NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021 AND 2020
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.
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 Jose De
Gracía S.A. de C.V. (“DynaOperaciones”), and
acquired effective control of Mineras de DynaResource, S.A. de C.V.
(formerly Minera Finesterre S.A. de C.V.,
“DynaMineras”). The Company owns 100% of Dyna
Mineras.
The
Company elected to become a voluntary reporting issuer in Canada in
order to avail itself of Canadian regulations regarding reporting
for mining properties and, more specifically, National Instrument
43-101 (“NI 43-101”). This regulation sets forth
standards for reporting resources in a mineral property and is a
standard recognized in the mining industry.
Reclassifications and Adjustments
Certain
financial statement reclassifications have been made to prior
period balances to reflect the current period’s presentation
format; such reclassifications had no impact on the Company’s
consolidated statements of income or consolidated statements of
cash flows and had no material impact on the Company’s
consolidated balance sheets.
Significant Accounting Policies
The
Company’s management selects accounting principles generally
accepted in the United States of America and adopts methods for
their application. The application of accounting
principles requires the estimating, matching and timing of 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 further acknowledges that it is solely
responsible for adopting sound accounting practices, establishing
and maintaining a system of internal accounting control and
preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other
items that: 1) recorded transactions are
valid; 2) valid transactions are
recorded; and 3) transactions are recorded in
the proper period in a timely manner to produce
financial statements which present fairly the
financial condition, results of operations and
cash flows of the Company for
the respective periods presented.
Basis of Presentation
The
Company prepares its financial statements on the accrual basis of
accounting in conformity with accounting principles generally
accepted in the United States.
Principles of Consolidation
The
financial statements include the accounts of DynaResource, Inc., as
well as DynaResource de México, S.A. de C.V. (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.
Non-Controlling Interest
The
Company’s subsidiary, DynaResource de México S.A. de
C.V, was 20% owned by Goldgroup Resources, Inc. until February 24,
2020 when the Company recovered the shares as partial satisfaction
of a legal judgement. See Note 10 for further details.
The
Company accounted for this outside interest as
“non-controlling interest” through February 2020. A 20%
share of operating income (loss) and comprehensive income (loss)
was allocated to the non-controlling interest through the date of
the recovery of the shares.
Investments in Affiliates
The
Company owns a 19.95% interest in DynaResource Nevada, Inc., a
Nevada Corporation (“DynaNevada”), with one operating
subsidiary in México, DynaNevada de México, S.A. de C.V.
(“DynaNevada de México”), together
“DynaNevada”. The Company accounts for this investment
using the cost basis. The Company has significant influence over
DynaNevada, but not control, due to the lack of a majority voting
interest in the entity. DynaNevada has been dormant for several
years. DynaUSA has no plan or intention of future funding with
DynaNevada nor are any other transactions with DynaNevada
contemplated at this time. The Company therefore accounts for this
investment using the cost basis. The investment was $70,000 and
$70,000 at March 31, 2021 and December 31, 2020,
respectively.
Cash and Cash Equivalents
The
Company considers all highly liquid debt instruments with an
original maturity of three months or less to be cash
equivalents. At times, cash balances may be in excess of
the Federal Deposit Insurance Corporation (“FDIC”)
insurance limits. As of March 31,
2021, the Company had $4,153,181 of deposits in U.S. Banks in
excess of the FDIC limit.
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 March 31, 2021 and
December 31, 2020, respectively, no allowance has been
made.
Foreign Tax Receivable
Foreign
Tax Receivable is comprised of recoverable value-added taxes
(“IVA”) charged by the Mexican government on goods and
services rendered. Under certain circumstances, these
taxes are recoverable by filing a tax return. Amounts
paid for IVA are tracked and held as receivables until the funds
are remitted. The total amounts of the IVA receivable as
of March 31, 2021 and December 31, 2020 are $2,552,318 and
$2,179,914, respectively.
Inventory
Inventories
are carried at the lower of cost or net realizable value and
consist of mined tonnage, and gravity and flotation concentrates,
and gravity tailings or flotation feed material. The inventories
are $1,259,844 and $603,967 as of March 31, 2021 and December 31,
2020, respectively.
Proven and Probable Reserves (No Known Reserves)
The
definition of proven and probable reserves is set forth in SEC
Industry Guide 7 (“Industry Guide 7”). Proven reserves
for which (1) quantity is computed from dimensions revealed in
outcrops, trenches, workings or drill holes, grade and/or quality
are computed from the results of detailed sampling and (2) the
sites for inspection, sampling and measurement are spaced so
closely and the geological character is so well defined that size,
shape, depth and mineral content of the reserves are
well-established. Probable reserves are reserves for which quantity
and grade and/or quality are computed from information similar to
that used for proven (measured) reserves, but the sites for
inspection, sampling, and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although
lower than that for proven (measured) reserves, is high enough to
assume continuity between points of observations.
As of
March 31, 2021, none of the Company's properties contain
resources that satisfy the definition of proven and probable
reserves. The Company classifies the development of its properties,
including the San Jose de Gracía Property, as exploration
stage projects since no proven or probable reserves have been
established under Industry Guide 7.
Property
Substantially
all mine development costs, including design, engineering, mine
construction, and installation of equipment are expensed as
incurred as the Company has not established proven and probable
reserves on any of its properties. Only certain types of mining
equipment which has alternative uses or significant salvage value,
may be capitalized without proven and probable reserves.
Depreciation is computed using the straight-line method. Office
furniture and equipment are being depreciated on a straight-line
method over estimated economic lives ranging from 3 to
5 years. Leasehold improvements, which relate to the Company's
corporate office, are being amortized over the term of the lease of
10 years.
Design, Construction, and Development
Costs: Mine development costs include
engineering and metallurgical studies, drilling and other related
costs to delineate an ore body, the removal of overburden to
initially expose an ore body at open pit surface mines and the
building of access ways, shafts, lateral access, drifts, ramps and
other infrastructure at underground mines.
When
proven and probable reserves as defined by Industry Guide 7 exist,
development costs are capitalized, and the property is a
commercially minable property. Mine development costs incurred
either to develop new ore deposits, expand the capacity of
operating mines, or to develop mine areas substantially in advance
of current production would be capitalized. Costs of start-up
activities and costs incurred to maintain current production or to
maintain assets on a standby basis are charged to operations as
incurred. Costs of abandoned projects are charged to operations
upon abandonment. All capitalized costs would be amortized using
the units of production method over the estimated life of the ore
body based on recoverable ounces to be mined from proven and
probable reserves.
Certain
costs to design and construct mining and processing facilities may
be incurred prior to establishing proven and probable reserves. As
no proven and probable reserves have been established on any of the
Company's properties, design, construction and development costs
are not capitalized at any of the Company's properties, and
accordingly, substantially all costs are expensed as incurred,
resulting in the Company reporting larger losses than if such
expenditures had been capitalized. Additionally, the Company does
not have a corresponding depreciation or amortization of these
costs going forward since these expenditures were expensed as
incurred as opposed to being capitalized. As a result of these and
other differences, the Company's financial statements may not be
comparable to the financial statements of mining companies that
have established reserves.
Mineral Properties Interests
Mineral
property interests include acquired interests in development and
exploration stage properties, which are considered tangible assets.
The amount capitalized relating to a mineral property interest
represents its fair value at the time of acquisition. When a
property does not contain mineralized material that satisfies the
definition of proven and probable reserves, such as with the San
Jose de Gracía Property, capitalized costs and mineral
property interests are amortized using the straight-line method
once production begins. As of March 31, 2021, 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 are amortized on the unit of production method based on
estimated recoverable resources. If it is determined that the
deferred costs related to a property are not recoverable over its
productive life, those costs will be written down to fair value as
a charge to operations in the period in which the determination is
made. The amounts at which mineral properties and the
related costs are recorded do not necessarily reflect present or
future values.
Impairment of Assets: The Company
reviews and evaluates its long-lived assets for impairment when
events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. Mineral properties are
monitored for impairment based on factors such as mineral prices,
government regulation and taxation, the Company's continued right
to explore the area, exploration reports, assays, technical
reports, drill results and its continued plans to fund exploration
programs on the property.
For
operating mines, recoverability is measured by comparing the
undiscounted future net cash flows to the net book value. When the
net book value exceeds future net undiscounted cash flows, an
impairment loss is measured and recorded based on the excess of the
net book value over fair value. Fair value for operating mines is
determined using a combined approach, which uses a discounted cash
flow model for the existing operations and a market approach for
the fair value assessment of exploration land claims. Future cash
flows are estimated based on quantities of recoverable mineralized
material, expected gold and silver prices (considering current and
historical prices, trends and related factors), production levels,
operating costs, capital requirements and reclamation costs, all
based on life-of-mine plans. The term "recoverable mineralized
material" refers to the estimated amount of gold or other
commodities that will be obtained after considering losses during
processing and treatment of mineralized material. In estimating
future cash flows, assets are grouped at the lowest level for which
there are identifiable cash flows that are largely independent of
future cash flows from other asset groups. The Company's estimates
of future cash flows are based on numerous assumptions and it is
possible that actual future cash flows will be significantly
different than the estimates, as actual future quantities of
recoverable minerals, gold, silver and other commodity prices,
production levels and costs and capital are each subject to
significant risks and uncertainties.
The
recoverability of the book value of each property will be assessed
annually for indicators of impairment such as adverse changes to
any of the following:
●
|
estimated
recoverable ounces of gold, silver or other precious
minerals;
|
●
|
estimated
future commodity prices;
|
●
|
estimated
expected future operating costs, capital expenditures and
reclamation expenditures.
|
A
write-down to fair value will be recorded when the expected future
cash flow is less than the net book value of the property or when
events or changes in the property indicate that carrying amounts
are not recoverable. This analysis will be completed as
needed, and at least annually. As of the date of this filing, no
events have occurred that would require write-down of any
assets. As of March 31, 2021 and December 31, 2020, no
indications of impairment existed.
