SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

 

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

OR

 

[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period ___________ to ____________.

 

Commission File Number 000-30371

 

DYNARESOURCE, INC.

(Exact name of small business issuer as specified in its charter)

  

Delaware		94-1589426
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

  

222 W Las Colinas Blvd., Suite 744 East Tower, Irving, Texas 75039

(Address of principal executive offices)

 

(972) 868-9066

(Issuer's telephone number)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

	Large Accelerated Filer [ ]		Accelerated Filer [ ]
	Non-Accelerated Filer [ ]		Smaller Reporting Company [X]

Indicate by a check mark whether the company is a shell company (as defined by Rule 12b-2 of the Exchange Act):

 

Yes [ ] No [X].

 

As of November 15, 2015, there were 16,722,825 shares of Common Stock of the issuer outstanding.

 

 

 

 

TABLE OF CONTENTS

 

 

 

PART I.	FINANCIAL STATEMENTS
ITEM 1.	Unaudited Financial Statements	3-6
	Notes to Unaudited Financial Statements	7-11
ITEM 2.	Management's Discussion and Analysis and Plan of Operation	12-20
ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	21
ITEM 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings	23-25
ITEM 2.	Unregistered Sales of Securities and Use of Proceeds	25
ITEM 3.	Default Upon Senior Securities	25
ITEM 4.	Mine Safety Disclosures	26
ITEM 5.	Other Information	26
ITEM 6.	Exhibits	26
SIGNATURES       CERTIFICATIONS		26       27-29
EXHIBIT 31.1	CHIEF EXECUTIVE OFFICER CERTIFICATION
EXHIBIT 31.2	CHIEF FINANCIAL OFFICER CERTIFICATION
EXHIBIT 32.1	CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

 

 

 

 

PART I

ITEM 1. FINANCIAL STATEMENTS

DYNARESOURCE, INC.

Consolidated BALANCE SHEETS

		September 30,				December 31,
		2015				2014
		(Unaudited)				(Audited)
ASSETS
Current Assets:
Cash and Cash Equivalents		$	3,240,546			$	250,959
Accounts Receivable			—				19,496
Inventories			87,863				100,000
Foreign Tax Receivable and Other Current			451,888				209,061
Total Current Assets			3,780,297				579,516
Mining Equipment and Fixtures (Net of Accumulated
Depreciation of $948,542 and $967,207)			650,129				205,374
Mining Concessions			4,132,678				4,194,439
Investments in Affiliate			70,000				70,000
Receivables from Affiliate			160,372				172,968
Other Assets			20,261				44,568
TOTAL ASSETS		$	8,813,737			$	5,266,865
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable		$	231,796			$	231,315
Note Payable			—				203,500
Due to Non-controlling Interest			231,500				231,500
Advances from Related Parties			150,000				—
Accrued Expenses			666,287				838,732
Total Current Liabilities			1,279,583				1,505,047
Notes Payable			956,250				1,509,855
Note Payable—Related Party			—				250,000
Financial Statement Derivative Liabilities			5,117,941				—
TOTAL LIABILITIES		$	7,353,774			$	3,264,902
Preferred Stock, Series C, $.0001 par value, 1,733,221 shares
Authorized, 1,733,221 and 0 shares issued and outstanding		$	4,333,053			$	—
Stockholders’ Equity:
Preferred Stock, Series A, $.0001 par value, 1,000 shares
Authorized, 1,000 and 1,000 issued and outstanding		$	1			$	1
Preferred Stock, $.0001 par value, 19,000,000 shares
Authorized, 0 shares issued and outstanding			—				—
Common Stock, $.01 par value, 25,000,000 shares authorized,
16,722,825 and 14,146,024 shares issued and outstanding			167,228				141,461
Preferred Rights			40,000				40,000
Additional Paid In Capital			54,671,258				50,042,582
Treasury Stock			(4,219,515	)			(4,152,750	)
Accumulated Other Comprehensive Income			5,002,489				2,495,629
Accumulated Deficit			(51,768,048	)			(40,383,731	)
Total DynaResource, Inc. Stockholders’ Equity			3,893,413				8,183,192
Non-Controlling Interest			(6,766,503	)			(6,181,229	)
TOTAL EQUITY		$	(2,873,090	)		$	2,001,963
TOTAL LIABILITIES AND EQUITY		$	8,813,737			$	5,266,865

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

DYNARESOURCE, INC.

Consolidated Statements of Operations and Other Comprehensive Loss

(unaudited)

 

		Three Months September 30, 2015				Three Months September 30, 2014				Nine Months September 30, 2015				Nine Months September 30, 2014
REVENUES		$	—			$	297,638			$	140,548			$	884,484
COSTS AND EXPENSES OF MINING
OPERATIONS
Production Costs Applicable to Sales			—				56,559				45,000				162,552
Mine Operating Costs			—				29,769				95,000				86,222
Pre-Pilot Production Costs			662,420				719,313				1,462,981				1,563,556
Property Holding Costs			178,564				104,470				414,881				391,493
General and Administrative			565,420				549,947				1,286,064				1,414,065
Share Based Compensation			791,400				—				1,277,535				687,500
Depreciation and Amortization			35,443				20,003				53,253				56,446
Total Operating Expenses		$	2,233,247			$	1,480,061			$	4,634,714			$	4,361,834
NET OPERATING LOSS			(2,233,247	)			(1,182,423	)			(4,494,166	)			(3,477,350	)
OTHER INCOME (EXPENSE)
Foreign Currency Gains (Losses)			(1,359,680	)			(174,392	)			(2,204,363	)			(167,354	)
Interest Income (Expense)			(35,759	)			(55,515	)			(195,780	)			(153,990	)
Inducement Costs			(293,822	)			—				(293,822	)			—
Other Income (Expense)			60,947				18				60,947				190
Total Other Income (Expense)		$	(1,628,314	)		$	(229,889	)		$	(2,633,018	)		$	(321,154	)
NET LOSS BEFORE TAXES		$	(3,861,561	)		$	(1,412,312	)		$	(7,127,184	)		$	(3,798,504	)
TAXES			—				—				—				—
NET LOSS		$	(3,861,561	)		$	(1,412,312	)		$	(7,127,184	)		$	(3,798,504	)
ACCRETION DUE TO PREFERRED C SHS			—				—				(4,637,178	)			—
DEEMED DIVIDEND ON PREF C			(43,687	)			—				(43,687	)			—
ATTRIBUTABLE TO NON-CONTROLLING INTERESTS			262,976				96,496				380,045				394,272
ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	(3,642,272	)		$	(1,315,816	)		$	(11,428,004	)		$	(3,404,232	)
EARNINGS PER SHARE DATA ATTRIBUTABLE TO THE EQUITY HOLDERS OF DYNARESOURCE, INC.:
Basic and Diluted Loss per Common Share		$	(.22	)		$	(.11	)		$	(.73	)		$	(.30	)
Weighted Average Shares Outstanding, Basic and Diluted			16,380,368				12,433,220				15,549,701				11,517,470
OTHER COMPREHENSIVE LOSS
NET LOSS PER ABOVE		$	(3,861,561	)		$	(1,412,312	)		$	(7,127,184	)		$	(3,798,504	)
Accretion Expense of Preferred Stock to Redemption Value			—				—				(4,637,178	)			—
Deemed Dividend for Pref Shs C			(43,687	)			—				(43,687	)			—
Foreign Currency Translation Gains (Losses)			(1,435,514	)			(18,801	)			(2,506,860	)			(32,836	)
TOTAL OTHER COMPREHENSIVE LOSS			(1,435,514	)			(18,801	)			(2,506,860	)			(32,836)
TOTAL COMPREHENSIVE LOSS		$	(5,340,762	)		$	(1,431,113	)		$	(14,314,909	)		$	(3,831,340	)
ATTRIBUTABLE TO:
EQUITY HOLDERS OF DYNARESOURCE, INC.		$	(5,237,525	)		$	(1,348,652	)		$	(14,109,680	)		$	(3,437,068	)
NON-CONTROLLING INTERESTS		$	(103,237	)		$	(82,461	)		$	(205,229	)		$	(394,272	)
TOTAL COMPREHENSIVE LOSS			(5,340,762	)			(1,431,113	)			(14,314,909	)			(3,831,340	)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

DYNARESOURCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		September 30, 2015				September 30, 2014
		(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss		$	(7,127,184	)		$	(3,798,504	)
Adjustments to reconcile net loss to cash
used in Operating activities
Issuance of Common Stock for Services			435,000				687,500
Issuance of Treasury Shares for Services			842,535				—
Inducement Expense			293,822				—
Adjustment Mark to Market for Preferred Stock, Series C			(60,515	)			—
Depreciation and Amortization			53,253				56,446
Change in Operating Assets and Liabilities:
Accounts Receivable			19,496				—
Receivables from Affiliate and Other Current			12,598				(358,058	)
Foreign Tax Receivable			(248,962	)			(250,825	)
Accounts Payable			(605	)			(29,096	)
Accrued Liabilities			(145,081	)			376,638
CASH FLOWS (USED IN) OPERATING ACTIVITIES			(5,925,643	)			(3,315,899	)
CASH FLOWS FROM INVESTING ACTIVITIES
Retirement of Property			58,754				(22,788	)
Purchase of Property			(549,110	)			—
Other Assets			24,307				(14,765	)
CASH FLOWS (USED IN) INVESTING ACTIVITIES			(466,049	)			(37,553	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Advance from Related Party			325,000				—
Proceeds from Sale of Preferred Stock, Series C			3,455,000				—
Proceeds from Note			500,000				—
Repurchase of Common Stock							(7,500	)
Proceeds from Sale of Common Stock			2,917,750				512,500
Proceeds from Sale of Preferred Stock, Series B			—				1,231,002
Payment of Note Payable			(203,500	)			—
Proceeds from Notes Payable			—				453,500
Loan from Non-Controlling Interest			—				111,500
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES			6,994,250				2,301,002
Effect of Foreign Exchange			2,387,029				154,092
NET INCREASE (DECREASE) IN CASH			2,989,587				(898,358	)
CASH AT BEGINNING OF PERIOD			250,959				1,143,344
CASH AT END OF PERIOD		$	3,240,546			$	244,986
SUPPLEMENTAL DISCLOSURES
Cash Paid for Interest		$	145,584			$	—
Cash Paid for Income Taxes		$	—			$	—
NON CASH TRANSACTIONS
Redemption of Preferred Stock, Series B for Common Stock		$	—			$	(14,333	)
Conversion of Notes Payable to Common Stock		$	(842,904	)		$	—
Issuance of Treasury Shares to Subsidiary		$	1,305,000			$	4,000,000
Capitalization  of Accrued Interest to Notes		$	33,119			$	147,291
Conversion of Advance to Common Stock		$	175,000			$	11,322
Derivative Liabilities due to Golden Post		$	5,178,458			$	—
Accretion of Preferred Stock to Redemption Value		$	4,637,178			$	—
Issuance of Common Stock for Treasury Stock		$	(1,305,000	)		$	—

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

DYNARESOURCE, INC.

Consolidated Statements of Changes in Stockholders’ Equity

 

 

		Preferred								Preferred				Preferred																Additional												Other
		Series A				Series A				Series B				Series B				Common				Common				Preferred				Paid In				Treasury				Treasury				Comprehensive								Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Rights				Capital				Shares				Amount				Income								Deficit				Total
Balance, January 1, 2015		1,000				1				—				—				14,146,024				141,461				40,000				50,042,582				1,378,013				(4,152,750			)	2,495,629								(40,383,731			)	8,183,192
Sale of Common Shares																			1,169,500				11,695								2,906,055																							2,917,750
Issuance of Shares to Subs																			750,000				7,500								1,297,500				750,000				(1,305,000	)														-
Issuance of Common Shs for Services																			250,000				2,500								432,500																							435,000
Issuance of Treasury Shs for Services																															(395,700	)			(415,700	)			1,238,235															842,535
Other Comprehensive Income																																											2,506,860											2,506,860
Establishment of Derivative   related to Golden Post Funding																															(3,025,758	)																						(3,025,758	)
Sale of warrants to Golden Post Funding																															2,106,425																							2,106,425
Fractional Shares																			139
Note Conversion to Stock																			337,162				3,372								839,532																							842,904
Advance Conversion to Stock																			70,000				700								174,300																							175,000
Inducement Costs																															293,822																							293,822
Net Loss																																																			(11,384,317	)		(7,187,699	)
Balance, September 30,2015			1,000				1				—				—				16,732,825				167,228				40,000				54,671,258				1,712,313				(4,219,515	)							5002,489				(51,768,048	)		3,893,413

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

DYNARESOURCE, INC.

Notes to the UNAUDITED Consolidated Financial Statements

September 30, 2015 and 2014

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

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 pilot production of precious metals.

The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) has been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included are adequate to make the information presented not misleading.

In management’s opinion, the unaudited Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2015 and 2014, the Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014, and the unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, contained herein, reflect all adjustments, consisting solely of normal recurring items, which are necessary for the fair presentation of the Company’s financial position, results of operations and cash flows on a basis consistent with that of the Company’s prior audited annual consolidated financial statements.  However, the results of operations for the interim periods may not be indicative of results to be expected for the full fiscal year.  Therefore, these financial statements should be read in conjunction with the audited financial statements and notes thereto and summary of significant accounting policies included in the Company’s Form 10-K for the year ended December 31, 2014.  Except as noted below, there have been no material changes in the footnotes from those accompanying the audited consolidated financial statements contained in the Company’s Form 10-K for the year ended December 31, 2014. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All inter-company accounts and transactions have been eliminated.

Certain amounts for the three and nine month periods ending September 30, 2014 have been adjusted to current reporting format.

NOTE 2 – INVESTMENT IN AFFILIATE/RECEIVABLES FROM AFFILIATE/OTHER ASSETS

DynaResource Nevada, Inc., a Nevada Corporation (“DynaNevada”), with one operating subsidiary in México, DynaNevada de México, S.A. de C.V. (“DynaNevada de México”) have common officers, directors and shareholders with the Company. The total amount loaned by the Company to DynaNevada at December 31, 2010 was $805,760. The terms of the Note Receivable provided for a “Convertible Loan,” repayable at 5% interest over a 3-year period, and convertible at the Company’s option into Common Stock of DynaNevada at $0.25 / Share.  On December 31, 2010, the Company converted its receivable from DynaNevada into 3,223,040 Shares of DynaNevada; and as a result, the Company owns 19.92% of the outstanding share capital of DynaNevada. DynaNevada is a related entity, and through its subsidiary in México (DynaNevada de México), (“DynaNevada de México”), 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”). In March, 2010, DynaNevada de México completed the Option with IMMSA so that it now owns 100% of Santa Gertrudis. In June, 2010, DynaNevada de México acquired an additional 6,000 Hectares in the State of Sinaloa (“the San Juan Property”). The Company has loaned additional funds to DynaNevada since 2010 for maintenance of concessions and other nominal required fees and expenses. The Company currently has a receivable from DynaResource Nevada, Inc. of $160,372 and an investment balance of $70,000 as of September 30, 2015. The balances as of December 31, 2014 were $172,968 in receivables and $70,000 in investment, respectively.

