NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and 2021
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 9,920 hectares (24,513 acres) on the west side of the Sierra Madre mountain range. DynaUSA currently owns 80% of the outstanding capital of DynaMéxico, 79% directly and 1% held by the current CEO on behalf of the Company, in compliance with Mexican law. DynaMéxico currently holds 20% of the Shares of DynaMéxico as treasury shares, after complete foreclosure and recovery of those shares on February 20, 2020 from 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”) as an operating subsidiary to manage registered employees, and acquired effective control of Mineras de DynaResource, S.A. de C.V. (formerly Minera Finesterre S.A. de C.V., “DynaMineras”). In 2020 the Company moved its registered employees from DynaOperaciones to DynaMexico in compliance with changes in Mexican employment law. The Company owns 100% of DynaMineras and 100% of DynaOperaciones.
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 consolidated 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 consolidated financial statements which present fairly the consolidated financial condition, results of operations and cash flows of the Company for the respective periods presented.
Basis of Presentation
The Company prepares its consolidated financial statements on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States.
Use of Estimates
In order to prepare 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 consolidated financial statements and determines whether contingent assets and liabilities, if any, are disclosed in the consolidated financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from the resolution currently anticipated by management and on which the consolidated financial statements are based.
Principles of Consolidation
The consolidated financial statements include the accounts of DynaResource, Inc., as well as DynaResource de México, S.A. de C.V., DynaResource Operaciones S.A. de C.V. and Mineras de DynaResource S.A. de C.V. 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 December 31, 2022, the Company had $ 18,375,699 of deposits in U.S. Banks in excess of the FDIC limit. The Company does not believe it is at a 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 December 31, 2022, and 2021, respectively, no allowance has been made. During the year ended December 31, 2021 the Company recorded a $381,871 bad debt write off of receivables from a former customer of the Company. At, December 31, 2022 management believes all accounts receivable are fully collectable.
Inventories
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 were $2,720,811 and $2,110,203 as of December 31, 2022 and December 31, 2021, respectively.
Foreign Tax Receivable
Foreign Tax Receivable is comprised of recoverable value-added taxes (“IVA”) charged by the Mexican government on goods and services rendered to the company in Mexico and paid by the company. Under certain circumstances, these taxes are recoverable by filing a tax return and application for reimbursement. IVA amounts charged to and paid by the company are recorded and carried as receivables until the funds are collected by the company. The total amounts of the IVA receivable as of December 31, 2022 and December 31, 2021 were
$9,355,863 and $4,742,180, respectively. In 2022, the Company recovered $403,308 of the IVA receivable.
Exploration Stage
According to Section 1300 of Regulation S-K, the Registrant is an exploration stage issuer with an exploration stage property since it does not have proven and probable reserves as defined in Section 1300 and does not have a preliminary or final feasibility study.
Property and Equipment
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.
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 proven and probable reserves are extracted. As of December 31, 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 Jose de Gracía property (“SJG”), the basis of which will be amotized once proven and probable reserves are extracted 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 is 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 is 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, 2022, and 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.
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) year-end exchange rates for balance sheet accounts, and (ii) the weighted average exchange rate of the reporting period for all income statement accounts. Foreign currency translation gains and losses are reported as a separate component of stockholders’ equity and comprehensive income (loss).
The financial statements of the subsidiaries should not be construed as representations that Mexican Pesos have been, could have been or may in the future be converted into U.S. dollars at such rates or any other rates.
Relevant exchange rates used in the preparation of the financial statements for the subsidiaries are as follows for the years ended December 31, 2022 and 2021 (Mexican Pesos per one U.S. dollar):
| | | | Dec 31, 2022 | | | Dec 31, 2021 | |
Current exchange rate | Pesos | | | | 19.48 | | | | 20.48 | |
Weighted average exchange rate for the period ended | Pesos | | | | 20.11 | | | | 20.29 | |
The Company recorded currency transaction gains (losses) of $58,426 for the year ended December 31, 2022 and $247,712 for the year ended December 31, 2021.
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 in accordance with applicable Mexican tax law.
Uncertain Tax Position
The Company is subject to income taxes in the U.S. and other foreign jurisdictions, with respect to which some of the outcome is uncertain. The evaluation of the Company’s uncertain tax positions involves significant judgment in the interpretation and application of GAAP and complex domestic and international tax laws. We establish reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based upon one of the following conditions: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. Although management believes the Company’s reserves are reasonable, no assurance can be given that the final outcome of these uncertainties will not be different from that which is reflected in the Company’s reserves. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments varies depending on the tax jurisdiction. Any tax benefit that is or has been reserved because of a failure to meet the "more likely than not" recognition threshold would be recognized in income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is "more likely than not" to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. Refer to Note 6.