Asset Retirement Obligation
As the
Company is not obligated to remediate the mining properties, no
Asset Retirement Obligation (“ARO”) has been
established. Changes in regulations or laws, any instances of
non-compliance with laws or regulations that result in fines, or
any unforeseen environmental contamination could result in a
material impact to the amounts charged to operations for
reclamation and remediation. Significant judgments and estimates
are made when estimating the fair value of AROs. Expected cash
flows relating to AROs could occur over long periods of time and
the assessment of the extent of environmental remediation work is
highly subjective. Considering all of these factors that go into
the determination of an ARO, the fair value of the AROs can
materially change over time.
Property Holding Costs
Holding
costs to maintain a property on a care and maintenance basis are
expensed in the period they are incurred. These costs include
security and maintenance expenses, lease and claim fees and
payments, and environmental monitoring and reporting
costs.
Exploration Costs
Exploration
costs are charged to operations and expenses as incurred.
Exploration, development, direct field costs and administrative
costs are expensed in the period incurred.
Transactions in and Translations of Foreign Currency
The
functional currency for the subsidiaries of the Company is the
Mexican Peso. As a result, the financial statements of the
subsidiaries have been translated from Mexican Pesos into U.S.
dollars using (i) yearend exchange rates for balance sheet
accounts, and (ii) the weighted average exchange rate of the
reporting period for all income statement accounts. Foreign
currency translation gains and losses are reported as a separate
component of stockholders’ equity and comprehensive income
(loss).
The
financial statements of the subsidiaries should not be construed as
representations that Mexican Pesos have been, could have been or
may in the future be converted into U.S. dollars at such rates or
any other rates.
Relevant
exchange rates used in the preparation of the financial statements
for the subsidiaries are as follows for the periods ended March 31,
2021 and December 31, 2020 (Mexican Pesos per one U.S.
dollar):
|
|
|
|
Exchange
Rate at Period End
|
Pesos
|
20.45
|
19.91
|
Relevant
exchange rates used in the preparation of the income statement
portion of financial statements for the subsidiaries are as follows
for the periods ended March 31, 2021 and March 31, 2020 (Mexican
Pesos per one U.S. dollar):
|
|
|
|
Weighted
Average Exchange Rate for the Three Months Ended
|
Pesos
|
20.36
|
20.28
|
The
Company recorded currency transaction gains (losses) of $(333,735)
and $(109,375) for the three months ended March 31, 2021 and 2020,
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 are taxed at
applicable Mexican tax law.
Use of Estimates
In
order to prepare financial statements in conformity with accounting
principles generally accepted in the United States, management must
make estimates, judgments and assumptions that affect the amounts
reported in the financial statements and determines whether
contingent assets and liabilities, if any, are disclosed in the
financial statements. The ultimate resolution of issues requiring
these estimates and assumptions could differ significantly from
resolution currently anticipated by management and on which the
financial statements are based.
Comprehensive Income (Loss)
ASC 220
“Comprehensive
Income” establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The
Company’s comprehensive income consists of net income and
other comprehensive income (loss), consisting of unrealized net
gains and losses on the translation of the assets and liabilities
of its foreign operations.
Revenue Recognition
The
Company follows ASC 606 “Revenue from contracts with
customers”. The Company generates revenue by selling
gold and silver produce from its mining operations. The Company
recognizes revenue for gold and silver concentrate production, net
of treatment and refining costs, when it satisfies the performance
obligation of transferring control of the concentrate to the
customer. This is generally when the material is delivered to the
customer facility for treatment and processing as the customer has
the ability to direct the use of and obtain substantially all the
remaining benefits from the material and the customer has the risk
of loss.
The
amount of revenue recognized is initially recorded on a provisional
basis based on the contract price and the estimated metal
quantities based on assay data. The revenue is adjusted upon final
settlement of the sale. The chief risk associated with the
recognition of sales on a provisional basis is the fluctuations
between the estimated quantities of precious metals base on the
initial assay and the actual recovery from treatment and
processing.
As of
March 31, 2021 there are $6,250,000 in customer deposit liabilities
for payments received in advance expected to be settled in
2021.
During
the periods ended March 31, 2021 and 2020 there was $0 and $0 of
revenue recognized during the period from customer deposit
liabilities (deferred contract revenue) from prior periods, and $0
of customer deposits refunded to the customer on order
cancellation.
As of
and for the periods ended March 31, 2021 and December 31, 2020,
there are no contract costs or commissions deferred.
We have
elected to account for shipping and handling costs as fulfillment
costs after the customer obtains control of the goods.
Stock-Based Compensation
The
Company accounts for stock options at fair value as prescribed in
ASC 718. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing
model and provides for expense recognition over the service period,
if any, of the stock option.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash, receivables,
payables and long-term debt. The carrying amount of cash,
receivable and payables approximates fair value because of the
short-term nature of these items. The carrying amount of long-term
debt approximates fair value due to the relationship between the
interest rate on long-term debt and the Company’s incremental
risk adjusted borrowing rate.
Per Share Amounts
Earnings
per share are calculated in accordance with ASC 260
“Earnings per
Share”. The weighted average number of common
shares outstanding during each period is used to compute basic
earnings (loss) per share. Diluted earnings per share
are computed using the weighted average number of shares and
potentially dilutive common shares
outstanding. Potentially dilutive common shares
are additional common shares assumed to be
exercised. Potentially dilutive common shares consist of
stock warrants, convertible preferred shares and convertible notes
and are excluded from the diluted earnings per share computation in
periods where the Company has incurred a net loss 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 3,391,835 warrants outstanding at March 31, 2021
which upon exercise, would result in the issuance of 3,391,835
shares of common stock. Of these warrants 2,166,527 were
exercisable at $2.05 per share and 1,225,308 were exercisable at
$.01 per share. The Company also had convertible debt instruments
as of March 31, 2021 which, upon conversion at valuations from
$2.00 to $2.50 per share, would result in the issuance of 2,227,312
shares of stock.
The Company had 3,391,835 warrants outstanding at December 31, 2020
which upon exercise, would result in the issuance of 3,391,835
shares of common stock. Of these warrants 2,166,527 were
exercisable at $2.05 per share and 1,225,308 were exercisable at
$.01 per share. The Company also had convertible debt instruments
as of December 31, 2020 which, upon conversion at valuations from
$2.00 to $2.50 per share, would result in the issuance of 2,227,312
shares of stock.
|
Three months
ended March 31
|
|
|
|
Net Income (loss)
attributable to common shareholders
|
$246,334
|
$(1,788,352)
|
Shares:
|
|
|
Weighted average
number of common shares outstanding, Basic
|
17,722,825
|
17,722,825
|
|
|
|
Weighted average
number of common shares outstanding, Diluted
|
18,948,133
|
17,722,825
|
|
|
|
Basic loss per
share
|
$0.01
|
$(0.10)
|
|
|
|
Diluted loss per
share
|
$0.01
|
$(0.10)
|
At
March 31, 2021 2,166,527 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.
At
March 31, 2020 potentially dilutive common shares related to stock
warrants and convertible debt were excluded from the diluted
earning per share computation because the Company incurred a net
loss 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 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 of March 31, 2021 and
December 31, 2020, respectively, were as
follows:
|
|
|
|
|
|
Mined
Tonnage
|
$1,103,731
|
$555,608
|
Gold-Silver
Concentrates
|
156,113
|
48,359
|
Total
Inventories
|
$1,259,844
|
$603,967
|
NOTE 3 – PROPERTY
Property
consists of the following at March 31, 2021 and December 31,
2020:
|
|
|
|
|
|
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
|
(113,988)
|
(113,176)
|
Total
Property
|
$5,166
|
$5,978
|
Depreciation
has been provided over each asset’s estimated useful
life. Depreciation expense was $812 and $813 for the
periods ended March 31, 2021 and 2020 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 March 31, 2021 and December 31, 2020,
respectively.
Depletion
expense was $0 and $0 for the periods ended March 31, 2021 and
2020, respectively.
NOTE 5 – INVESTMENT IN AFFILIATE/RECEIVABLES FROM
AFFILIATE/OTHER ASSETS
The
Company owns 19.95% DynaResource Nevada, Inc.
(“DynaNevada”), a Nevada Corporation, which owns 100%
of one operating subsidiary in México, DynaNevada de
México, S.A. de C.V. (“DynaNevada de
México”). DynaNevada is a related entity (affiliate),
and through its subsidiary, DynaNevada de México has entered
into an Option agreement with Grupo México (IMMSA) in
México, for the exploration and development of approximately
3,000 hectares in the State of San Luis Potosi (“The Santa
Gertrudis Property”). DynaNevada de México exercised the
Option with IMMSA in March 2010, so that DynaNevada de México
now owns 100% of the Santa Gertrudis Property. In June 2010,
DynaNevada de México acquired an additional 6,000 hectares in
the State of Sinaloa (the “San Juan
Property”).
On December 31, 2010, the Company received 3,223,040 shares, which
represents approximately 19.95% of the outstanding shares of
DynaNevada. At the time of the exchange, DynaNevada’s net
book value was approximately $695,000, consisting of $30,000 of
cash and the remainder being unproven mining properties. Subsequent
to the exchange management determined the investment to be impaired
due to a lack of development of the properties and incurred a
charge to the income statement. Management estimated the value of
the Company’s DynaNevada shares as of March 31, 2021 and
December 31, 2020 to be $70,000 and $70,000,
respectively.
At March 31, 2021 and December 31, 2020, the Company had a
receivable from DynaNevada de México of $70,294 and $71,465,
respectively for working capital advances. These amounts are
included in Other Assets in the accompanying consolidated balance
sheets.
NOTE 6 – CONVERTIBLE PROMISSORY NOTES
Notes Payable – Series I
In April and May 2013, the Company entered into note agreements
with shareholders in the principal amount of $1,495,000, of which
$340,000 was then converted to preferred shares within the same
year, netting to proceeds of $1,155,000 (the “Series I
Notes”). The Series I Notes bear simple interest at twelve
and a half percent (12.5%), accrued for twelve months, and
with the accrued interest to be added to the principal,
and then interest will be paid by the Company, quarterly in
arrears. The holders of the Series I Notes (in aggregate) are also
entitled to receive ten percent (10%) of the net profits
received by the Company, on the first fifty thousand tons processed
through the mill facilities at San Jose de Gracía. Such net
profits (if any) are to be calculated after deducting
“all expenses related to the production”, and
after a prior deduction of thirty-three percent (33%)
from the net profits, to be deposited into a sinking fund cash
reserve. To date, the Company has not produced any net profits as
calculated in accordance with the Series I Notes.
