | $8.25M advance on August 9, 2021. Settled on September 27, 2021 |
(6) | $8.25M advance on September 29, 2021. Settled on November 17, 2021 |
(7) | $8.25M advance on November 19, 2021. Settled on December 20, 2021 |
(8) | $9.25M advance on December 30, 2021. Settled on February 25, 2022 |
(9) | $8.175M advance on February 25, 2022. Settled on March 30, 2022 |
(10) | $7.875M advance on March 30, 2022. Settled on May 13, 2022 |
(11) | $8.875M advance on May 19, 2022. Settled on June 27, 2022 |
(12) | $8.75M advance on June 28, 2022 |
NOTE 16 - SUBSEQUENT EVENTS
The Company has evaluated events commencing June 30, 2022 and through the date the financial statements were issued, and determined the following items required disclosure:
On July 1, 2022, the Company paid in full the Series I and Series II Convertible Notes Payable.