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 consolidated 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 accounts for revenue recognition under ASC 606 “ Revenue from contracts with customers”. The Company generates revenue by selling gold and silver mineral concentrate 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 based on the initial assay and the actual recovery from treatment and processing.
As of December 31, 2022, there are $9,350,000 in customer advances for payments received during the period for contracts expected to be settled in 2023.
During the years ended December 31, 2022, and 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.
As of and for the year ended December 31, 2022, and December 31, 2021, there are no deferred contract costs or commissions.
We have elected to account for shipping and handling costs as fulfillment costs after the customer obtains control of the concentrate.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, receivables, payables and installment notes payable. The carrying amount of cash, accounts receivable and accounts payable approximates fair value because of the short-term nature of these items. The carrying amount of installment notes payable debt approximates fair value due to the relationship between the interest rate on installment notes payable debt and the Company’s incremental risk adjusted borrowing rate.
Earnings Per Share
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 warrants outstanding to purchase 892,165 shares of common stock at December 31, 2022 which upon exercise, would result in the issuance of 892,165 shares of common stock. These warrants are exercisable at $0.01 per share
The Company’s Series C Preferred Stock including outstanding dividends is convertible into 2,643,082 shares of Common Stock at December 31, 2022. The Company’s Series D Preferred including outstanding dividends is convertible into 790,400 shares of common stock at December 31, 2022.
The Company had warrants outstanding (the 2015 Warrant) to purchase 2,657,895 shares of common stock at December 31, 2021 which upon exercise, would result in the issuance of 3,060,998 shares of common stock. Of these warrants 2,168,745 were exercisable at $2.04 per share and 892,165 were exercisable at $0.01 per share. The Company also had convertible debt instruments as of December 31, 2021 which, upon conversion at $2.50 per share, would result in the issuance of 217,312 shares of common stock.
| | Years ended December 31 | |
| | 2022 | | | 2021 | |
Net income (loss) attributable to common shareholders | | $ | 6,744,654 | | | $ | 8,345,664 | |
Shares: | | | | | | | | |
Weighted average number of common shares outstanding, Basic | | | 19,456,765 | | | | 17,797,528 | |
| | | | | | | | |
Weighted average number of common shares outstanding, Diluted | | | 22,890,246 | | | | 17,797,528 | |
| | | | | | | | |
Basic income (loss) per share | | $ | 0.33 | | | $ | 0.47 | |
| | | | | | | | |
Diluted income (loss) per share | | $ | 0.29 | | | $ | 0.47 | |
Diluted Earnings Per Share is calculated as follows:
| | Dec 31, | |
| | 2022 | |
Net income attributable to common shareholders | | $ | 6,451,503 | |
| | | | |
Deemed Dividends of Series C Preferred Stock | | | 173,499 | |
Deemed Dividends of Series D Preferred Stock | | | 60,800 | |
| | | | |
Adjusted Diluted Earnings | | $ | 6,685,802 | |
| | | | |
Weighted average number of share outstanding - Basic | | | 19,456,765 | |
| | | | |
Series C Preferred Stock Common Stock Equivalent | | | 2,643,082 | |
Series D Preferred Stock Common Stock Equivalent | | | 790,400 | |
| | | | |
Weighted average number of share outstanding - Diluted | | | 22,890,246 | |
| | | | |
Diluted Earnings Per Share | | $ | 0.29 | |
At December 31, 2022, 892,165 of potentially dilutive common stock related to outstanding warrants were excluded from the diluted earnings per share calculation as the net income impact of the converted shares would cause earnings per share to increase, therefore their effect would be antidilutive.
At December 31, 2021, 2,168,833 shares of potentially dilutive common stock related to outstanding stock warrants and 217,312 shares of potentially dilutive common stock related to convertible debt were excluded from the diluted earnings per share calculation, using the treasury stock method, because the exercise and conversion prices exceeded the average stock price and therefore their effect would be anti-dilutive. In addition, at December 31, 2021, 892,165 of potentially dilutive common stock related to outstanding warrants were excluded from the diluted earnings per share calculation as the net income impact of the converted shares would cause earnings per share to increase, therefore their effect would be antidilutive.
Related Party Transactions
FASB ASC 850 "Related Party Disclosures" requires companies to include in their consolidated 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.