The Notes originally matured on December 31, 2015. As of December
31, 2018, seven of the Series I Notes totaling $646,875 had
subsequently been extended to December 30, 2019. On December 31,
2019, the Company entered into agreements to extend seven
outstanding notes totaling $646,875 plus accrued interest totaling
$34,277 for new total notes of $681,152 until December 31,
2020.
On March 31, 2020 the Company entered into agreements to extend the
seven outstanding notes totaling $691,152 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.
At March 31, 2021 six Series I Notes remained outstanding with a
total balance of $455,905. The Company has the right to prepay the
Series I Notes with a ten percent (10%) penalty.
The Series I Note holder retains the option, at any time prior to
maturity or prepayment, to convert any unpaid principal and accrued
interest into Common Stock at $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.
Notes Payable – Series II
In 2013 and 2014, the Company entered into additional note
agreements of $199,808 and $250,000, respectively (the
“Series II Notes”) with similar terms as the Series I
Notes. The Series II Notes bear simple interest at twelve and a
half percent (12.5%), accrued for twelve months, and with the
accrued interest to be added to the principal, and then
interest will be paid by the Company, quarterly in arrears.
The holders of the Series II Notes (in aggregate) are also entitled
to receive ten percent (10%) of the net profits received by
the Company, on the second fifty thousand tons processed through
the mill facilities at San Jose de Gracía. Such net profits
(if any) are to be calculated after deducting “all
expenses related to the production” and after a
prior deduction of thirty-three percent (33%) from the
net profits, to be deposited into a sinking fund cash reserve. To
date, the Company has not produced any net profits as calculated in
accordance with the Series II Notes.
The Notes originally matured on December 31, 2015. 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.
At March 31, 2021, two Series II notes remained outstanding for
$87,374. The Company has the right to prepay the Series II Notes
with a ten percent (10%) penalty.
The Note holder may, at any time prior to maturity or prepayment,
convert any unpaid principal and accrued interest into common stock
of the Company at $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.
NOTE 7 – INCOME TAXES
The
Company has adopted ASC 740-10, “Income Taxes”, which requires the
use of the liability method in the computation of income tax
expense and the current and deferred income taxes payable (deferred
tax liability) or benefit (deferred tax asset). Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
The
cumulative tax effect at the expected statutory tax rate of 21% of
significant items comprising the Company’s net deferred tax
amounts as of March 31, 2021 and December 31, 2020 are as
follows:
Deferred Tax Asset Related to:
|
|
|
Prior
Year
|
$13,473,000
|
$13,780,490
|
Tax
(Expense) Benefit for Current Year
|
50,970
|
953,120
|
Expiration
of NOL Carryforward Period
|
-
|
(1,260,610)
|
Total
Deferred Tax Asset
|
13,523,970
|
13,473,000
|
Less
Valuation Allowance
|
(13,523,970)
|
(13,473,000)
|
Net
Deferred Tax Asset
|
$-
|
$-
|
For Financial Reporting Purposes Income (Loss) Before Taxes for the
Periods ended March 31, 2021 and 2020 includes the Following
Components:
|
|
|
United
States
|
$(1,114,646)
|
$(297,172)
|
Foreign
|
1,404,354
|
(1,509,439)
|
|
$289,708
|
$(1,806,611)
|
The Expense (Benefit) for Taxes for the Periods Ended March 31,
2021 and 2020 Consist of the Following:
Current
|
|
|
Federal
|
$-
|
$-
|
State
|
-
|
-
|
Foreign
|
-
|
-
|
|
$-
|
$-
|
Deferred
and Other
|
|
|
Federal
|
$(123,944)
|
$(89,605)
|
State
|
-
|
-
|
Foreign
|
72,974
|
(377,360)
|
|
(50,970)
|
(466,965)
|
|
|
|
Total
Tax Expense (Benefit)
|
(50,970)
|
(466,965)
|
Change
in Valuation Allowance
|
50,970
|
466,965
|
Net
Tax Expense (Benefit)
|
$-
|
$-
|
The Company's Income Tax Expense (Benefit)for the periods ending
March 31, 2021 and 2020 differs from the Statutory Rate of 21% due
to the following:
|
|
|
Tax
(Expense) Benefit at Statutory Rate
|
$60,839
|
$(379,388)
|
Foreign
Tax Rate Differential
|
126,392
|
(72,264)
|
Permanent
Differences
|
|
|
Stock
Issued for Services
|
-
|
|
Change
in Derivative Liability
|
83,006
|
(15,312)
|
Amortization
of Loan Discount
|
28,836
|
|
Timing
Differences
|
|
|
Depreciation
& Capitalized Assets
|
(8,163)
|
|
Sales
& Accounts Receivable
|
(137,265)
|
|
Inventory
and COGS
|
(202,905)
|
|
Other
|
(1,710)
|
|
Change
in Valuation Allowance
|
50,970
|
466,965
|
Provision
for Income Tax Expense (Benefit)
|
$-
|
$-
|
The net deferred tax asset and benefit for the current year is
generated primarily from the cumulative net operating loss
carry-forward which is approximately $53,590,000 at March 31, 2021
and will expire as follows:
United
States Expiring 2029 through
|
$18,500,000
|
|
United
States indefinite limited to 80% of NOL
|
8,390,000
|
|
Foreign
expiring from 2020 to 2021
|
26,700,000
|
|
Total
|
$53,590,000
|
|
NOTE 8 – STOCKHOLDERS’ EQUITY
Authorized Capital. The total number of
shares of all classes of capital stock which the corporation shall
have the authority to issue is 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 March
31, 2021, 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. The Company issued 1,000
shares of Series A Preferred Stock to its CEO. At March 31, 2021
and December 31, 2020, there were 1,000 shares of Series A
Preferred Stock outstanding.
Series C Senior Convertible Preferred Shares
On June 30, 2015, the Company issued 1,600,000 Series C Senior
Convertible Preferred Shares (the “Series C Preferred
Shares”) at $2.50 per share for gross proceeds of $4,000,000,
as well as issuing 133,221 additional Series C Preferred Shares due
to anti-dilution provisions (with no cash remuneration). Legal fees
of $45,000 were deducted from the proceeds of this transaction at
closing. These Series C Preferred Shares were convertible to common
shares at $2.50 per share, through June 30, 2020. The Series C
Preferred Shares may receive a 4% per annum dividend, payable if
available, and in arrears. A description of the transaction which
included the issuance of the Series C Preferred Shares is included
below. The Dividend is calculated at 4.0% of $4,337,480 payable
annually on June 30. At March 31, 2021 dividends for the years 2017
to 2020 totaling $693,459 were in arrears.
Financing Agreement with Golden Post Rail, LLC, a Texas Limited
Liability Company
1.
On
May 6, 2015, the Company, Golden Post Rail, LLC, a Texas limited
liability company (“Golden Post”), and Mr. Koy W.
(“K.D.”) Diepholz, Chairman-CEO of the Company entered
into a Securities Purchase Agreement (the “SPA”).
Pursuant to the SPA, Golden Post acquired the following
securities:
a)
1,600,000
shares of Series C Senior Convertible Preferred Stock (the
“Series C Preferred”) at a purchase price of $2.50 per
share ($4M USD), plus an additional 133,221 shares of Series C
Preferred pursuant to anti-dilution provisions. The Series C
Preferred is entitled to receive dividends at the per share rate of
four percent (4%) per annum, ranks senior (in priority) to the
Common Stock, the Series A Preferred Stock, and each other class or
series of equity security of the Company. The Series C Preferred is
convertible into Common Stock of the Company at the price of $2.41
per share and is entitled to anti-dilution protection for (i)
subsequent equity issuances by the Company and (ii) changes in the
Company’s ownership of DynaResource de México SA de CV
(“DynaMéxico”). The Series C Preferred is also
entitled to preemptive rights, and the holder has the right to
designate one person to the Company’s Board of Directors as a
Class III director.
b)
A
Common Stock Purchase Warrant (the “Golden Post
Warrant”) for the purchase of 2,166,527 shares of the
Company’s Common Stock, at an exercise price of $2.50 per
share, and expiring June 30, 2020. The anti-dilution protections
contained in the terms of the Series C Preferred are essentially
replicated in the Golden Post Warrant. The expiration of the Golden
Post Warrant was extended on May 14, 2020, pursuant to an
additional financing agreement with Golden Post.
2.
Pursuant
to the SPA, the Company executed a Registration Rights Agreement
pursuant to which Golden Post may require the Company to register
the shares of Common Stock which may be issued upon the conversion
of the Series C Preferred and the shares of Common Stock issuable
upon the exercise of the Warrant, including any additional shares
of Common Stock issuable pursuant to anti-dilution
provisions.
Additional 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 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. One half of the principal amount of the Golden Post
Note, or $1,250,000, has been fully funded in accordance with an
agreed-upon draw summary and budget. The balance of the principal
amount will also be funded in accordance with agreed-upon draw
summaries and the budget. The Golden Post Note is convertible, at
the option of Golden Post, into shares of Series D Senior
Convertible Preferred Stock (the “Series D Preferred”)
at a conversion price of $2.00 per share; and
(b)
A
common stock purchase warrant (the “2020 Warrant”) for
the purchase of 783,976 shares of the Company’s common stock,
at an exercise price of $0.01 per share, and maturing on the
10-year anniversary of the date of issuance. The 2020 Warrant
contains anti-dilution provisions; and
● The Remaining
Purchasers acquired the following securities:
(a)
Convertible
promissory notes (the “Remaining Notes”) in the
aggregate principal amount of $1,400,000, bearing interest at 10%,
and maturing two years from the date of issuance. The Remaining
Notes have been fully funded. The Remaining Notes are convertible,
at the option of each individual Remaining Purchaser, into shares
of Series D Preferred at a conversion price of $2.00 per share;
and
(b)
Common
stock purchase warrants (the “Remaining Purchasers
Warrants”) for the purchase of an aggregate of 439,026 shares
of the Company’s common stock, at an exercise price of $0.01
per share, and maturing on the 10-year anniversary of the date of
issuance. The Remaining Purchasers Warrants contain anti-dilution
provisions.