NOTE 3 – PROMISSORY NOTES

Notes Payable – Series I

In April and May, 2013, the Company entered into note agreements with individual shareholders in the principal amount of $1,495,000, of which $340,000 was then converted to Series B Preferred shares within the same year, netting to proceeds of $1,155,000 (the “Series I Notes” Series I). The Series I Notes bear simple interest at twelve and a half percent (12.5%), accrued interest for twelve months, and with the accrued interest to be added to the principal, and then interest to 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, and generated from the bulk sampling material (if any, and up to fifty thousand tonnes) processed through the existing, or improved mill facilities at San Jose de Gracia. Such net profits (if any) are to be calculated after deducting all expenses related to the processing of the bulk sample material, and after a prior deduction of thirty-three percent (33%) from the profits, to be deposited in a sinking fund cash reserve. This net profit percentage (if any) would be paid quarterly in arrears based on the profits generated (if any) for the prior quarter. At the time of the Series I Notes, there were no proven or probable reserves and the Company had not produced any net profits. Consequently, the fair value of the net profits interest on the date of the Series I Note was deemed to be zero. Further, no payments have been made under the terms of this codicil. The Notes originally matured on December 31, 2015. In April, 2015, the notes were extended to December 31, 2016.

The Company has the right to prepay the Series I Notes with a ten percent (10%) penalty. The notes are secured by the Company’s stock at $5 per share.

 

The Series I Note holder retains the option, at any time prior to maturity or prepayment, to convert any unpaid principal and accrued interest into Common Stock at $5.00 per share. If the Series I Note is converted into Common Stock, at the time of conversion, the holder would also receive warrants, in the same number as the number of common shares received upon conversion, to purchase additional common shares of the Company for $7.50 per share, with such warrants expiring on December 31, 2015. In 2013, the Company offered an inducement to all Series I Note holders to convert their Series I Notes and accrued interest into Series B Preferred Stock (“Series B”), $5/Share, which Series B was convertible into common stock on a 2 for 1 basis (i.e., $2.50 stock). This conversion into Series B created $197,771 in inducement expense, with an offset to additional paid in capital. In 2013, $340,000 principal and $22,734 of capitalized accrued interest of the Series I Notes were converted into Preferred Stock, Series B and 72,546 shares were issued. At September 30, 2014, these 72,546 Series B shares were converted into 145,092 common shares.

In April, 2015, the Company received note extensions (allonges) from all Series I note holders to ensure that all Series I Notes were in good standing and it also extended the maturity date of the Series I Notes to December 31, 2016.

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, and generated from the bulk sampling material (if any, on the second fifty thousand tonnes) processed through the existing, or improved mill facilities at San Jose de Gracia. Such net profits (if any) are to be calculated after deducting all expenses related to the processing of the bulk sample material, and after a prior deduction of thirty-three percent (33%) from the profits, to be deposited in a sinking fund cash reserve. This net profit percentage (if any) would be paid quarterly in arrears based on the profits generated (if any) for the prior quarter. At the time of the Series II notes, there were no proven or probable reserves and the Company had not produced any net profits. Consequently, the fair value of the net profits interest on the date of the Series II note was deemed to be zero. Further, no payments have been made under the terms of this codicil. The Notes mature on December 31, 2016.

The Company retains the right to prepay the Notes with a ten percent (10%) penalty. The notes are secured by the Company’s stock at $5 per share. The Note holder may, at any time prior to maturity or prepayment, convert any unpaid principal and accrued interest into common stock of the Company at $5.00 per share. At the time of conversion, the holder would receive a warrant to purchase additional common shares of the Company for $7.50 per share, such warrant expiring on December 31, 2016.

Series I and Series II Notes Outstanding

The principal and interest balances on the Series I Notes as of September 30, 2015 and December 31, 2014 were $765,000 and $1,285,607, respectively. The principal and interest balances on the Series II Notes as of September 30, 2015 and December 31, 2014 were $191,250 and $474,278, respectively, for total Note balances of $956,250 and $1,759,885 as of September 30, 2015 and December 31, 2014, respectively. The accrued interest for these notes was $29,883 and $109,292 as of September 30, 2015 and December 31, 2014, respectively. The principal balance on the Note—Related Party was $0 and $250,000 as of September 30, 2015 and December 31, 2014, respectively.

In April, 2015, the Company received allonges (note extensions) from all noteholders to ensure that all notes were in good standing and also confirmed the maturity of the Series II notes to be December 31, 2016. We have evaluated the terms of the allonges and have concluded that they are not extinguishments as defined in EITF 96-19.

Note Conversion Contracts

On June 30, 2015, the Company entered into conversion agreements with six (6) note holders. Principal and interest in the amount of $809,784 plus $33,119 of accrued interest (total of $842,903) was contracted to convert into 337,162 common shares. In addition, 337,162 warrants are to be issued which provide the option to purchase common shares at $2.50, with all warrants expiring December 31, 2017. The Company recorded $293,822 inducement expense related to these conversion transactions.

On August 17, 2015, these common shares and warrants were issued.

NOTE 4 – STOCKHOLDERS’ EQUITY

Issuance of 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). These Series C Preferred Shares are convertible to common shares at $2.50 per share, through February 20, 2020. The Series C Preferred Shares may receive a 4% per annum dividend, payable if available, and in arrears. A description of the transaction which included the issuance of the Series C Preferred Shares is included below.

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. (“J.D.”} Diepholz, Charman-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 $2.50 per share, and is entitled to anti-dilution protection for (i) subsequent equity issuances by the Company and (ii) changes in the Company’s ownership of DynaResource de México SA de CV (“DynaMéxico”). The Series C Preferred is also entitled to preemptive rights, and the holder has the right to designate one person to the Company’s Board of Directors as a Class III director.

b)

A Common Stock Purchase Warrant (the “Golden Post Warrant”) for the purchase of 2,166,527 shares of the Company’s Common Stock, at an exercise price of $2.50 per share, and expiring June 30, 2020. The anti-dilution protections contained in the terms of the Series C Preferred are essentially replicated in the Golden Post Warrant.

2.

On May 6, 2015, the Company executed a Promissory Note (the “Golden Post Note”) payable to Golden Post in the principal amount of $500,000, and bearing interest at 8%. The principal amount of the Golden Post Note and accrued interest to June 30, 2015 in the amount of $6,000 were credited against amounts payable to the Company pursuant to the Securities Purchase Agreement described above.

3.

Pursuant to the SPA, the Company executed a Registration Rights Agreement pursuant to which Golden Post may require the Company to register the shares of Common Stock which may be issued upon the conversion of the Series C Preferred and the shares of Common Stock issuable upon the exercise of the Warrant, including any additional shares of Common Stock issuable pursuant to anti-dilution provisions.

Due to underlying anti-dilutive provisions contained in the Series C Preferred Shares and the Golden Post Warrant, the Company incurred derivative liabilities of $2,152,700 in connection with the Series C Preferred Shares, and $3,025,758 in connection with the Golden Post Warrant. Additionally, the Company fully accreted the discount related to the Series C Preferred Shares and the Golden Post Warrant in the amount of $4,637,178, which is reflected “below” the net income (loss) amount. Legal fees of $45,000 was deducted from the proceeds of this transaction at closing.

In the current quarter, these contracts were adjusted from mark to market and a reduction of the derivative liability was recorded in the amount of $60,517, with the offset to other expense.

Also in the current quarter, the Company reported $40,000 deemed dividend for Golden Post Rail related to its 4% dividend terms. As the Company has not declared these dividends, it is required only as an item “below” the net income (loss) amount.

Due to the nature of this transaction as mandatorily redeemable, the preferred shares are classified as “temporary equity” on the balance sheet.

Common Stock Issuances

During the three months ended September 30, 2015, the Company issued 407,162 common shares for the conversion of notes, accrued interest and advances at $2.50 per share. These stock issuances also included the issuance of 407,162 warrants exercisable at $2.50 per share, expiring December 31, 2017. During the nine months ended September 30, 2015, the Company issued 1,169,500 common shares for cash at $2.50 per share, and the Company also issued 1,319,000 Warrants, with 1,020,000 of these warrants exercisable at $2.50 per share expiring December 31, 2017 and 149,500 warrants exercisable at $5 per share through December 31, 2015 and 149,500 warrants exercisable at $7.50 per share, expiring December 31, 2016.