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 at December 31, 2022 and 2021, respectively, were as follows:
| | 2022 | | | 2021 | |
Mined Tonnage | | $ | 2,610,116 | | | $ | 2,042,633 | |
Gold-Silver Concentrates | | | 110,695 | | | | 67,570 | |
Total Inventories | | $ | 2,720,811 | | | $ | 2,110,203 | |
NOTE 3 – PROPERTY Property consists of the following at December 31, 2022 and 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 | | | (119,154 | ) | | | (116,425 | ) |
Total Property | | $ | - | | | $ | 2,729 | |
Depreciation and amortization has been provided over each asset’s estimated useful life. Depreciation and amortization expense was $ 2,729 and $3,249 for the years ended December 31, 2022 and 2021 respectively.
NOTE 4 – MINING CONCESSIONS
Mining properties consist of the San Jose de Gracía (“SJG”) concessions. Mining Concessions were $4,132,678 and $4,132,678 at December 31, 2022 and December 31, 2021, respectively. As we are an exploration stage company, there was no depletion expense for the years ended December 31, 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, of which $340,000 was converted to preferred shares within the same year, netting 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 Series I Note holders 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. The notes were extended multiple times including some interest payments being rolled into the principal. At December 31, 2021, six Series I Notes remained outstanding with a total balance of $455,905.
On July 1, 2022 the remaining Series I Notes were paid off in full in cash. None of the notes were converted into common stock and no stock warrants were issued.
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 Note holder retained the option to 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 their conversion date.
The Notes originally matured on December 31, 2015. The notes were extended multiple times including some interest payments being rolled into principal. At December 31, 2021, two Series II notes remained outstanding with a balance of $87,374.
On July 1, 2022 the remaining Series II Notes were paid off in full in cash. None of the notes were converted into common stock and no stock warrants were issued.
NOTE 6 – INCOME TAXES
FASB ASC 740-10, Income Taxes, mandates the asset and liability approach to determine the income tax provision or benefit. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Income tax receivables and liabilities and deferred tax assets and liabilities are recognized based on the amounts that more likely than not will be sustained upon ultimate settlement with taxing authorities.
Developing our provision for income taxes and analysis of uncertain tax positions requires significant judgment and knowledge of federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets.
We assess the realization of our deferred tax assets to determine whether an income tax valuation allowance is required. Based on all available evidence, both positive and negative, and the weight of that evidence to the extent such evidence can be objectively verified, we determine whether it is more likely than not that all or a portion of the deferred tax assets will be realized.
We consider many factors when evaluating our uncertain tax positions, and such judgments are subject to periodic review. Tax benefits associated with uncertain tax positions are recognized in the period in which one of the following conditions is satisfied: (1) the more likely than not recognition threshold is satisfied; (2) the position is ultimately settled through negotiation or litigation; or (3) the statute of limitations for the taxing authority to examine and challenge the position has expired. Tax benefits associated with an uncertain tax position are derecognized in the period in which the more likely than not recognition threshold is no longer satisfied.
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
| | | | | | |
Federal Net Operating Loss Carryforwards | | $ | 509,711 | | | $ | 4,653,402 | |
Foreign Net Operating Loss Carryforwards | | | 2,459,782 | | | | 7,674,197 | |
Other | | | 917 | | | | 862 | |
Total Deferred Tax Asset | | | 2,970,410 | | | | 12,328,461 | |
Less Valuation Allowance | | | - | | | | (12,328,461 | ) |
Net Deferred Tax Asset | | $ | 2,970,410 | | | $ | - | |
The Company's pre-tax income (loss) by jurisdiction was as follows for the years ending December 31, 2022 and December 31, 2021
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
| | | | | | |
Domestic | | $ | 3,221,618 | | | $ | (10,064,644 | ) |
Foreign | | | 883,774 | | | | 18,627,977 | |
Total | | $ | 4,105,392 | | | $ | 8,563,333 | |
The provision for income taxes for continuing operations for the year ended December 31, 2022 and December 31, 2021 consist of the following
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Current income taxes | | | | | | |
Federal | | $ | 220,000 | | | $ | - | |
State | | | - | | | | - | |
Foreign | | | 170,000 | | | | 28,970 | |
Total current income taxes | | $ | 390,000 | | | $ | 28,970 | |
| | | | | | | | |
Deferred income taxes | | | | | | | | |
Federal | | $ | (510,629 | ) | | $ | - | |
State | | | - | | | | - | |
Foreign | | | (2,459,781 | ) | | | - | |
Total deferred income taxes | | $ | (2,970,410 | ) | | | - | |
| | | | | | | | |
Total income tax expense (benefit) | | $ | (2,580,410 | ) | | $ | 28,970 | |
A reconciliation between the amount of reported income tax expense (benefit) and the amount computed by multiplying income from continuing operations before income taxes by the statutory federal income tax rate is shown below. Income tax expense for the year ended December 31, 2022 includes state minimum taxes, permanent differences, and deferred tax assets for which a full valuation allowance has been released. A corresponding tax benefit is included for the year ended December 31, 2022 to reflect the release in the valuation allowance.