2.
Also
pursuant to the NPA, the Company and the Lead Purchaser have agreed
to amend the common stock purchase warrant dated June 30, 2015 (the
“2015 Warrant”), issued to the Lead Purchaser in
connection with that certain Securities Purchase Agreement dated as
of May 6, 2015. The 2015 Warrant contemplates the purchase, upon
exercise, of 2,166,527 shares (subject to adjustment) of the
Company’s common stock and matured June 30, 2020 (the
“Termination Date”). The amendment to the 2015 Warrant
provides that, following the expiration of the 2015 Warrant
pursuant to its terms, the Company will issue to the Lead Purchaser
a new warrant (the “New Warrant”), substantially in the
same form of the 2015 Warrant, for the number of shares of the
Company’s common stock that went unexercised on the
Termination Date, 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 Senior Convertible Preferred Stock
(“Series C Preferred”), (ii) the conversion of the
Series D Preferred, and (iii) the shares of common stock issuable
upon the exercise of the 2015 Warrant, the 2020 Warrant, 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 agreed to
call a special meeting of Company stockholders, to be held not
later than July 14, 2020, to solicit stockholder approval of (a) an
amendment of the Company’s certificate of incorporation to
increase the number of authorized shares of common stock from
25,000,000 shares to 40,000,000 shares, and (b) an amendment of the
Certificate of Designations of the Series C Preferred, in order to
(a) extend the maturity date of the Series C Preferred by an
additional two (2) years, (ii) add an equity cap in respect of the
conversion of Series C Preferred into common stock of the Company,
and (iii) add certain restrictions on the ability of the Company to
issue Series C Preferred. The special meeting was properly called
and held on July 13, 2020, whereby Company stockholders confirmed
approval for each item referenced in item 4 above.
4.
Compensatory
Issuances. On May 13, 2020, one
business day prior to the NPA, the Company issued to the Lead
Purchaser the following: (i) a common stock purchase warrant for
2,306 shares, at an exercise price of $0.01 per share, and maturing
on the 7-year anniversary of the date of issuance (the
“Compensatory Warrant”); and (ii) 1,771 shares of
Series C Preferred Shares. 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 (“Certificate of
Increase”).
(1)
Also,
on May 13, 2020, the Company filed with the Secretary of State of
Delaware a Certificate of Designations of the Powers, Preferences
and Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions
thereof of Series D Senior Convertible Preferred Stock,
contemplating the authorization of 3,000,000 shares of Series D
Preferred (“Certificate of Designation”).
The sale of the Golden Post Note, the Remaining Notes, the 2020
Warrant, the Remaining Purchasers Warrants, the Compensatory
Warrant, and the Series C Preferred was made pursuant to a
privately negotiated transaction that did not involve a public
offering of securities and, accordingly, the Company believes that
the transaction was exempt from the registration requirements of
the Securities Act pursuant to Section 4(a)(2) thereof. Each
investor represented that it (A) is an “accredited
investor” and (B) has such knowledge and experience in
financial and business matters that the investor is capable of
evaluating the merits and risks of acquiring the securities
acquired by such investor. All of the foregoing securities are
deemed restricted securities for purposes of the Securities
Act.
Due to underlying anti-dilutive provisions contained in the Series
C Preferred Shares and the Golden Post 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 Shares and the Golden Post warrants were
extended to June 30, 2022. In addition, a new derivative liability
was incurred due to the issuance of warrants for kicker shares. At
March 31, 2021 the total derivative liability was $2,766,827 which
included $712,532 for the Series C Preferred Shares, and $953,997
in connection with the Golden Post Warrants and $1,100,298 in
connection with the Series D Convertible Note Kicker Warrants. At
December 31, 2020 the total derivative liability was $2,371,560
which included $601,313 for the Series C Preferred Shares, and
$817,613 in connection with the Golden Post Warrants and $952,634
in connection with the Series D Convertible Note Kicker Warrants.
The deemed dividend for the periods ending March 31, 2021 and March
31, 2020 were $43,375 and $43,330. 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).
Due to the nature of this transaction as mandatorily redeemable,
the preferred shares are classified as “temporary
equity” on the balance sheet.
|
|
|
|
Carrying
Value, December 31, 2019
|
$4,333,053
|
Issuances
at Fair Value, Net of Issuance Costs
|
—
|
Bifurcation
of Derivative Liability
|
—
|
Relative
Fair Value of Warrants – Preferred Stock
Discount
|
4,427
|
Accretion
of Preferred Stock to Redemption Value
|
—
|
Carrying
Value, December 31, 2020
|
4,337,480
|
|
|
Issuances
at Fair Value, Net of Issuance Costs
|
—
|
Bifurcation
of Derivative Liability
|
—
|
Relative
Fair Value of Warrants – Preferred Stock
Discount
|
—
|
Accretion
of Preferred Stock to Redemption Value
|
—
|
Carrying
Value, March 31, 2021
|
$4,337,480
|
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 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 March
31, 2021 and December 31, 2020, 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
March 31, 2021 and December 31, 2020, there were 17,722,825 and
17,722,825 shares outstanding, respectively. No dividends were
paid for the periods ended March 31, 2021 and 2020,
respectively.
Preferred Rights
The Company issued “Preferred Rights” for the rights to
percentages of revenues generated from the San Jose de Gracía
Pilot Production Plant and received $784,500 for these rights. This
has been reflected as “Preferred Rights” in
stockholders’ equity. As of March 31, 2021, $744,500 had been
repaid, leaving a current balance of $40,000 and $40,000 as of
March 31, 2021 and December 31, 2020,
respectively
Stock Issuances
There
were no issuances of common stock during the periods ending March
31, 2021 and December 31, 2020.
Treasury Stock
During the year ending December 31, 2020, 262,500 treasury shares
were transferred for services provided to the Company.
No
treasury stock was issued during the period ended March 31,
2021
Outstanding
treasury shares total 516,980 at both March 31, 2021 and December
31, 2020.
Warrants
2021 activity
The
Company had 3,391,835 warrants outstanding at March 31, 2021. There
were no warrants issued or exercised in 2021 and no warrants
expired in 2021.
2020 Activity
On May 13, 2020, the Company issued 2,306 warrants to purchase
shares of common stock with an exercise price of $.01per share
related to anti-dilution provisions of the Series C preferred
stock. These warrants expire on May 13, 2027.
On May 14, 2020, the Company issued 1,223,002 warrants to purchase
shares of common stock with an exercise price of $.01 per share as
kicker shares as part of the Series D note agreements. These
warrants expire on May 14, 2030.
On June 30, 2020, as part of the Series D note agreement the
Company issued 2,166,527 warrants to purchase shares of common
stock with an exercise price of $2.05 per share to replace the
2,166,527 warrants previously outstanding which expired on that
date. These warrants expire on June 30, 2022.
At December 2020, the Company had a total of 3,391,835 warrants
outstanding.
The
Company recorded no expense related to the issuance of these
warrants since these warrants were issued in common stock for cash
sales and note conversions.
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Balance at
December 31, 2019
|
2,166,527
|
$2.45
|
0.51
|
$—
|
Granted
|
3,391,815
|
$1.31
|
4.89
|
$—
|
Exercised
|
—
|
$—
|
|
$—
|
Forfeited
|
2,166,527
|
$—
|
|
$—
|
Balance at
December 31, 2020
|
3,391,815
|
$1.31
|
4.34
|
$—
|
Granted
|
—
|
$—
|
|
$—
|
Exercised
|
—
|
$—
|
|
$—
|
Forfeited
|
—
|
$—
|
|
$—
|
Balance at
March 31, 2021
|
3,391,815
|
$1.31
|
4.09
|
$—
|
Exercisable at
March 31, 2021
|
3,391,815
|
$1.31
|
4.09
|
$—
|
NOTE 9 – RELATED PARTY TRANSACTIONS
Dynacap Group Ltd.
The
Company paid $33,750 and $15,000 to Dynacap Group, Ltd.
(“Dynacap”, an entity controlled by the CEO of the
Company) for consulting and other fees during the periods ended
March 31, 2021 and 2020, respectively.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Concession Taxes
The
Company is required to pay taxes in México in order to
maintain mining concessions owned by
DynaMéxico. Additionally, the Company is required
to incur a minimum amount of expenditures each year for all
concessions held. The minimum expenditures are
calculated based upon the land area, as well as the age of the
concessions. Amounts spent in excess of the minimum may
be carried forward indefinitely over the life of the concessions
and are adjusted annually for inflation. Based on
Management’s recent business activities and current and
forward plans and considering expenditures on mining concessions
since 2002-2017 and continuing expenditures in current and forward
activities, the Company does not anticipate that DynaMéxico
will have any difficulties meeting the minimum annual expenditures
for the concessions ($388 – $2,400 Mexican Pesos per
hectare). DynaMéxico retains sufficient carry-forward amounts
to cover over 10 years of the minimum expenditure (as calculated at
the 2017 minimum, adjusted for annual inflation of
4%).
Leases
In
addition to the surface rights held by DynaMéxico pursuant to
the Mining Act of
México and its Regulations (Ley Minera y su Reglamento),
DynaMineras maintains access and surface rights to the SJG Project
pursuant to the 20-year Land Lease Agreement. The 20 Year Land Lease Agreement with the
Santa Maria Ejido Community surrounding San Jose de Gracía was
dated January 6, 2014 and continues through 2033. It covers an area
of 4,399 hectares surrounding the main mineral resource areas of
SJG and provides for annual lease payments on January
1st
each year by DynaMineras of
$1,359,443 Pesos (approx. $72,000 USD), commencing in 2014.
The Land Lease Agreement provides DynaMineras with surface access
to the core resource areas of SJG (4,399 hectares), and allows for
all permitted mining and exploration activities from the owners of
the surface rights (Santa Maria Ejido community).