During the nine months ended September 30, 2015, the Company issued 1,169,500 shares of common stock for cash of $2,917,750.

During the nine months ended September 30, 2015, the Company issued 750,000 common shares to Mineras de DynaResource S.A. de C.V. (“DynaMineras”, a wholly owned subsidiary) in exchange for services at a fair value of $1.74 per share. The shares are carried in Treasury for consolidation purposes.

During the nine months ended September 30, 2015, the Company issued 250,000 shares to Dynacap Group Ltd., a related party, for services rendered at a fair value of $1.74 per share.

Treasury Stock Distributions

During the current quarter, the Company recognized $791,400 of expense related to the distribution of 395,700 treasury shares for services rendered. During the first quarter 2015, the Company recognized $51,135 in expense for the distribution of 20,000 treasury shares.

In August, 2014, the Company distributed 20,000 treasury shares.

Note Conversions

As described in Note 3, Six (6) Noteholders converted principal and interest in the amount of $809,784 plus $33,119 of accrued interest (total of $842,903) into 337,162 shares of common stock ($2.50 per share). In addition, 337,162 warrants were issued, exercisable at $2.50 per share, expiring December 31, 2017.

 

Chairman / CEO Conversion of Advance

During the current quarter and as noted above, the Company converted $175,000 of advances from the CEO for the issuance of 70,000 shares of common (at $2.50 per share) as well as issuing 70,000 warrants, exercisable at $2.50 per share, expiring December 31, 2017.

NOTE 5 – RELATED PARTY TRANSACTIONS

Dynacap Group Ltd.

The Company paid $22,500 and $45,750 to Dynacap Group, Ltd. (an entity controlled by an officer of the Company (“Dynacap”) for consulting and other fees during the three and nine months ended September 30, 2015. For the three and nine months ended September 30, 2014, the amounts paid to Dynacap were $16,000 and $69,750, respectively.

The Company also issued 250,000 shares of common stock in February, 2015 to Dynacap for services performed.

Cash Advances by Management

Company Chairman/CEO contributed $175,000, and Company CFO contributed $150,000 in the nine months ended September 30, 2015 as advances to the Company. The CEO also received 20,000 treasury shares in the current quarter.

As noted above, the Company converted $175,000 of advances from the CEO for the issuance of 70,000 shares of common (at $2.50 per share) as well as 70,000 warrants, exercisable at $2.50 per share, expiring December 31, 2017.

CFO Conversion Contract of Note Receivable

On April 24, 2015, the Company’s CFO agreed to convert a $281,500 note ($250,000 principal and capitalized interest of $31,250) into common stock at $2.50 per share. On June 30, 2015, this agreement was revised to be included with the additional other note holders that agreed to note conversion as of June 30, 2015 and received the same terms as other shareholders. Therefore, an additional $6,792 of accrued interest through June 30, 2015 yielded a total of 115,217 common shares (at $2.50 per share) and 115,217 warrants. These shares and warrants were issued on August 17, 2015.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

The Company is required to pay taxes in México in order to maintain mining concessions owned by DynaMéxico.  Additionally, the Company is required to incur a minimum amount of expenditures each year for all concessions held.  The minimum expenditures are calculated based upon the land area, as well as the age of the concessions.  Amounts spent in excess of the minimum may be carried forward indefinitely over the life of the concessions, and are adjusted annually for inflation.  Based on Management’s business plans, the Company does not anticipate that DynaMéxico will have any issues in meeting the minimum annual expenditures for the concessions, and DynaMéxico retains sufficient carry-forward amounts to cover over 20 years of the minimum expenditure (as calculated at the 2014 minimum, adjusted for annual inflation of 4%).

In addition to the surface rights held by DynaMéxico pursuant to the Mining Act of México and its Regulations (Ley Minera y su Reglamento), DynaMineras maintains access and surface rights to the SJG Project pursuant to a 20-year Land Lease Agreement with the Santa Maria Ejido community adjacent to San Jose de Gracia. The 20 Year Land Lease Agreement with the Santa Maria Ejido was dated January 6, 2014 and continues through 2033. It covers an area of 4,399 hectares surrounding the main mineral resource areas of SJG, and provides for annual lease payments by DynaMineras of $1,359,443 Pesos (approx. $85,000 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).

In September 2008, the Company entered into a 37-month lease agreement for its corporate office.  In June, 2015, the Company entered into a one-year extension of the lease through August 31, 2016. The Company paid rent expense of $41,800 and $31,700 related to this lease for the nine months ended September 30, 2015 and 2014, respectively.

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.

Litigation

The Company believes that no material adverse change will occur as a result of the legal actions taken, and the Company further believes that there is little to no potential for the assessment of a material monetary judgment against the Company for legal actions it has filed in México. Further, the Company believes there is no legal basis for which to conduct arbitration proceedings. (See Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations; and see Part II, Item 1. Legal Proceedings.)

 

 

NOTE 7 – 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 20%. Changes in Non-Controlling Interest for the nine months ended September 30, 2015 and 2014, respectively were as follows:

		Sept 30, 2015				Dec 31, 2014
Beginning balance		$	(6,181,229	)		$	(5,680,107	)
Operating income (loss)			(380,045	)			(536,357	)
Share of other comprehensive income (loss)			(205,229	)			35,235
Ending balance		$	(6,766,503	)		$	(6,181,229	)

The Company began allocating a portion of other comprehensive income (loss) to the non-controlling interest with the adoption of ASC 160 as of January 1, 2009. However, this amount is only reflected in the income statement.

NOTE 8 – SUBSEQUENT EVENTS

Damages Awarded to DynaMéxico in México Litigation

On October 5, 2015 DynaResource de México SA de C.V. (“DynaMéxico”), was awarded in excess of $48 M USD (Forty-Eight Million Dollars) in damages from Goldgroup Resources, Inc. (the “Goldgroup Damages”) by virtue of a Sentencia Definitiva (the “Definitive Sentence”) issued by the Thirty Sixth Civil Court of the Superior Court of Justice of the Federal District of México (Tribunal Superior de Justicia del Distrito Federal), File number 1120/2014. The Definitive Sentence included the considerations and resolutions by the Court, and additional Resolutions were also ordered in favor of DynaMéxico (together the Goldgroup Damages and the additional Resolutions are referred to as, the “Oct. 5, 2015 Resolution”). The October 5, 2015 Resolution is described below; See Part II, Item 1., Legal Proceedings, $48 M USD in Damages Awarded to DynaMéxico in México Litigation.

Gold Sales

On November 3, 2015, DynaMineras reported the delivery for sale of an approximate 350 Oz gold contained in concentrates (exact weights in gold and silver oz. to be determined at final settlement).

NOTE 9 – 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 September 30, 2015 and 2014, carrying value of the Company’s financial assets and liabilities, such as cash, receivables, inventories approximate fair value because of their short maturity. The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors based on historical quoted market prices for the Company’s common stock and are classified within Level 3 of the valuation hierarchy.

Fair Value Measurement at September 30, 2015 Using:

		September 30, 2015				Quoted Prices In Active Markets For Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Derivative Liabilities—December 31, 2014  beginning balance			—				—				—			$	—
Golden Post Derivatives June 30, 2014			(5,178,456	)			—				—				(5,178,456	)
Golden Post Mark to Market Derivative Adjustment			60,515												60,515
Totals September 30, 2015 Balance			(5,117,941	)			—				—			$	(5,117,941	)
Fair Value Measurement at September 30, 2014 Using:
None			—				—				—			$	—
Totals			—				—				—			$	—

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to in this annual report as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this annual report as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in this annual report. Factors that can cause or contribute to these differences include those described under the heading “Management Discussion and Analysis and Plan of Operation.”

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statement you read in this annual report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this annual report. The Company expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any change in its views or expectations. The Company can give no assurances that such forward-looking statements will prove to be correct.