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Tax Expense at statutory federal rate of 21% | | $ | 808,560 | | | $ | 1,798,300 | |
Permanent Differences | | | 927,343 | | | | 501,707 | |
Foreign Rate Differential | | | 56,580 | | | | 1,103,990 | |
GILTI NOL Impact | | | 145,913 | | | | - | |
GILTI NOL Adjustment – Previously Offset by Valuation Allowance | | | 7,781,388 | | | | - | |
Change in Valuation Allowance | | | (12,328,462 | ) | | $ | (1,143,877 | ) |
Other | | | 28,268 | | | $ | (2,231,150 | ) |
Income tax expense (benefit) | | $ | (2,580,410 | ) | | $ | 28,970 | |
The net deferred tax asset and benefit for the current year is generated primarily from cumulative net operating loss carryforward, which totals approximately $11 million at December 31, 2022.
| | December 31, | | | December 31, | |
| | 2022 | | | 2021 | |
United States Expiring 2029 to 2037 | | $ | - | | | $ | 16,400,000 | |
United States Indefinite Limited to 80% | | | 2,800,000 | | | | 2,700,000 | |
Foreign NOLs | | | 8,200,000 | | | | 12,500,000 | |
| | | | | | | | |
| | $ | 11,000,000 | | | $ | 31,600,000 | |
At December 31, 2022, our carryforwards available to offset US federal future taxable income consisted of net operating loss (“NOL”) carryforwards of approximately $2.8 million pre-tax, all of which, has no expiration date. Future NOL utilization will be subject to the 80-percent of taxable income limitation, as all remaining NOLs have been generated after 2017 and the passage of the Tax Cuts and Jobs Act of 2017. The Company’s Mexico net operating losses of $8.2M pre-tax are subject to a ten-year carryforward period and the Company anticipates utilizing all of its Mexico NOL in future years before expiration.
During the year ended December 31, 2022, the valuation allowance was released. The Company believes a full valuation allowance against the net deferred tax asset is no longer warranted based on the positive evidence in recent years. Such positive evidence includes no longer being in a three-year cumulative losses, the rising prices in gold, utilization of current year tax attributes, and projected taxable income in the future.
Our practice is to recognize interest and penalties related to income taxes in income tax expense in continuing operations, as incurred. We did not have any uncertain tax benefits or interest and penalties related to uncertain tax benefits as of December 31, 2022.
The Company is subject to income taxes in the US federal jurisdiction as well as Mexico. The Company is no longer subject to US federal, state and local tax examinations by tax authorities for years prior to fiscal year 2021. The Company began utilizing its NOL in 2021. The statute of limitations began when the Company filed its 2021 US Federal Tax Return. The Company is no longer subject to Mexican tax examinations for years prior to fiscal year 2017. The Company is currently not under audit by any tax authority.
The Company has not provided U.S. income taxes and foreign withholding taxes, on its cumulative earnings for certain non-U.S. subsidiaries, because such earnings are intended to be indefinitely reinvested. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable.
NOTE 7 – 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 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 one thousand (1,000) shares shall be 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 December 31, 2022, 15,265,008 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. In 2007, the Company issued 1,000 shares of Series A Preferred Stock to its current CEO. At December 31, 2022 and December 31, 2021, there were 1,000 shares of Series A Preferred Stock outstanding.
Series C Senior Convertible Preferred Stock
At December 31, 2022 and December 31, 2021, there were 1,734,992 and 1,734,992 Series C Preferred shares outstanding, respectively. These Series C Preferred Shares are convertible to common shares at $2.04 per share, redeemable on demand and include anti-dilution protection on both the Preferred Series C and the 2,655,361 of Common Stock acquired through the exercise of the Series C stock warrants in June 2022. 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 December 31, 2022, dividends for the years 2017 to 2022 totaling $1,053,777 were in arrears.
Due to the nature of this transaction as mandatorily redeemable by the Company at the election of the Series C preferred stock shareholder at maturity, the Series C Senior Convertible Preferred Shares are classified as “temporary equity” on the balance sheet.