The
Company leases office space for its corporate headquarters in
Irving, Texas. In September 2017, the Company entered into a
sixty-six-month extension of the lease through 2023. As part of the
agreement the Company received six months free rent as a finish out
allowance. The Company capitalized the leasehold improvement costs
and amortized them over the rent abatement period as rent expense.
The Company makes tiered lease payments on the 1st of each
month.
Effective
January 1, 2019, the Company adopted ASC 842, which requires
recognition of a right-of-use asset and lease liability for all
leases at the commencement date based on the present value of lease
payments over the lease term. Additional qualitative and
quantitative disclosures regarding the Company's leasing
arrangements are also required. The Company adopted ASC 842
prospectively and elected the package of transition practical
expedients that does not require reassessment of (1) whether any
existing or expired contracts are or contain leases, (2) lease
classification and (3) initial direct costs. In addition, the
Company has elected other available practical expedients to not
separate lease and non-lease components, which consist principally
of common area maintenance charges, for all classes of underlying
assets and to exclude leases with an initial term of 12 months or
less.
The
Company determines if a contract is or contains a lease at
inception. As of March 31, 2021, the Company has two operating
leases - a six and one-half year lease for office space with a
remaining term of twenty-one 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
March 31,
2021
|
Operating Lease
– Office Lease
|
$21,371
|
Operating Lease
– Ground Lease
|
22,169
|
Short Term Lease
Costs
|
3,792
|
Variable Lease
Costs
|
—
|
TOTAL
|
$47,332
|
Weighted
average remaining lease term and weighted average discount rate are
as follows:
Weighted Average
Remaining Lease Term (Years) – Operating Leases
|
11.00
|
Weighted Average
Discount Rate – Operating Leases
|
12.50%
|
Estimated
future minimum lease obligations are as follow for the years ending
March 31:
YEAR
|
|
2022
|
$178,022
|
2023
|
167,719
|
2024
|
96,896
|
2025
|
99,803
|
2026
|
102,797
|
Thereafter
|
684,884
|
Total
|
$1,330,121
|
Less Imputed
Interest
|
(590,482)
|
RIGHT
OF USE LIABILITY
|
$739,639
|
Other Contingencies
The Company's mining and exploration activities are subject to
various laws and regulations governing the protection of the
environment. These laws and regulations are continually changing
and generally becoming more restrictive. The Company conducts its
operations so as to protect public health and the environment, and
believes its operations are materially in compliance with all
applicable laws and regulations. The Company has made, and expects
to make in the future, expenditures to comply with such laws and
regulations.
Arbitration filed by Goldgroup / DynaMéxico Complaint against
Goldgroup
On
March 14, 2014, Goldgroup filed for arbitration in the United
States with the American Arbitration Association ("AAA"), citing
the Earn In Agreement dated September 1, 2006 as the basis for the
arbitration filing. The Company filed an answer on April 10, 2014,
disputing that any issues exist which provide for
arbitration.
On
December 9, 2014, DynaMéxico filed an Ordinary commercial
lawsuit (Civil Claims) against Goldgroup Mining Inc., its parent
company Goldgroup Resources Inc., and the AAA, in the Thirty Sixth
Civil Court in the Federal District of México, under file 1120
number / 2014 ("the DynaMéxico Trial"). The DynaMéxico
Trial sought to terminate the U.S.-based arbitration proceedings,
as DynaMéxico believes there is no legal basis for
arbitration, and to nullify the arbitration proceedings since
Goldgroup previously sought recourse in Mexican courts. In the
DynaMéxico Trial, DynaMéxico also requests that
substantial damages (in the amount of US $50 million) be awarded to
DynaMéxico against Goldgroup for:
a)
Wrongfully using
and disseminating confidential information and data belonging to
DynaMéxico;
b)
Asserting that
Goldgroup owns any interest in the San Jose de Gracía Project
in northern Sinaloa, México, rather than accurately disclosing
that Goldgroup owns a common shares equity interest
(shareholder’s interest) in DynaMéxico;
c)
Improperly
disclosing the percentage of common shares equity interest
(shareholder’s interest) owned by Goldgroup in
DynaMéxico;
d)
Improperly
disclosing or implying that Goldgroup is the operator of the San
Jose de Gracía Project;
e)
Attempting to
delay, stop, or otherwise impair the financing of, and further
development of, the SJG Project;
f)
Making numerous
threats against DynaMéxico management and
officers;
g)
Failing to properly
disclose that broad powers of attorney for acting on behalf of
DynaMéxico are held by an individual not affiliated with
Goldgroup.
On
October 5, 2015, the Thirty Sixth Civil Court of the Superior Court
of Justice of the Federal District of México (Tribunal
Superior de Justicia del Distrito Federal), file number 1120/2014
declared, among other resolutions, that:
(a)
|
The AAA must “cease and desist” from the arbitration
proceeding;
|
(b)
|
The AAA does not have jurisdiction to hear any conflict and/or
interpretation arising from the Earn In/Option Agreement, dated
September 1, 2006; and
|
(c)
|
The AAA does not have jurisdiction to hear disputes arising between
shareholders of DynaMéxico, which disputes do not arise
directly and immediately from the Earn In/Option Agreement, dated
September 1, 2006.
|
$48M Damages Awarded to DynaMéxico
Also on
October 5, 2015, DynaMéxico was awarded in excess of US $48
million in damages from Goldgroup Resources, Inc. by virtue of a
Sentencia Definitiva (the “Definitive Sentence”) issued
by the Thirty Sixth Civil Court of the Superior Court of Justice of
the Federal District of México (Tribunal Superior de Justicia
del Distrito Federal), File number 1120/2014. The Definitive
Sentence included the considerations and resolutions by the Court,
and additional Resolutions were also ordered in favor of
DynaMéxico (together the damages award and the additional
Resolutions are referred to as, the “Oct. 5, 2015
Resolution”).
A
concise translation to English of the Oct. 5, 2015 Resolution (the
resolution portion of the Definitive Sentence) is set forth
below:
FIRST:
The action and
litigation based on commercial law filed by DynaMéxico is
valid and enforceable, and where Goldgroup and the American
Arbitration Association were found to be in default, was
proper.
SECOND:
Goldgroup is
declared in breach of its corporate duties, for failure to refrain
from claiming direct ownership of 50% of the San José de
Gracía Mining Project.
THIRD:
Goldgroup is
condemned and ordered to pay to DynaMéxico the amount of USD
$20,000,000 (Twenty Million Dollars) in damages caused by Goldgroup
to DynaMéxico, deriving from its breach of obligations in
refraining from claiming direct ownership of 50% of the San Jose de
Gracía Mining Project; which amount should be paid within five
days upon execution of this order and resolution.
FOURTH:
Goldgroup is
condemned and ordered to pay to DynaMéxico the amount of USD
$28,280,808.34 (Twenty Eight Million Two Hundred and Eighty
Thousand Eight Hundred and Eight and 34/100 Dollars), for breach of
its corporate duty and covenants with regards to the San Jose de
Gracía mining project, as a result of depriving profits from
DynaMéxico which DynaMéxico could have earned for the
sale of gold produced and extracted during the years 2013 and 2014;
amounts that should be paid within five days upon execution of this
order and resolution.
FIFTH:
Goldgroup is
condemned and ordered to pay losses and damages to DynaMéxico,
which Goldgroup continues to cause, until full payment of the
above-mentioned amounts has been made, which damages, and losses
shall be calculated by an expert opinion in a corresponding legal
procedure related to this litigation.
SIXTH:
Pursuant to Article
1424 of the Commercial Code of México, the arbitration
provision established under clause 8.16 of the Earn In/Option
Agreement, dated as of September 1, 2006, is ineffective and
impossible to execute.
SEVENTH:
This court declares
that any controversy arising from the Ear In/Option Agreement must
be brought and resolved under Mexican Law and by competent Mexican
Courts with proper jurisdiction, in recognition of the waiver and
exclusion of the arbitration clause (contained in the Earn
In/Option Agreement) by both parties.
EIGHT:
This Court declares
that the American Arbitration Association must abstain from hearing
arbitration procedure number 50 501 T 00226 14, or any other
ongoing and/or future arbitration proceeding already filed or that
may be filed by the co-defendant Goldgroup against
DynaResource.
NINTH:
This Court declares
that the American Arbitration Association does not have
jurisdiction to hear any conflict and/or interpretation arising
from the Earn In/Option Agreement, dated September 1,
2006.
TENTH:
This Court declares
that the American Arbitration Association does not have
jurisdiction to hear disputes arising between shareholders of
DynaMéxico, which disputes do not arise directly and
immediately from the Earn In/Option Agreement, dated September 1,
2006.
ELEVENTH:
This Court declares
that the American Arbitration Association does not have
jurisdiction to hear any matters where Koy Wilber Diepholz, who is
the President of the Board of Directors of DynaMéxico and has
been personally sued in relation to the arbitration clause
established under clause 8.16 of the Earn In/Option Agreement,
dated September 1, 2006, since he signed the mentioned instrument
in representation of the Company and not in his personal
capacity.
TWELFTH:
The expenses and
costs associated with these proceedings are hereby
waived.
THIRTEENTH:
LET IT SO BE
PUBLISHED. A Copy of this order and Sentence shall be found in the
corresponding records.
ORDERED, adjudged and decreed by the Thirty Sixth Civil
Judge of the Superior Court of the Federal District, Mr.
JULIO GABRIEL IGLESIAS
GOMEZ.
The
October 5, 2015 Resolution constitutes a public record which may be
viewed through the Courts in México City.
México City Court Approves Lien on Shares of DynaMéxico
owned by Minority Interest Holder
On
October 5, 2016, the Thirty-Sixth Civil Court of the Superior Court
of Justice of the Federal District of México (Tribunal
Superior de Justicia del Distrito Federal) approved a Lien
(referred to by the court as an “Embargo”), in favor of
DynaMéxico, upon Stock Certificates in the name of Goldgroup
Resources Inc. (“Goldgroup”). The Stock Certificates
subject to the Lien (“Embargo”) constitute Shares of
DynaMéxico (“the Goldgroup DynaMéxico
Shares”).