CAUTIONARY NOTE TO UNITED STATES INVESTORS—INFORMATION CONCERNING PREPARATION OF RESOURCE AND RESERVE ESTIMATES

The Company is an “OTC Reporting Issuer” as that term is defined in BC Multilateral Instrument 51-105, Issuers Quoted in the U.S. Over-the-Counter Markets, promulgated by the British Columbia Securities Commission. Accordingly, certain disclosure in this quarterly report has been prepared in accordance with the requirements of securities laws in effect in Canada, which differ from the requirements of United States securities laws. In Canada, an issuer is required to provide technical information with respect to mineralization, including reserves and resources, if any, on its mineral exploration properties in accordance with Canadian requirements, which differ significantly from the requirements of the United States Securities and Exchange Commission (the “SEC”) applicable to registration statements and reports filed by United States companies pursuant to the Securities Act or the Exchange Act. As such, information contained in this annual report concerning descriptions of mineralization under Canadian standards may not be comparable to similar information made public by United States companies subject to the reporting and disclosure requirements of the SEC and not subject to Canadian securities legislation. This annual report may use the terms “measured mineral resources”, “indicated mineral resources” and “inferred mineral resources”. While these terms are recognized and required by Canadian securities legislation (under National Instrument 43-101, Standards of Disclosure for Mineral Projects), the SEC does not recognize them. United States investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted to reserves. In addition, “inferred mineral resources” have a great amount of uncertainty as to their existence and economic and legal feasibility. It cannot be assumed that all or any part of a measured mineral resource, indicated mineral resource or inferred mineral resource will ever be upgraded to a higher category. Under Canadian securities legislation, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, although they may form, in certain circumstances, the basis of a “preliminary economic assessment” as that term is defined in National Instrument 43-101, Standards of Disclosure for Mineral Projects. U.S. investors are cautioned not to assume that any part or all of any reported measured, indicated, or inferred mineral resource estimates referred to herein or in the Technical Report are economically or legally mineable.

Company

The Company is a minerals investment, management, and exploration company, and currently conducting test mining and pilot milling operations through an operating subsidiary in México, with specific focus on precious and base metals in México. The Company was incorporated in the State of California on September 28, 1937, under the name West Coast Mines, Inc. In November 1998, the Company re-domiciled from California to Delaware and changed its name to DynaResource, Inc. (“DynaUSA”).

In 2000, the Company formed DynaResource de México S.A. de C.V. (“DynaMéxico”) for the purpose of acquiring and holding mineral properties and mining concessions in México and, specifically for acquiring and consolidating the Mining District of San Jose de Gracia. DynaMéxico completed the consolidation of the entire SJG District to DynaMéxico in 2003 (approx. 15 sq. km. at that time), with the exception of the San Miguel Mining Concession (7 Hectares, for which DynaMéxico is proceeding towards accomplishing the transfer of title, under previously signed sale and purchase agreements).

DynaMéxico currently owns a portfolio of mining concessions, equipment, camp and related facilities which comprise the San José de Gracia Project (“SJG”). The mining concessions cover 69,121 hectares (170,802 acres) on the west side of the Sierra Madre mountain range, in northern Sinaloa State.

 

The Company currently owns 80% of the outstanding shares of DynaMéxico. We also own 100% of Mineras de DynaResource S.A. de C.V. (“DynaMineras”), the exclusive operator of the San José de Gracia Project, under contract with DynaMéxico, and we own 100% of DynaResource Operaciones de San Jose de Gracia, S.A. de C.V., (“DynaOperaciones”), a company which manages the personnel registered to work at the San Jose de Gracia Project.

San Jose de Gracia - History

Historical production records from San Jose de Gracia (“SJG”) report 1,000,000 Oz gold production from a series of underground workings. The major areas report 471,000 Oz. produced at the La Purisima area of SJG, at an average grade of 66.7 g/t.; and 215,000 Oz. produced from the La Prieta area, at an average grade of 27.6 g/t. Mineralization at SJG has been traced on surface and underground over 15 sq. km.

DynaMéxico was formed in March 2000, for the purpose of acquiring the concessions comprising the SJG District, and to consolidate all ownership of SJG under DynaMéxico. DynaMéxico focused on acquisition and consolidation work through 2003, and reported a virtually clear title and consolidated ownership to the district at December 31, 2013.

Drilling – Exploration Programs (1997 – 2000)

A drill program was conducted at SJG in 1997 to 1998 by a prior majority owner. Approximately 6,172 meters drilling was completed in 63 core drill holes. Significant intercepts, including bonanza grades, outlined the down dip potential of the Northeast section (150 Meter NE to SW extent of the Drilling) of the Los Hilos to Tres Amigos Trend of SJG. Surface and underground sampling in 1999 to 2000 confirmed high grades in historic workings and surface exposures throughout the project area. These high grades outline the presence of mineralization shoots developed within the veins. The mineralized shoots appear to be controlled by dilational jogs and/or vein intersections. A total of 544 samples were collected in 1999 to 2000, and assayed an average 6.51 g/t gold.

Structure of Company / Operations

Activities in México are currently conducted by DynaMineras; with the management of personnel being contracted by DynaMineras through to DynaOperaciones. Executive Management of DynaResource, Inc. and consultants manage the operating companies in México; while the Chairman/CEO of DynaUSA is the President of each of DynaMéxico, DynaMineras and DynaOperaciones. Fees for management and administration are charged by DynaMineras and DynaOperaciones, which are eliminated in consolidation.

Exclusive Operating Entity at San Jose de Gracia

Under agreement with DynaMéxico, Mineras de DynaResource S.A. de C.V. (“DynaMineras”) has been named the exclusive operating entity at the San Jose de Gracia Project. DynaResource owns 100% of DynaMineras.

DynaMéxico General Powers of Attorney

The Chairman-CEO of DynaUSA also serves as the President of DynaMéxico. The President of DynaMéxico holds broad powers of attorney granted by the shareholders of DynaMéxico which gives the current President significant and broad authority within DynaMéxico.

Company Ownership and Description of Subsidiaries

A description of the subsidiaries owned by the Company and its ownership in each is summarized below:

DynaResource de México, S.A. de C.V.: 80% Owned by DynaResource, Inc.

·

100% owner of the San Jose de Gracia Property;

Mineras de DynaResource, S.A. de C.V.: 100% Owned by DynaResource, Inc.

·

Exclusive Operator of the San Jose de Gracia Project;

·

Entered into Exploitation Agreement (“EAA”) with DynaMéxico (See EAA below);

·

Entered into 20-year Surface Rights Agreement with the Santa Maria Ejido (See Surface Rights Agreement below);

DynaResource Operaciones de San Jose de Gracia, S.A. de C.V.: 100% Owned by DynaResource, Inc.

·

Personnel Management Company at San Jose de Gracia;

Pilot Production Activities (2003 – 2006)

DynaMéxico, conducting operations through DynaMineras, mined high-grade veins at the San Pablo area of SJG from mid-2003 to June 2006. 18,250 Oz. gold was produced and sold from mill feed tonnage of 42,000 tonnes, at an average grade of approximately 15-20 g/t. Production costs were reported at approximately $175/Oz. gold in this small scale, pilot production operation (See results in table below). The pilot operations at SJG consisted of the installation of a gravity/flotation processing circuit to an existing mill, and initial test runs with tailings were completed in 2002. Actual test mining at the higher grade San Pablo area of the property commenced in March 2003.

Mined and Milled Tonnage	42,000 tonnes
Production (Oz Au)	18,250 Oz
Average Grade	15-20 g/t
Recovery Efficiency (Plant)	85%
Recovery in Concentrate (Sales)	90%
Production Cost (Average, 4 Years)	$175 / Oz

 

 

Suspension of Production Activities (2006)

The Company initiated the test production activity in 2003 and, at that time, gold prices were depressed. Exploration funding opportunities, while available, were deemed to be too dilutive by Company management. Subsequently, in 2006, commodities prices were improving and the Company was able to negotiate financing in order to fund exploration activities. Therefore, the Company suspended test mining activities in 2006 in order to focus on the exploration of the vast SJG District. While the test mining and pilot milling operations were considered successful (see results in the table above), a small scale production operation was not expected to provide the necessary capital in order to fund exploration of the vast SJG District. The limited-scope pilot production activity provided significant benefits through confirmation of production grades, metallurgy and process, efficiency of recoveries, and production costs.