The 2015 Warrant - Attached to the Series C Preferred Stock issued in 2015 were 2,000,000 warrants, described as the “2015 Warrant” which gave the holder the right to purchase common shares at $2.50 per share. After anti-dilution protection, these warrants became 2,166,527 warrants to purchase common shares at $2.04 and on June 28, 2022, the 2015 Warrant was exercised.
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 of DynaUSA (“DynaUSA Shareholders”), and related agreements. A summary of the transactions and related agreements are 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 of the NFP (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 was 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 |
| · | 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. |
Retirement of Series D Convertible Debt
On October 7, 2021, the Company paid $2,500,000 to repurchase one note that was convertible into Series D Preferred Stock.
The remaining ten noteholders of notes convertible into Series D Preferred Stock elected to convert their notes totaling $1,520,000 into Series D Preferred stock at $2.00 per share. On October 18, 2021 the Company issued 760,000 shares of Series D Preferred Stock for these notes.
In addition the redemption of the Series D notes trigged an acceleration of the amortization of the original loan discount booked at the issuance of the Series D notes (see discussion below) and being amortized over the 24 month life of the notes of $287,508 in October 2021.
As part of the transaction all Series D noteholders agreed to waive the non-dilution rights contained in the original note and an amendment of the Series D Preferred Stock designation was filed with the State of Delaware.
At December 31, 2022 and December 31, 2021, there were 760,000 and 760,000 Series D Preferred shares outstanding, respectively. These Series D Preferred Shares are convertible to common shares at $2.00 per share, through October 18, 2026. The Series D Preferred Shares carry a 4% per annum dividend and in arrears. The Dividend is calculated at 4.0% of $1,520,000 payable annually on October 18. At December 31, 2022, $60,800 dividends were in arrears.
Due to the nature of this transaction as mandatorily redeemable by the Company at the election of the Series D preferred stock holder at maturity, the Series D preferred shares are classified as “temporary equity” on the balance sheet.
Due to underlying anti-dilutive provisions contained in the Series C Preferred Stock and the 2015 Warrant, the Company incurred derivative liabilities. On May 14, 2020 in connection with the Series D Convertible Note financing, the expiration date for the Series C Preferred Stock and the 2015 Warrant were extended to June 30, 2022. In addition, a new derivative liability was incurred due to the issuance of warrants for kicker shares. At December 31, 2021, the total derivative liability was $ 3,898,914 which included $1,019,431 for the Series C Preferred Stock, and $1,320,380 in connection with the 2015 Warrant and $ 1,559,103 in connection with the warrants for kicker shares in connection with the Series D financing. The 2015 Warrant was exercised at June 28, 2022 ending the related derivative liability. The Series C Preferred Stock became payable on demand when not converted on June 30, 2022 extinguishing the associated derivative liability. At December 31, 2022 the remaining derivative liability was $2,172,417 in connection with the warrants for kicker shares in connection with the Series D financing. The deemed dividends for the years ending December 31, 2022, and December 31, 2021 were $234,299 and $188,699, 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, the 1,734,992 authorized shares designated as Series C Preferred Shares and 3,000,000 authorized shares designated as Series D Preferred Stock, 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 December 31, 2022 and December 31, 2021, 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 40,000,000 common shares at a par value of $0.01 per share. These shares have full voting rights. At December 31, 2022 and December 31, 2021, there were 22,246,654 and 18,091,293 common stock shares outstanding, respectively. No dividends were paid for the years ended December 31, 2022 and 2021, respectively.
Preferred Rights
In 2003, the Company issued “Preferred Rights” for the rights to percentages of revenues generated from the San Jose de Gracía Pilot Production Plant and received $784,500 for these rights. This has been reflected as “Preferred Rights” in stockholders’ equity in accompanying consolidated balance sheets. As of December 31, 2022, $744,500 had been repaid, leaving a current balance of $40,000 and $40,000 as of December 31, 2022 and 2021, respectively.
Stock Issuances
On June 28, 2022, the Company issued 2,655,361 shares of common stock upon the exercise of the 2,166,775 warrants by one warrant holder for $2.04 a share. There shares carry the antidilution provision of the Series C Preferred stock.
On December 28, 2022, the Compensation Committee approved performance based common stock awards to employees, directors and consultants of the Issuer for performance based compensation. The stock awards approved were issued to each of the individuals/entities and vested 25% immediately with the remainder vesting 25% each year on December 31 for the next three years, subject to resignation or termination provisions. The awards totaled 1,500,00 shares and the Company recorded stock compensation expense of $881,250 representing value of the 25% of shares that vested in 2022.
On October 18, 2021, five warrant holders exercised a total of 368,468 warrants to purchase 368,468 shares of common stock for $0.01 a share.