The
Goldgroup DynaMéxico Shares were seized as a partial recovery
of assets by DynaMéxico after DynaMéxico was awarded more
than $48M USD (Forty-Eight Million Dollars) in damages against
Goldgroup (the “Damages against Goldgroup”) on October
05, 2015, as described in a Sentencia Definitiva (the
“Definitive Sentence”) issued by the same court, the
Thirty Sixth Civil Court of the Superior Court of Justice of the
Federal District of México, File number 1120/2014. Excerpts
from the Definitive Sentence appear below. In addition to the
Damages against Goldgroup, the Definitive Sentence also included
additional Resolutions ordered in favor of DynaMéxico (the
Damages against Goldgroup and the additional Resolutions are
together referred to as the “Oct. 5, 2015
Resolution”).
Denial of Amparo Appeal
On
August 24, 2017 a Federal Amparo Judge (“Juzgado de
Distrito”) in the State of Vera Cruz, México, dismissed
Goldgroup Resources Inc’s Amparo Trial Challenge to the $48 M
USD damages award previously granted in favor of DynaMéxico.
Pursuant to the dismissal ruling, the $48M USD damages award,
previously granted to DynaMéxico by the Thirty-Sixth Civil
Court of the Superior Court of Justice of the Federal District of
México on October 5, 2015, was effectively
confirmed.
México Circuit Court of Appeals – Notice of Intent for
Final Ruling in Favor of DynaResource de México
On May 27, 2019, The Eleventh Collegiate Court in Civil Matters of
the First Circuit (“México Circuit Court”, and the
Court of Final Appeal for Goldgroup Resources Inc.) issued a
written notice confirming it was ruling against the Amparo Appeal
filed by Goldgroup Resources Inc. and in Favor of DynaResource de
México, S.A. de C.V. In an effort to stay the issuance
of the Ruling by the México Circuit Court, Goldgroup Resources
Inc. filed a request to The Supreme Court of México to review
the Amparo Appeal decision.
Rejection of Goldgroup Resources Inc. request to the Supreme Court
of México
On July 3, 2019 an Official Ruling from The Supreme Court of
México was issued to Reject the Request of Goldgroup Resources
Inc. (the “México Supreme Court Rejection to
Goldgroup”). The Justices of the First Chamber of the
Supreme Court of Justice of México issued a Rejection Notice
to Goldgroup Resources Inc., “due to the lack of legitimacy
presented by Goldgroup”; and in issuing the Rejection Notice
to Goldgroup, the Supreme court thereby reverted the Amparo Appeal
back to the México Circuit Court where the Official and Final
Ruling from the México Circuit Court is expected to be
issued.
Final Legal Ruling in México (DynaMéxico Final Legal
Ruling)
On
December 6, 2019 the 11th Federal Circuit
Collegiate Court in México issued its Final Ruling (“the
DynaMéxico Final Legal Ruling”).
The
DynaMéxico Final Legal Ruling is Favorable to DynaMéxico,
and denies the Amparo challenge of Goldgroup Resources Inc., the
subsidiary of Goldgroup Mining Inc. (“GGA.TO”). The
DynaMéxico Final Legal Ruling constitutes the Final Appeal of
Goldgroup Resources Inc.; and is Not subject to further appeal or
protest.
The
DynaMéxico Final Legal Ruling is the result and culmination of
7 years of legal action performed by DynaMéxico and is the
Final Ruling of the 11th Federal Circuit
Collegiate Court. With this DynaMéxico Final Legal Ruling
issued, all matters before the Court in México with respect to
DynaMéxico and Goldgroup Resources Inc. are fully resolved and
are no longer subject to appeal or reconsideration.
Legal Summary - Consequence of the México Final Legal
Ruling:
1.
The
$48,280,808.34 USD damages award (dated October 05, 2015) in favor
of DynaMéxico and against Goldgroup Resources Inc. is now
Final. Goldgroup Resources’ challenge(s) to that award have
been fully denied and the damages award is Final.
2.
The Lien against the Shares of DynaMéxico
owned by Goldgroup Resources Inc. (established October 5, 2016, the
“Lien against Goldgroup Shares”) is now fully
confirmed, Final, and enforceable.
3.
Ownership
of the shares of DynaMéxico currently held by Goldgroup
Resources (currently representing 20% of the outstanding shares of
DynaMéxico) are subject to the Lien against Goldgroup
Shares.
DynaMéxico Recovery of 100% of Goldgroup Shares
On February 20, 2020, a México City court issued its
Final Judgment, effectively foreclosing on all shares of
DynaMéxico formerly held by Goldgroup Resources Inc. and
awarding those shares to DynaMéxico (the “DynaMéxico Foreclosure
Judgment”).
The
DynaMéxico Foreclosure Judgment awarded to DynaMéxico
100% of the Shares of DynaMéxico previously owned by Goldgroup
Resources Inc. (a Subsidiary Company in México owned 100% by
Goldgroup Mining Inc., Vancouver, BC., “GGA.TO”). Prior
to the DynaMéxico Foreclosure Judgment, Goldgroup Resources
Inc. owned shares of DynaMéxico constituting 20% of the total
outstanding shares of DynaMéxico (the “Goldgroup Shares
of DynaMéxico”). The Goldgroup Shares of DynaMéxico
were held under Lien by DynaMéxico since October 2016. DynaUSA
previously owned 80% of the outstanding shares of
DynaMéxico.
Arbitration Ruling
In
direct contradiction to the October 5, 2015 Definitive Sentence
issued by court in México, on August 25, 2016 the American
Arbitration Association - International Centre for Dispute
Resolution, Denver office (the “AAA”) issued an
Arbitration Ruling (the “Arbitration Ruling”) in favor
of Goldgroup Resources Inc. against DynaMéxico and
DynaResource, Inc. The Arbitration Ruling was the result of a
proceeding in which neither DynaMéxico nor DynaResource
participated, since the Definitive Sentence issued by the court in
México effectively prohibited their participation in the
Arbitration proceeding and should have prohibited Goldgroup
Resources Inc. participation.
The
Arbitration Ruling provides the following: (i) the Earn In/Option
Agreement is still in force, and consequently Goldgroup may appoint
two directors to the DynaMéxico board, and may participate in
the appointment of a fifth director; (ii) the DynaMéxico
Management Committee is reinstated, and must approve all budgets
and expenditures; (iii) amounts expended by DynaMéxico that
were not approved by the Management Committee are subject to
repayment by DynaResource; (iv) the issuance of additional shares
by DynaMéxico (and consequent dilution of Goldgroup’s
equity interest) was in violation of the Earn In/Option Agreement;
and (v) DynaResource and DynaMéxico are responsible for
Goldgroup’s costs and professional fees associated with the
Arbitration Ruling.
Unlike
most arbitration proceedings in the U.S., the Arbitration Ruling is
not final. Since the Arbitration Ruling is subject to international
rules, the ruling may be vacated by U.S. courts, or simply not
recognized by U.S. courts, on several grounds. Accordingly, both
DynaMéxico and DynaResource have timely requested relief from
the United States Federal District Court in Colorado, via the
filing of a Petition for Nonrecognition of Foreign Arbitral Award
and/or Motion to Vacate Arbitration Award (the “Petition for
Nonrecognition”), and a supporting brief. The Petition for
Nonrecognition relies heavily upon the Mexican court’s
Definitive Sentence, key excerpts of which appear immediately
below.
The
Mexican court has already ruled that “any controversy arising
from the Earn In/Option Agreement must be brought and resolved
under Mexican Law and by competent Mexican Courts with proper
jurisdiction.” Consequently, the monetary awards against
DynaResource – which are based upon a finding that the Earn
In/Option Agreement is still in force – will not be
enforceable if the Mexican court rules that the Earn In/Option
Agreement is terminated. The Company believes that the potential
for the assessment of a material monetary judgment against
DynaResource is remote.
SIXTH:
|
Pursuant
to Article 1424 of the Commercial Code of México, the
arbitration provision established under clause 8.16 of the Earn
In/Option Agreement, dated as of September 1, 2006, is ineffective
and impossible to execute.
|
SEVENTH:
|
This
Court declares that any controversy arising from the Earn In/Option
Agreement must be brought and resolved under Mexican Law and by
competent Mexican Courts with proper jurisdiction, in recognition
of the waiver and exclusion of the arbitration clause (contained in
the Earn In/Option Agreement) by both parties.
|
EIGHT:
|
This
Court declares that the American Arbitration Association must
abstain from hearing arbitration procedure number 50 501 T 00226
14, or any other ongoing and/or future ongoing arbitration already
filed or to be filed by the defendant Goldgroup, based on the Earn
In/Option Agreement dated September 1, 2006.
|
NINTH:
|
This
Court declares that the American Arbitration Association does not
have jurisdiction to hear any conflict and/or interpretation
arising from the Earn In/Option Agreement, dated September 1,
2006.
|
TENTH:
|
This
Court declares that the American Arbitration Association does not
have jurisdiction to hear disputes arising between shareholders of
DynaMéxico, which disputes do not arise directly and
immediately from the Earn In/Option Agreement, dated September 1,
2006.
|
ELEVENTH:
|
This
Court declares that the American Arbitration Association does not
have jurisdiction to hear any matters where Koy Wilber Diepholz,
who is the President of the Board of Directors of DynaMéxico,
and has been personally sued in relation to the arbitration clause
established under clause 8.16 of the Earn In/Option Agreement,
dated September 1, 2006, since he signed the mentioned instrument
in representation of the Company and not in representation of the
Company and not in his personal capacity.
|
(a)
The Arbitration
Ruling contains an acknowledgement by the AAA that the AAA was
named as a defendant in the legal demand filed by DynaMéxico
in the Thirty Sixth Civil Court of the Superior Court of Justice of
the Federal District of México (the “DynaMéxico
Legal Demand”). The Arbitration Ruling also contains a
statement that the AAA was not properly served notice of the
DynaMéxico Legal Demand;
(b)
DynaMéxico
obeyed the October 5, 2015 Court Order and did not attend the
Arbitration hearing;
(c)
DynaMéxico
will pursue all legal remedies in order to obtain a full dismissal
of the Arbitration Ruling;
(d)
The
October 5, 2015 Court Order and the $48 million USD award of
damages against Goldgroup Resources Inc. remained in full force and
effect as issued. DynaMéxico was currently pursuing all
available remedies in order to collect $48 million USD in damages
from Goldgroup Resources Inc. (See Court Approves Lien on Shares of
DynaMéxico owned by Goldgroup Resources, above).