Drilling programs (2007 – 2011)

Drilling programs completed by the Company’s subsidiaries produced a total of 298 drill holes covering 68,741 meters of drilling from 2007 through March 2011. Results of the drilling activity, including the results of previous drilling in 1997-1998, appear in an “SJG Drill Intercepts Summary File through 11-298”, as Exhibit 99.1 to our Form 10-Q for the period ended June 30, 2011 filed with the SEC on August 22, 2011, and available on EDGAR at: [http://www.sec.gov/Archives/edgar/data/1111741/000112178111000241/ex99one.htm]. Additionally, the updated Drill Summary File is posted on the Company’s web site at www.dynaresource.com.

Mineral Resource Estimate and Technical Report 43-101 (2012)

In 2012, DynaMéxico commissioned Servicios y Proyectos Mineros (“SPM”) for the production of Technical Report 43-101 (“43-101”) at San Jose de Gracia. Additionally, DynaMéxico commissioned Mr. Robert Sandefur, a senior reserve analyst for Chlumsky, Armbrust & Meyer LLC, Lakewood, CO (“CAM”) to produce a mineral resource estimate for the 4 main vein systems at the property.

Parameters Used to Estimate the Mineral Resource Estimate--The data base for the San Jose de Gracia Project consists of 372 drill holes of which 361 are diamond drill holes (“DDH”) and the remaining 11 were reverse circulation holes “(RC”), with a total drilling of 75,878 meters. The 2012 DynaMéxico-CAM SJG Mineral Resource Estimate concentrates on four main mineralized vein systems at SJG: Tres Amigos, San Pablo, La Union, and La Purisima. Of the 372 drill holes, 368 were drilled to test these four main vein systems and the remaining four holes tested the Argillic Zone. Technical personnel of Minop S.A. de C.V. (“Minop”), a subsidiary (or affiliate) of Goldgroup Mining Inc. (“Goldgroup”) built three dimensional solids to constrain estimation to the interpreted veins in each swarm. The 172 holes most recently drilled (2009-2011), were allocated as follows: Tres Amigos (64 holes), San Pablo (49 holes), La Union (24 holes), La Purisima (32 holes) and Argillic Zone (3 holes). The data base also includes rock and chip sampling, regional stream sediment sampling, and IP Surveys.

Density--A total of 5,540 pieces of core were measured for specific gravity using the weight in air vs. weight in water method. This represents an additional 3,897 measurements taken in the 2009-11 drill seasons with density measurements taken from all mineral zones. Dried samples were coated with paraffin wax before being measured. The results tabulated have been sorted by lithology and mineralized veins. The average specific gravity of 5,051 wall rock samples was 2.59 while the average specific gravity for 489 samples of vein material is 2.68. CAM and Servicios y Proyectos Mineros have reviewed the procedures and results, and opine that the results are suitable for use in mineral resource estimation.

Mineral Resource Estimate - Construction of Wireframes--Mineral Resources were estimated by Mr. Sandefur within wireframes constructed by technical personnel of Minop. Minop was contracted by Mineras de DynaResource S.A. de C.V. (“DynaMineras”).

Mineral Resource Estimate - Explanation of Resource Estimation--Resource estimation was done in MineSight and MicroModel computer systems with only those composites that were inside the wireframe used in the estimate. Estimation was done using kriging with the omni-directional variogram derived from all the data in each area for gold using the relative variogram derived from the log variogram. High grades were restricted by capping the assays at a breakpoint based on the cumulative frequency curves. Estimation was done using search radii of 100 x 100 x 50 m “blocks” oriented subparallel to the general strike and dip of the vein system in each area. A sector search, corresponding to the faces of the search box with a maximum of two points per sector was used in estimation. A density of 2.68 based on within ‘vein density’ samples was used in the resource estimate. Within each of the four areas there are approximately 20 to 40 veins in the vein swarm. Resources were estimated by kriging using data from all veins in the swarm. In general, gold accounts for at least 80% of the value of contained metal at the project, so the variograms for gold were used in estimation of the four other metals. Mineral Resources at Tres Amigos and San Pablo were classified as “Indicated” as follows:

1)

they were within a vein within the swarm which contained at least 7 drill holes;

2)

they are within 25 m of the nearest sample point; and,

3)

the block was estimated by at least three drill holes.

All other Mineral Resources were classified as “Inferred”. Since there are no precise quantitative definitions of Measured, Indicated and Inferred, resource classification is subjective and depends on the experience and judgment of the Qualified Person (“QP”) calculating the resource estimate. Mr. Sandefur, QP, allowed indicated material at Tres Amigos and San Pablo because of (1) the similarity of the variograms, and (2) the fact of recent production by DynaMéxico from San Pablo of some 42,000 tonnes mill feed at an average grade of approximately 15 g/t (“grams per tonne”).  Three of the individual veins at La Purisima satisfied criterion (1) above, but CAM elected not to include this material in “Indicated” because of the higher nugget effect at La Purisima, and because there was apparently historic underground mining there. This Mineral Resource Estimate for SJG does not include any ore loss or dilution outside wireframes, and as currently defined, is probably most appropriate for a highly selective, small equipment underground operation.

 

The veins at San Jose de Gracia have been historically mined for many years and historic mined volumes are not available. The one exception is the approximate 42,000 tonnes of ore processed by DynaMéxico during its pilot production activities in 2003-2006. The resource table is not adjusted for any historic mining. To validate that historic mining had not significantly reduced the resource, CAM reviewed the database for all assays greater than 1 gram per ton gold that were next to missing values at the bottom of drill holes. Only four assays satisfying this criterion were found, and on the basis of this review, Mr. Sandefur does not believe that significant mining has occurred within the volumes defined by the wireframes.

Servicios y Proyectos Mineros performed a database review and considers that a reasonable level of verification has been completed, and that no material issues have been left unidentified from the drilling programs undertaken.

Mineral Resource Estimate and 43-101 Technical Report - Data Verification--Mr. Ramon Luna Espinoza (“Mr. Luna”) initially visited the San Jose de Gracia Project in November 2010, and conducted site inspections at SJG in November 2011 and January 2012. Mr. Sandefur conducted a site inspection of the SJG Project in January 2012. While at the Property in November 2011, Mr. Luna inspected the areas of Tres Amigos, La Prieta, Gossan Cap, San Pablo, La Union, and La Purisima, and historic mining sites. In January 2012, Mr. Sandefur and Mr. Luna inspected the areas of Tres Amigos, San Pablo, La Union, and La Purisima. Pictures of the areas were taken. Many of the drill pads for the drilling programs of 2007 to 2011 were clearly located and identified. Mr. Luna also inspected San José de Gracia’s core logging and storage facilities, the geology offices, the meteorological station, the plant nursery, and the mill. Mr. Sandefur also inspected San José de Gracia’s core logging and storage facilities.

National Instrument 43-101 (“NI 43-101”) Mineral Resource Estimate for the San Jose de Gracia Property (2012)

The Company received from DynaMéxico on February 14, 2012, a National Instrument 43-101 Mineral Resource Estimate for San Jose de Gracia. The NI 43-101 Resource Estimate (the “2012 DynaMéxico-CAM SJG Mineral Resource Estimate”, the “Resource Estimate”) was prepared by Mr. Robert Sandefur, BS, MSc, P.E., a Qualified Person as defined under NI 43-101, and a senior reserve analyst for Chlumsky, Armbrust & Meyer LLC, Lakewood, CO (“CAM”). The Resource Estimate concentrates on four separate main vein systems at SJG: Tres Amigos, San Pablo, La Union, and La Purisima.