Treasury Stock
During the year ending December 31, 2022, there were no treasury stock transactions.
During the year ending December 31, 2021, 504,300 treasury shares were transferred for services provided to the Company. At December 31, 2022 and 2021, 12,180 treasury shares remained held by the Company.
Warrants
2022 Activity
On June 28, 2022, one warrant holder exercised 2,166,775 warrants to purchase 2,655,361 shares of common stock for $2.04 a share. These shares carry the antidilution provisions of the Series C preferred Stock.
At December 31, 2022, the Company had a total of 892,165 warrants outstanding.
2021 Activity
On October 18, 2021, five warrant holders exercised a total of 368,468 warrant to purchase 368,468 shares of common stock for $0.01 a share.
At December 2021, the Company had a total of 3,060,998 warrants outstanding.
| | | | | | Weighted | | | | |
| | | | | Weighted | | | Average | | | | |
| | | | | Average | | | Remaining | | | | |
| | Number | | | Exercise | | | Contractual | | | Intrinsic | |
| | of Shares | | | Price per share | | | Life (Years) | | | Value | |
Balance at December 31, 2020 | | | 3,429,466 | | | $ | 1.30 | | | | 4.33 | | | | | |
Exercise of 2020 warrants | | | (368,468 | ) | | $ | 0.01 | | | | | | | | | |
Balance at December 31, 2021 | | | 3,060,998 | | | $ | 1.46 | | | | 2.79 | | | | | |
Exercise of the 2015 warrant | | | (2,166,775 | ) | | $ | 2.04 | | | | | | | | | |
Forfeiture of the 2015 warrant | | | (2,058 | ) | | $ | - | | | | | | | | - | |
Balance at December 31, 2022 | | | 892,165 | | | $ | 0.01 | | | | 7.37 | | | | | |
Exercisable at December 31, 2022 | | | 892,165 | | | $ | 0.01 | | | | 7.37 | | | | - | |
NOTE 8 – STOCK BASED COMPENSATION
On December 28, 2022, the Company issued 1,500,000 shares of restricted common stock to certain key employees and consultants. The shares were 25% vested at issuance and vest an additional 25% on December 28, 2023, 2024, and 2025. The shares were valued at the closing stock price of $2.35 on the date of issuance and accounted for under ASC 718. Stock compensation expense for the year ended December 31, 2022 was $881,250 representing the 25% vested portion of the total stock value. At December 31, 2022, deferred compensation totaling $2,643,750 will be expensed pro rata upon vesting.
NOTE 9 – RELATED PARTY TRANSACTIONS
Restricted Stock Awards
The Compensation Committee approved stock awards to employees, directors and consultants of the Company for performance based compensation. The stock awards approved were issued to each of the individuals/entities and vested 25% immediately and the remainder vest 25% each year on December 31 for the next three years, subject to resignation or termination provisions. The awards totaled 150,000 shares of which 475,000 were awarded to officers and/or directors.
Dynacap Group Ltd.
The Company paid $184,583 and $285,999 to Dynacap Group, Ltd., an entity formerly controlled by the current CEO of the Company, for consulting and other services during the years ended December 31, 2022 and 2021, respectively.
The Company is not aware of any other material relationships or related transactions between the Company and any officers, directors or holders of more than five percent of any class of outstanding securities of the issuer.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Legal Update
2014 Arbitration Proceeding filed by Goldgroup Resources Inc.
On March 14, 2014, Goldgroup Resources, Inc. ("Goldgroup") filed for arbitration in the United States with the American Arbitration Association (“AAA”), seeking monetary and nonmonetary relief, and citing the Earn In/Option Agreement as the basis for its filing. On August 25, 2016, the AAA issued a ruling in favor of Goldgroup against the Company and DynaMéxico (the “Arbitration Award”). On May 9, 2019, the United States District Court for the District of Colorado (the “Colorado U.S. District Court”) confirmed the Arbitration Award.
On May 20, 2021, the Company and DynaMéxico agreed to release the $1.111 million bond that had been posted, and paid an additional $4,054 in interest, in full satisfaction of the monetary portion of the Arbitration Award. Since that time, the Company has fully performed the non-monetary portion of the Arbitration Award, which included the election of a Goldgroup designee to the board of DynaMéxico.
DynaResource de Mexico SA de CV Legal Update & Disclosure:
On March 3, 2023, Goldgroup Resources Inc. (“Goldgroup”) filed a formal notice with the México Federal Legal Authorities, which confirmed Goldgroup’s complete withdrawal of all legal claims in Mexico and under Mexican law against DynaResource de México SA de CV.