DynaUSA and DynaMéxico filed Motion to Vacate Arbitration
Ruling
On
November 17, 2016, DynaUSA and DynaMéxico filed a Motion to
Vacate the Arbitration Ruling in United States District Court,
District of Colorado.
Recommendation to Vacate Arbitration Ruling issued by United States
Magistrate Judge
On
February 13, 2018 a Recommendation to Vacate the Arbitration Ruling
was issued by a United States Magistrate Judge of the United States
District Court, District of Colorado.
Arbitration Award against DynaResource, Inc. and DynaResource de
México, S.A. de C.V.
On May
9, 2019, the United States District Court for the District of
Colorado confirmed the August 2016 Arbitration award against
DynaResource, Inc. and DynaResource de México, S.A. de
C.V. The district court’s decision overruled the
recommendation previously issued by the magistrate judge to sustain
the DynaResource entities’ motion to vacate the arbitration
award. Each of DynaResource, Inc. and DynaResource de México,
S.A. de C.V. intends to exercise all its rights, as appropriate,
including an appeal.
DynaResource Entities Filings in US District Court in Response to
Arbitration Ruling
DynaUSA
and DynaMéxico filed Motion to Alter Judgment
On June
6, 2019 DynaUSA and DynaMéxico file a Motion to Alter
Judgment.
DynaUSA
and DynaMéxico filed Motion for Stay of Judgment Pending
Appeal and to Waive Bond
On June
7, 2019 DynaUSA and DynaMéxico filed A Motion for Stay of
Judgment Pending Appeal and to Waive Bond.
DynaUSA
and DynaMéxico filed Motion for Leave to Supplement the
Record
On July
13, 2019 DynaUSA and DynaMéxico filed A Motion for Leave to
Supplement the Record with the following information:
“Rejection
of Goldgroup Resources Inc. request to the Supreme Court of
México”
On July
3, 2019 an Official Ruling from The Supreme Court of México
was issued to Reject the Request of Goldgroup Resources Inc. (the
“México Supreme Court Rejection to Goldgroup”).
The Justices of the First Chamber of the Supreme Court of Justice
of México issued a Rejection Notice to Goldgroup Resources
Inc., “due to the lack of legitimacy presented by
Goldgroup”; and in issuing the Rejection Notice to Goldgroup,
the Supreme court thereby reverted the Amparo Appeal back to the
México Circuit Court where the Official and Final Ruling from
the México Circuit Court is expected to be
issued.
DynaUSA
and DynaMéxico filed Reply in Support of Motion to Alter
Judgment.
On July
23, 2019 DynaUSA and DynaMéxico filed a Reply in Support of
Motion to Alter Judgment. Goldgroup Resources was confirmed to be
misleading the US District Court with inaccurate reports of the
ruling of the México Supreme Court Rejection.
Final
Legal Ruling in México (DynaMéxico Final México
Legal Ruling)
On
December 6, 2019 the 11th Federal Circuit
Collegiate Court in México issued its Final Ruling (“the
DynaMéxico Final México Legal
Ruling”).
The
DynaMéxico Final México Legal Ruling is Favorable to
DynaMéxico, and denies the Amparo challenge of Goldgroup
Resources Inc., the subsidiary of Goldgroup Mining Inc.
(“GGA.TO”). The DynaMéxico Final México Legal
Ruling constitutes the Final Appeal of Goldgroup Resources Inc.;
and is Not subject to further appeal or protest.
The
DynaMéxico Final Legal Ruling is the result and culmination of
7 years of legal action performed by DynaMéxico and is the
Final Ruling of the 11th Federal Circuit
Collegiate Court. With this DynaMéxico Final Legal Ruling
issued, all matters before the Court in México with respect to
DynaMéxico and Goldgroup Resources Inc. in México are
fully resolved and are no longer subject to appeal or
reconsideration.
Legal
Summary - Consequence of the México Final Legal
Ruling:
The
$48,280,808.34 USD damages award (dated October 05, 2015) in favor
of DynaMéxico and against Goldgroup Resources Inc. is now
Final. Goldgroup Resources’ challenge(s) to that award have
been fully denied and the damages award is Final.
The Lien against the Shares of DynaMéxico
owned by Goldgroup Resources Inc. (established October 5, 2016, the
“Lien against Goldgroup Shares”) is now fully
confirmed, Final, and enforceable.
Ownership
of the shares of DynaMéxico currently held by Goldgroup
Resources (currently representing 20% of the outstanding shares of
DynaMéxico) are subject to the Lien against Goldgroup
Shares.”
DynaMéxico Recovery of 100% of Goldgroup Shares
On February 20, 2020, a México City court issued its
Final Judgment, effectively foreclosing on all shares of
DynaMéxico formerly held by Goldgroup Resources Inc. and
awarding those shares to DynaMéxico (the “DynaMéxico Foreclosure
Judgment”).
The
DynaMéxico Foreclosure Judgment awarded to DynaMéxico
100% of the Shares of DynaMéxico previously owned by Goldgroup
Resources Inc. (a Subsidiary Company in México owned 100% by
Goldgroup Mining Inc., Vancouver, BC., “GGA.TO”). Prior
to the DynaMéxico Foreclosure Judgment, Goldgroup Resources
Inc. owned shares of DynaMéxico constituting 20% of the total
outstanding shares of DynaMéxico (the “Goldgroup Shares
of DynaMéxico”). The Goldgroup Shares of DynaMéxico
were held under Lien by DynaMéxico since October 2016. DynaUSA
previously owned 80% of the outstanding shares of
DynaMéxico.
Confirmation of Arbitration Award in U.S. District Court –
District of Colorado
On
March 25, 2020 The U.S. District Court, District of Colorado
affirmed the August 24, 2016 Arbitration Award in favor of
Goldgroup Resources Inc.
DynaUSA and DynaMéxico filed Appeal of Arbitration Affirmation
to U.S. District Court - 10th Circuit Court of
Appeals
On July
17, 2020, DynaUSA and DynaMéxico filed an Appeal of the
Affirmation of the Arbitration Award to the U.S. District Court
– 10th Circuit Court of
Appeals.
On July
17, 2020, DynaUSA and DynaMéxico posted supersedeas bond with
the U.S. District Court, District of Colorado, in the amount of
$1.111M USD.; and DynaUSA and DynaMéxico filed a motion for
Stay of Judgment pending Appeal.
U.S. Court of Appeals - 10th Circuit Court of
Appeals Denial of DynaUSA and DynaMéxico Appeal
On
April 16, 2021, the U.S. Court of Appeals for the 10th Circuit Court
issued a Ruling which denied the DynaUSA and DynaMéxico Appeal
of the August 24, 2016 Arbitration Award in favor of Goldgroup
Resources, Inc. In denying the Appeal of DynaUSA and
DynaMéxico, the Arbitration Award in favor of Goldgroup was
affirmed.
●
On July 17, 2020,
DynaUSA and DynaMéxico posted supersedeas bond with the U.S.
District Court, District of Colorado, in the Amount of $1.111M USD,
in order to fully bond the Monetary portion of the Arbitration
Award.
●
On August 24, 2020,
DynaMéxico conducted an Extraordinary Shareholder’s
Meeting of DynaMéxico, wherein all Non-Monetary portions of
the Arbitration Award were fully performed and
executed.
●
In addition to
fully performing the Monetary and Non-Monetary Portions of the
Arbitration Award; DynaUSA and DynaMéxico are analyzing the
options in response to the Ruling of the U.S. Court of Appeals,
including an Appeal.
Complaint filed by Goldgroup against the May 17, 2013
Shareholders’ Meeting of DynaMéxico
On
February 2nd, 2014, Goldgroup Resources Inc. filed a petition with
the Judge of the Tenth District Mazatlán, according to record
08/2014, in the ordinary commercial action, against DynaResource
Inc., and DynaResource de México, S.A. de CV.
(“DynaMéxico”). In the Petition, Goldgroup
complains against the results of the shareholders meeting of
DynaMéxico of May 17, 2013, and petitions for the
nullification of the meeting itself and for the nullification of
the additional shares of the outstanding capital of DynaMéxico
issued to DynaResource, Inc. in satisfaction of debts owed to
DynaResource.
DynaResource
and DynaMéxico filed a response on January 9, 2016.
DynaMéxico will vigorously defend against all such complaints
by Goldgroup, as there exists no legal basis for the complaint by
Goldgroup against the May 17, 2013 shareholders meeting of
DynaMéxico.
On
October 31, 2018, the Judge of the Tenth District declared the
Expiration of the Trial, due to inactivity of Goldgroup in the
process, and the Judge decreed the Trial as a concluded and filed
trial. As a result, the shareholders' meeting of May 17, 2013
remains valid.
On
November 16, 2018, Goldgroup appealed the declaration of Expiration
of the Trial.
On
February 12, 2019, the Court of Appeals (Segundo Tribunal Unitario
de Circuito in Mazatlán) confirmed the resolution issued
October 31, 2018 by the Judge of Tenth District and declared and
confirmed the Expiration of the Trial, due to the inactivity of
Goldgroup to the process, and therefore the Court of Appeals
decreed the matter as a concluded and filed trial. As a result, the
shareholders' meeting of May 17, 2013 remains valid.
Goldgroup
has filed a writ of amparo against the resolution of the Court of
Appeals that confirmed the declaration of expiration of the trial.
This Amparo Trial is pending resolution.
Litigation(s) in México – Company as
Plaintiff
The
Company, and DynaMéxico have filed several legal actions in
México against Goldgroup Mining Inc. and Goldgroup Resources
Inc., and certain individuals
retained as agents of Goldgroup Mining Inc., or Goldgroup
Resources. The Company and DynaMéxico are plaintiffs in the
actions filed in México and the outcomes are
pending.
The
Company believes that no material adverse change will occur as a
result of the actions taken, and the Company further believes that
there is little to no potential for the assessment of a material
monetary judgment against the Company for legal actions it has
filed in México. For purposes of confidentiality, the Company
does not provide more specific disclosure in this Form
10-Q.