The mineral resource estimates prepared by Mr. Robert Sandefur for this Technical Report include Indicated Resources at Tres Amigos of 893,000 tonnes with an average grade of 4.46 g/t (128,000 Oz. Au), and at San Pablo of 1,308,000 tonnes with an average grade of 6.52 g/t (274,000 Oz. Au). The estimate also includes an Inferred Resource of 3,953,000 tonnes in aggregate for the four vein systems, with an average grade of 5.83 g/t (741,000 Oz. Au). The resource estimate is reported using a 2.0 g/t cutoff grade, with the effective date of February 6, 2012. The following tables are summaries of the 2012 DynaMéxico-CAM Mineral Resource Estimate of the four main vein systems and also a table summary disclosing the aggregate of the mineral resources of those four vein systems.

 

 

 

 

 

(Due to rounding the numbers in the above may not check exactly. This is an estimate of in situ resources only and there is no assurance that any part of these resources can be converted to reserves. Grades are given to 2 decimals and contained metal to the nearest 000 for comparative purposes and do not imply this degree of accuracy). 

All references to ounces in the 2012 DynaMéxico-CAM Mineral Resource Estimate are references to troy ounces. Tonnes, contained ounces, and contained kilograms of metals are given to the nearest thousand, and grades are reported to two decimals for comparative purposes only and do not imply this degree of accuracy.

National Instrument 43-101 Technical Report on the San Jose de Gracia Property (2012)

The Company received from DynaMéxico on March 28, 2012, a National Instrument 43-101 (“NI 43-101”) compliant Technical Report for the San Jose de Gracia Project (the “2012 DynaMéxico Luna-CAM SJG Technical Report”, the “Technical Report”), and approved by DynaResource de México, S.A. de C.V. (“DynaMéxico”), the 100% owner of SJG.

The 2012 DynaMéxico Luna-CAM SJG Technical Report was prepared by Mr. Ramon Luna Espinoza, BS, P. Geo., of Servicios y Proyectos Mineros, Hermosillo, México, and a Qualified Person as defined under NI 43-101; and by Mr. Robert Sandefur, BS, MSc, P.E., a senior reserve analyst for Chlumsky, Armbrust & Meyer LLC, Lakewood, CO., and a Qualified Person as defined under NI 43-101. The 2012 DynaMéxico Luna-CAM SJG Technical Report includes as Section Fourteen (14) a Mineral Resource Estimate for SJG as prepared by Mr. Sandefur (the “2012 DynaMéxico-CAM SJG 43-101 Mineral Resource Estimate”, the “Resource Estimate”).

The Company filed the Technical Report on SEDAR (www.sedar.com) on March 28, 2012.

Updated National Instrument 43-101 Technical Report for San Jose de Gracia (2012)

The Company received from DynaMéxico on December 31, 2012, an updated NI 43-101 compliant Technical Report for the San Jose de Gracia Project (the “Updated 2012 DynaMéxico Luna-CAM SJG Technical Report”). The updated Technical Report was approved by DynaMéxico, and filed by the Company on SEDAR on December 31, 2012.

No Known Reserves

The SJG property is without known reserves. Under U.S. standards, mineralization may not be classified as a “reserve” unless a determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made.

 

Exploitation Amendment Agreement (“EAA”)

On May 15, 2013, DynaMineras entered into an Exploitation Amendment Agreement (“EAA”) with DynaMéxico. The EAA grants to DynaMineras the right to finance, explore, develop and exploit the SJG Property, in exchange for:

(a) Reimbursement of all costs associated with financing, maintenance, exploration, development and exploitation of the SJG Property, which costs are to be charged and billed by DynaMineras to DynaMéxico; and,

(b) After Item (A) above, the receipt by DynaMineras of 75% of gross receipts received by DynaMéxico from the sale of all minerals produced from SJG, to the point that DynaMineras has received 200% of its advanced funds; and,

(c) after items (A) and (B) above; the receipt by DynaMineras of 50% of all gross receipts received by DynaMéxico from the sale of all minerals produced from SJG, and throughout the term of the EAA; and,

(d) in addition to Items (A), (B), and (C) above, DynaMineras shall receive a 2.5% NSR (“Net Smelter Royalty”) on all minerals sold from SJG over the term of the EAA.

The total Advances made by DynaMineras to DynaMéxico as of September 30, 2015 is $5,350,000. The EAA is the third and latest Amendment to the original Contract Mining Services and Mineral Production Agreement (the “Operating Agreement”), which was previously entered into by DynaMineras with DynaMéxico in April 2005, wherein DynaMineras was named the Exclusive Operating Entity at SJG. The Operating Agreement was previously amended in September 2006 (the “First Amendment”), and amended again at July 15, 2011 (the “Second Amendment”). The Term of the Second Amendment is 20 years, and the EAA (Third Amendment) provides for the continuation of the 20 Year Term from the date of the Second Amendment (July 15, 2011).

Surface Rights Agreement

On January 6, 2014 DynaMineras entered into a 20-year surface rights agreement with the Santa Maria Ejido Community surrounding the San Jose de Gracia Property (the “20 Year SRA”). The 20 Year SRA covers an area of 4,399 hectares surrounding the main mineral resource areas of SJG, and provides for annual lease payments by DynaMineras of $1,359,443 Pesos (approx. $85,000 USD), commencing in 2014. The 20 year SRA provides DynaMineras with surface access to the core resource areas of SJG, and allows for all permitted mining, pilot production and exploration activities from the owners of the surface rights (Santa Maria Ejido community).

Additionally, DynaMineras expects to construct a Medical Facility and a Community Center within the SJG community in year 2015. DynaMineras reports that land and building for which the medical facility and community center will be constructed have been approved for re-zoning by the local community; and plans are being drawn for constructing the facilities.

Rehabilitation and Start-up of Pilot Mill Facility at San Jose de Gracia

Under the terms of the Exploitation Amendment Agreement (“EAA”), as described above, DynaMineras has rehabilitated the pilot mill facility at SJG and it has rehabilitated the San Pablo mine. The SJG pilot mill facility (a gravimetric-flotation circuit) is designed to process bulk samples mined from selected target areas of SJG, including San Pablo. Operations at SJG are managed by DynaMineras, and are projected to be similar to those conducted by DynaMéxico during 2003-2006.

Current Operations - Test Underground Mining and Pilot Mill Operations

Operational Permits for the rehabilitation of the San Pablo Mine and for the refurbishment of the Pilot Mill Facility, including the installation of the Tailings Pond area adjacent to the pilot mill facility were obtained in fall 2013, leading to the rehabilitation of the San Pablo Mine and the refurbishing of the Pilot Mill Facility in 2014. Pilot Production Operations commenced in October 2014, with approximately 1,650 Oz. Gold being delivered for sale during the startup testing phase.

DynaMineras reports the following summary of its operations during 2014:

v

$ 4 M invested in the rehabilitation of mine, refurbishing of the pilot mill facility and start up testing operations;

v

8,850 Tons mined and processed through the pilot mill facility;

v

300 Tons of gold-silver concentrate produced and sold;

v

10.2 Kg of gold-silver Dore produced sold;

v

1,650 Oz gold sold;

v

Approximately 3,000 Tons of semi-processed material remaining for re-processing; at an average grade of 6 g/t;

DynaMineras expects to continue its test mining and pilot mill production operations in 2015. (See Preparation for Pilot Production Improvement and Expansion below.)

Preparation for Pilot Production Improvement and Expansion

Subsequent to the rehabilitation of the San Pablo mine, and subsequent to the refurnishing of the Pilot mill facility at SJG, and subsequent to the initial test mill runs of the pilot mill facility through March 2015, DynaMineras is now improving and expanding its test mining activities and in order to achieve higher volumes of bulk mining samples to be delivered to the pilot mill facility for processing. The Company is advancing funds to DynaMineras for this purpose, and has budgeted approximately $ 3M USD for this improvement and expansion program, utilizing the proceeds from the Golden Post transaction (See “Financing Agreement with Golden Post Rail, LLC, a Texas Limited Liability Company”, above).