Goldgroup’s complete legal withdrawal is the result and culmination of 7 years of legal actions undertaken in Mexico by DynaMéxico. Accordingly, all matters before the courts in México with respect to DynaMéxico and Goldgroup Resources Inc. are fully resolved and are no longer subject to appeal.
Consequence of the México legal ruling and the Goldgroup legal withdrawal:
1. The $48,280,808.34 USD damages award (dated October 05, 2015) in favor of DynaMéxico and against Goldgroup Resources Inc., confirmed by Mexican courts in 2019, is final, conclusive, and enforceable under Mexican law. Goldgroup Resources’ challenges to that award have been fully denied and the damages award is final.
2. Goldgroup’s challenges to DynaMéxico’s share ownership have also been fully denied and consequently, under Mexican law, Goldgroup owns no shares in DynaMéxico.
Mercuria Energy Trading S.A vs Mineras de DynaResource S.A. de C.V.
In 2020, Mercuria Energy Trading, S.A. (“Mercuria”) initiated an arbitration proceeding against Mineras de Dynaresource, S.A. de C.V. (“Mineras”), arising out of the earlier-terminated supply agreement between the parties. In January 2022, The arbitration panel awarded Mercuria the sum of US$1,822,674, plus interest at 2% over the quarterly compounded USD 3- month LIBOR rate, from February 2020 forward. In August 2022, the panel also assessed costs of the arbitration proceeding against Mineras, in the aggregate amount of £ 376,232.75. DynaResource has accrued $1,000,000 for the arbitration award and related costs.
The Company notes the following: since Mineras is a company of Mexican nationality, under Mexican law Mineras has the right to legally oppose the recognition and enforcement of the award to Mercuria, the assessment of any costs, and any supplemental award.
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 from 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 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 of $1,359,443 pesos adjusted for inflation based on the Mexico minimum wage increase commencing in 2014. Rent was $3,678,437 Pesos (approx. $183,000 USD) for the year ended December 31, 2022. 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 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 December 31, 2022, the Company has two operating leases - a six- and one-half year lease for office space with a remaining term of one month and a twenty-year ground lease in association with its México mining operations with a remaining term of eleven 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, 2022 | |
Operating Lease – Office Lease | | $ | 88,043 | |
Operating Lease – Ground Lease | | | 91,334 | |
Short Term Lease Costs | | | 17,711 | |
Variable Lease Costs | | | 91,590 | |
TOTAL | | $ | 288,678 | |
| | | | |
Weighted average remaining lease term and weighted average discount rate are as follows: | | | | |
| | | | |
Weighted Average Remaining Lease Term (Years) – Operating Leases | | | 10.0 | |
Weighted Average Discount Rate – Operating Leases | | | 12.50 | % |
| | | | |
Estimated future minimum lease obligations are as follow for the years ending December 31: | | | | |
| | | | |
YEAR | | | | |
2023 | | $ | 101,499 | |
2024 | | | 96,896 | |
2025 | | | 99,803 | |
2026 | | | 102,797 | |
2027 | | | 105,881 | |
Thereafter | | | 579,003 | |
Total | | $ | 1,085,879 | |
Less Imputed Interest | | | (498,097 | ) |
OPERATING LEASE LIABILITY | | $ | 587,782 | |
NOTE 11 - 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 conversion feature qualified as embedded 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 (see “Note 12”) 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 | | | 4.41 | % | | | 0.73 | % |
Remaining Term | | 0.00 years | | | 0.50 years | |
Fair Value of common stock | | $ | 2.44 | | | $ | 1.75 | |
For the years ended December 31, 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 nine and twelve months ended December 31, 2022 and December 31, 2021.
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 (issued at the same time as the Series C Preferred Stock) qualified as a derivative liability and is required to be accounted for as such. The Company performed a valuation applying 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 (see note 12) and used an equity simulation model to determine the value of the 2015 Warrant based on the assumptions below:
| | 2022 | | | 2021 | |
Annual volatility rate | | | 0 | % | | | 147 | % |
Risk free rate | | | 4.41 | % | | | 0.73 | % |
Remaining Term | | 0.00 years | | | 0.50 years | |
Fair Value of common stock | | $ | 2.44 | | | $ | 1.75 | |
For the years ended December 31, 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 December 31, 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 | |
| | | | | | | | |
The 2015 Warrant was exercised on June 28, 2022. 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 2020 warrants and remaining purchaser 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 2020 warrants and remaining purchaser warrants, and then remeasured at each reporting date. The Company performed a valuation of the conversion feature of the 2020 warrants and remaining purchaser warrants. 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 (see “Note 11”) 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 | | | 116 | % | | | 147 | % |
Risk free rate | | | 4.41 | % | | | 0.73 | % |
Remaining Term | | 7.37 years | | | 8.37 years | |
Fair Value of common stock | | $ | 2.44 | | | $ | 1.75 | |
For the years ended December 31, 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 twelve months ended December 31, 2022 and December 31, 2021.