Litigation
The Company believes that no material adverse change will occur as
a result of the legal actions taken, and the Company further
believes that there is little to no potential for the assessment of
an adverse material monetary judgment against the Company for legal
actions it has filed in México. Further, the Company believes
there is no legal basis for which to conduct arbitration
proceedings.
Coronavirus Pandemic
In
March 2020, the World Health Organization declared the outbreak of
a novel coronavirus (COVID-19) as a pandemic, which continues to
spread throughout the United States of America. Efforts
implemented by local and national governments, as well as
businesses, including temporary closures, are expected to have
adverse impacts on local, national and the global economies.
Although the disruption is currently expected to be temporary,
there is uncertainty around the duration and the related economic
impact. Therefore, while we expect this matter to have an
impact our business, the impact to our results of operations and
financial position cannot be reasonably estimated at this
time.
NOTE 11 – DERIVATIVE LIABILITIES
Preferred Series C Stock
As
discussed in Note 8, the Company analyzed the embedded conversion
features of the Series C Preferred Stock and determined that the
stock qualified as a derivative liability and is required to be
bifurcated and accounted for as such since the host and the
embedded instrument are not clearly and closely related. The
Company performed a valuation of the conversion feature. In
performing the valuation, the Company applied the guidance in ASC
820, “Fair Value
Measurements”, to nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring
basis. ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). To measure fair value, the Company incorporates
assumptions that market participants would use in pricing the asset
or liability and utilizes market data to the maximum extent
possible.
In
instances where the determination of the fair value measurement is
based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or
liability.
The
Company considered the inputs in this valuation to be level 3 in
the fair value hierarchy under ASC 820 and used an equity
simulation model to determine the value of conversion feature of
the Series C Preferred Stock based on the assumptions
below:
|
|
|
Annual volatility
rate
|
165%
|
156%
|
Risk free
rate
|
0.16%
|
0.13%
|
Remaining
Term
|
1.25 years
|
1.50 years
|
Fair Value of
common stock
|
$0.90
|
$0.78
|
For the
periods ended March 31, 2021 and December 31, 2020, 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 March 31, 2021 and
December 31, 2020.
Year
Ended
|
|
|
Fair value of
derivative (stock), beginning of year
|
$601,313
|
$37,038
|
Change in fair
value of derivative
|
111,219
|
276,547
|
Fair value of
derivative on the date of issuance
|
-
|
287,728
|
Fair value of
derivative (stock), end of year
|
$712,532
|
$601,313
|
Preferred Series C Warrants
As
discussed in Note 8, the Company analyzed the embedded conversion
features of the Series C Preferred Stock and determined that the
Warrants qualified as a derivative liability and is required to be
bifurcated and accounted for as such since the host and the
embedded instrument are not clearly and closely related. The
Company performed a valuation of the conversion feature. In
performing the valuation, the Company applied the guidance in ASC
820, “Fair Value
Measurements”, to nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring
basis. ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). To measure fair value, the Company incorporates
assumptions that market participants would use in pricing the asset
or liability and utilizes market data to the maximum extent
possible.
In
instances where the determination of the fair value measurement is
based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or
liability.
The
Company considered the inputs in this valuation to be level 3 in
the fair value hierarchy under ASC 820 and used an equity
simulation model to determine the value of conversion feature of
the Warrants based on the assumptions below:
|
|
|
Annual volatility
rate
|
165%
|
156%
|
Risk free
rate
|
0.16%
|
0.13%
|
Remaining
Term
|
1.25 years
|
1.5 years
|
Fair Value of
common stock
|
$0.90
|
$0.78
|
For the
periods ended March 31, 2021 and December 31, 2020, 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 March 31, 2021 and
December 31, 2020.
Year
Ended
|
|
|
Fair value of
derivative (warrants), beginning of year
|
$817,613
|
$49,066
|
Change in fair
value of derivative
|
136,384
|
367,781
|
Fair value of
derivative on the date of issuance
|
—
|
400,766
|
Fair value of
derivative(warrants), end of year
|
$953,997
|
$817,613
|
Series D Notes Kicker Warrants
As discussed in Note 8, the Company analyzed the conversion
features of the Series D Notes and determined that the Warrants
qualified as a derivative liability. The fair value was required to
be allocated among 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 Series D Warrants based on the assumptions
below:
|
|
|
Annual volatility
rate
|
165%
|
156%
|
Risk free
rate
|
0.16%
|
0.13%
|
Remaining
Term
|
9.13 years
|
10 years
|
Fair Value of
common stock
|
$0.90
|
$0.78
|
For the
periods ended March 31, 2021 and December 31, 2020, 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 March 31, 2021 and
December 31, 2020.
Year
Ended
|
|
|
Fair value of
derivative (warrants), beginning of year
|
$952,634
|
$—
|
Fair value of
derivative on the date of issuance
|
—
|
409,998
|
Change in fair
value of derivative
|
147,664
|
542,636
|
Fair value of
derivative(warrants), end of year
|
$1,100,298
|
$952,634
|
NOTE 12 – NON-CONTROLLING INTEREST
The Company’s Non-Controlling Interest recorded in the
consolidated financial statements relates to an interest in
DynaResource de México, S.A. de C.V. of 50% through May 13,
2013, and 20% until February 24, 2020 when the minority
interest was eliminated. Changes in Non-Controlling Interest for
the year ended December 31, 2020 was as follows:
|
|
Beginning
balance
|
$(5,723,663)
|
Operating
income (loss)
|
(61,589)
|
Share
of Other Comprehensive Income (loss)
|
(11,669)
|
Elimination
of Non-Controlling Interest
|
5,796,921
|
Ending
balance
|
$—
|
|
|
NOTE 13 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The ASC
guidance for fair value measurements and disclosure establishes a
fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3
measurements). The three levels of the fair value
hierarchy are described below:
Level 1 Inputs
–
Quoted prices for
identical instruments in active markets.
Level 2 Inputs
–
Quoted prices for
similar instruments in active markets; quoted prices for identical
or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
Level 3 Inputs
–
Instruments with
primarily unobservable value drivers.
As of
March 31, 2021, and December 31, 2020, the Company’s
financial assets were measured at fair value using Level 3 inputs,
with the exception of cash, which was valued using Level 1 inputs.
A description of the valuation of the Level 3 inputs is discussed
in Note 11.
Fair Value
Measurement at March 31, 2021 Using:
|
|
Quoted Prices
in
Active Markets
For
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Liabilities
|
$2,766,827
|
—
|
—
|
2,766,827
|
Totals
|
$2,766,827
|
$—
|
$—
|
$2,766,827
|
Fair
Value Measurement at December 31, 2020
|
|
|
|
|
Liabilities:
|
|
|
|
|
Derivative
Liabilities
|
$2,371,560
|
—
|
—
|
2,371,560
|
Totals
|
$2,371,560
|
$—
|
$—
|
$2,371,560
|
NOTE 14 – REVENUE CONCENTRATION
The
Company had certain customers whose revenue individually
represented 10% or more of the Company’s total revenue, or
whose accounts receivable balances individually represented 10% or
more of the Company’s total accounts receivable, as
follows:
For
each of the three months ended March 31, 2021 and 2020, three and
two customers accounted for 100% of revenue,
respectively.
At
March 31, 2021 and December 31, 2020, three and four customer
accounted for 100% of accounts receivable,
respectively.
NOTE 15 – NOTES PAYABLE
In June 2017, the Company entered into financing agreements for
unpaid mining concession taxes on the Francisco Arturo mining
concession for the period July 1, 2014 to December 31, 2015 in the
amount of $533,580. The Company paid an initial 20% payment in the
amount of $106,716 and financed the balance over 36 months at 18%
interest.
In February 2018, the Company entered into a financing agreement
for unpaid mining concessions taxes on the Francisco Arturo mining
concession for the year ended December 31, 2016 in the amount of
$552,990. The Company paid an initial payment of $110,598 and
financed the balance over 36 months at 18%.
In June 2018, the Company entered into financing agreements for the
unpaid mining concession taxes 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
21%.
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
March 31, 2021 $757,321 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 periods ended March 31, 2021
and December 31, 2020:
|
|
|
|
Balance December
31, 2019
|
2,272,431
|
Exchange
Rate Adjustment
|
(124,352)
|
2020
Principal Payments
|
(66,644)
|
Balance December
31, 2020
|
2,081,435
|
Exchange Rate
Adjustment
|
(54,168)
|
2021 Principal
Payments
|
(17,291)
|
Balance March 31,
2021
|
$2,009,976
|
|
|
At March 31, 2021
future maturities of notes payable are as
follows:
|
|
|
|
Year Ending March
31:
|
|
2022
|
$1,954,958
|
2023
|
55,018
|
|
$2,009,976
|
NOTE 16 – SUBSEQUENT EVENTS
The Company has evaluated events from March 31, 2021, through the
date whereupon the financial statements were issued, and has
determined the below described events subsequent to the end of the
period.
U.S. Court of Appeals - 10th Circuit Court of
Appeals Denial of DynaUSA and DynaMéxico Appeal
On
April 16, 2021, the U.S. Court of Appeals for the 10th Circuit Court
issued a Ruling which denied the DynaUSA and DynaMéxico Appeal
of the August 24, 2016 Arbitration Award in favor of Goldgroup
Resources, Inc. In denying the Appeal of DynaUSA and
DynaMéxico, the Arbitration Award in favor of Goldgroup was
affirmed.
●
On July 17, 2020,
DynaUSA and DynaMéxico posted supersedeas bond with the U.S.
District Court, District of Colorado, in the Amount of $1.111M USD,
in order to fully bond the Monetary portion of the Arbitration
Award.
●
On August 24, 2020,
DynaMéxico conducted an Extraordinary Shareholder’s
Meeting of DynaMéxico, wherein all Non-Monetary portions of
the Arbitration Award were fully performed and
executed.
●
In addition to
fully performing the Monetary and Non-Monetary Portions of the
Arbitration Award; DynaUSA and DynaMéxico are analyzing the
options in response to the Ruling of the U.S. Court of Appeals,
including an Appeal.