Period Ended | | 2022 | | | 2021 | |
Fair value of derivative (warrants), beginning of period | | $ | 1,559,103 | | | $ | 952,634 | |
Exercise of warrants | | | - | | | | (659,558 | ) |
Change in fair value of derivative | | | 613,314 | | | | 1,266,027 | |
Fair value of derivative (warrants), end of period | | $ | 2,172,417 | | | $ | 1,559,103 | |
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 | |
NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS | |
The ASC guidance for fair value measurements and disclosure establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 Inputs – Quoted prices for identical instruments in active markets.
Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs – Instruments with primarily unobservable value drivers.
As of December 31, 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 | | | | | | Significant | |
| | | | | Identical | | | Significant Other | | | Unobservable | |
| | | | | Assets | | | Observable Inputs | | | Inputs | |
Fair Value Measurement at December 31, 2022: | | | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Liabilities: | | | | | | | | | | | | |
Derivative Liabilities | | $ | 2,172,417 | | | | — | | | | — | | | $ | 2,172,417 | |
Totals | | $ | 2,172,417 | | | $ | — | | | $ | — | | | $ | 2,172,417 | |
Fair Value Measurement at December 31, 2021: | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
Derivative Liabilities | | $ | 3,898,914 | | | | — | | | | — | | | $ | 3,898,914 | |
Totals | | $ | 3,898,914 | | | $ | — | | | $ | — | | | $ | 3,898,914 | |
NOTE 13 – REVENUE CONCENTRATION
The Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenue, or whose accounts receivable balances individually represented 10% or more of the Company’s total accounts receivable, as follows:
For the years ended December 31, 2022 and 2021, one and three customers accounted for 100% of revenue, respectively. At December 31, 2022 and 2021, one and one customers accounted for 100% of accounts receivable, respectively.
NOTE 14 – 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 22%.
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 for a reduction in the liability equal to the reduction in the Francisco Arturo concession above. For financial reporting purposes the Company continues to carry all notes at unpaid principal amount and accrues interest on a monthly basis. At December 31, 2022, $1,572,972 of accrued interest on the notes was included in accrued liabilities on the accompanying consolidated balance sheet.
In October 2019, the Company entered into a financing agreement for unpaid mining concession taxes on the San Jose de Gracia 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 years ended December 31, 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 | | | 100,424 | |
2022 Principal Payments | | | (94,698 | ) |
Balance December 31, 2022 | | $ | 1,968,251 | |
NOTE 15 – REVOLVING CREDIT LINE FACILITY
On February 4, 2021 Mineras de DynaResource SA de CV (“Seller”) entered into a Revolving Credit Line Facility and Commercial Offtake Agreement (the “RCL”), with a commercial buyer. The RCL was assigned from Mineras to DynaMexico in March 2022 and in December 2022 it was extended for one year. 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; |
| · | At May 1, 2021, the RCL increased to an amount equal to 80% of prior 3 month’s revenue; |
| · | Each successive month, the RCL shall be adjusted according to the company’s prior 3 month’s 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 consolidate balance sheet, |
Deposits under Revolving Credit Line Facility
Under the terms of the RCL, Mineras de DynaResource received the following advances from the buyer:
(1) | $2.50M 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 30, 2021 |
(8) | $9.25 M 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, 2020. Settled on June 27, 2022 |
(12) | $8.75M advance on June 28, 2022. Settled on August 15, 2022 |
(13) | $7.80M advance on August 19, 2022. Settled on September 28, 2022 |
(14) | $7.7375M advance on September 29, 2022. Settled on November 15, 2022 |
(15) | $8.25M advance on November 14, 2022. Settled on December 28, 2022 |
(16) | $9.35 advance on December 28, 2022. |
NOTE 16 – SUBSEQUENT EVENTS
On January 31, 2023, the Company entered in a 52 month extension on its office lease where the Company is headquartered in Irving, Texas. The term of the new lease commences on or about April 15, 2023 or when the finish out of the additional two offices is complete, and expires 52 months later. The new lease requires monthly lease payments of approximately $10,000 after the four-month rent abatement period.
The Company has evaluated events from December 31, 2022, through the date whereupon the consolidated financial statements were issued, and has described below the events subsequent to the end of the period.