 

Competitive Advantage

The Company, through its subsidiaries, has been conducting business in México since March 2000. During this period the Company believes it has structured its subsidiaries properly and strategically, and during which time the Company has retained key personnel and developed key relationships and support. The Company believes its experience and accomplishments and relationships in México give it a competitive advantage, even though many competitors may be larger and have more capital resources.

DynaMéxico retains 100% of the rights to concessions over the area of the San José de Gracia property and it currently sees no competition for mining on the lands covered by those concessions. The sale of gold and any bi-products would be subject to global market prices; which prices fluctuate daily. DynaMéxico was successful in selling gold concentrates produced from SJG in prior years, and the Company expects a competitive market for produced concentrates and/or other mineral products in the future. Actual prices received by DynaMineras in the sale of concentrates or other products produced from San Jose de Gracia would depend upon these global market prices, less deductions.

The Company’s operating subsidiaries, DynaMineras and DynaOperaciones, receive monthly fees for management of the SJG activities and personnel. These fee amounts are eliminated in consolidation. Other than those intercompany fees, the Company reported revenue of $140,548 and $884,484 for the nine months ended September 30, 2015 and 2014.

Capital Requirements

The mining industry in general requires significant capital in order to take a property from the exploration, to development to production. These costs remain a significant barrier to entry for the average company but once in production, there is a ready market for the final products, In the case of SJG, the final product would be mainly gold, the price of which is determined by global markets, so there is not a dependence on a customer base.

Gold

Gold Uses.     Gold generally is used for fabrication or investment. Fabricated gold has a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins and jewelry.

Gold Supply.    A combination of current mine production, recycling and draw-down of existing gold stocks held by governments, financial institutions, industrial organizations and private individuals make up the annual gold supply. Based on public information available for the years 2008 through 2015, on average, current mine production has accounted for approximately 64% of the annual gold supply.

Gold Price.    The following table presents the annual high, low and average daily afternoon fixing prices for gold over the past ten years on the London Bullion Market ($/ounce):

Year		High				Low				Average
2002		$	349			$	278			$	310
2003		$	416			$	320			$	363
2004		$	454			$	375			$	410
2005		$	536			$	411			$	444
2006		$	725			$	525			$	604
2007		$	841			$	608			$	695
2008		$	1,011			$	713			$	872
2009		$	1,213			$	810			$	972
2010		$	1,421			$	1,058			$	1,225
2011		$	1,895			$	1,319			$	1,572
2012		$	1,792			$	1,540			$	1,669
2013		$	1,694			$	1,192			$	1,411
2014		$	1,380			$	1,140			$	1,265
2015 (through Nov 13, 2015)		$	1,302			$	1,083			$	1,170

 

Source: Kitco, Reuters and the London Bullion Market Association

On November 13, 2015, the afternoon fixing gold prices were (a) on the London Bullion Market - $1,081.50 per ounce; and (b) on the New York Commodity Exchange - $1,083.90 per ounce.

Condition of Physical Assets and Insurance

Our business is capital intensive and requires ongoing capital investment for the replacement, modernization or expansion of equipment and facilities. We and our subsidiaries maintain insurance policies against property loss. Such insurance, however, contains exclusions and limitations on coverage, particularly with respect to environmental liability and political risk. There can be no assurance that claims would be paid under such insurance policies in connection with a particular event.

 

 

Environmental Matters

Our activities are largely outside the United States and subject to governmental regulations for the protection of the environment. We conduct our operations so as to protect public health and the environment and believe our operations are in compliance with applicable laws and regulations in all material respects. DynaMéxico is involved with maintaining tailings ponds and test mining and pilot production activities (through DynaMineras) with the oversight of SEMARNAT, the federal environmental agency of México.

Results for the Three and Nine Months Ended September 30, 2015 and 2014

In 2013, the Company was focused on obtaining operational permits and raising funds, in order to prepare for rehabilitation of the San Pablo mine and refurbishing the pilot mill facility at SJG; and preparing to install the tailings pond adjacent to the pilot mill facility. Operational permits were obtained in fall 2013, leading to the rehabilitation of the San Pablo Mine and the refurbishing of the Pilot Mill Facility.

In the second quarter 2014, DynaMineras commenced test mining and pilot mill operations at San Jose de Gracia. Further rehabilitation of the San Pablo mine and the tailings pond area adjacent to the pilot mill facility continued into the fourth quarter. The rehabilitation of the San Pablo mine included driving ramps and building access to the high grade areas of San Pablo as defined by core drill holes.

Throughout the year 2014, the test pilot operations have yielded the underground mining and mill processing of approx. 8,841 tonnes of material, the production of approximately 1,676 gross oz. au (and net of buyer’s price discount and refining costs approximately 1,438 oz au) of gold-silver concentrates, and the receipt of $1,476,188 in revenues from the sale of gold-silver products from Dore and gravity-flotation concentrates. Throughout the year, DynaMineras was active in rehabilitating and developing the San Pablo Mine and refurbishing the Pilot Mill Facility and generally preparing to commence pilot production operations.

For the nine months ended September 30, 2015, the test pilot operations have yielded the production of an estimated 150 Oz gold from mill runs completed over a 10-day period in January, from approximately 900 tons of mineralized feed material which was processed through the gravity and flotation circuit of the Pilot Mill Facility at SJG. And, DynaMineras further reports mined inventory of approximately 1,000 tons, available for processing through the pilot mill facility, and approximately 15 tons of gold concentrates available for delivery and sale.

REVENUE. Revenues for the nine months ended September 30, 2015 and 2014 were $140,548 and $884,484, respectively. The Company commenced test mining and initial test runs of the pilot mill facility in the 2^nd quarter of 2014. Revenues for the three months ended September 30, 2015 and 2014 were $0 and $297,638, respectively. In the current quarter, the Company was engaged in the final stages of mine and mill preparation and improvements to operations in order to commence and sustain consistent test mining and milling operations, and in closing financing agreements in which to fund consistent operations.

PRODUCTION COSTS RELATED TO SALES. Production costs related to sales for the three and nine months ended September 30, 2015 were $0 and $45,000, respectively. These are expenses are directly related to the milling, packaging and shipping of gold and other precious metals product. Costs were nominal in 3^rd quarter, 2015 as the Company was engaged in the final stages of mine and mill preparation in order to commence consistent operations. Production costs related to sales for the three and nine months ended September 30, 2014 were $56,559 and $162,552, respectively. As the Company was not conducting consistent operations in the 1^st Quarter of 2014, therefore, only costs incurred in 2^nd quarter.

MINE OPERATING COSTS. Mine operating costs for the three and nine months ended September 30, 2015 were $0 and $95,000, respectively. These costs are directly related to the extraction of mine tonnage to be processed at the mill. Mine operating costs for the three and nine months ended September 30, 2014 were $29,769 and $86,222, respectively. Again, the main reason for low mining costs in the 1^st and 2^nd quarters of 2014 is that San Pablo mine was being rehabilitated during the period, and little test mining activity was conducted.

PRE-PILOT PRODUCTION EXPENSES. Pre Pilot-Production Expenses for the three and nine months ended September 30, 2015 were $662,420 and $1,462,981, respectively. The decrease in expense in 2015 was due to the Company focusing on the final stages of mine and mill preparation and improvements in order to commence and maintain consistent operations; and negotiating the financing in order to fund consistent operations (See financing agreement with Golden Post Rail LLC., above). Pre Pilot-Production expenses for the three and nine months ended September 30, 2014 were $719,313 and $1,563,556, respectively. During the 1^st quarter 2014, the San Pablo mine and the pilot mill facility were prepared for initial test operations, and significant pre-pilot production expenses were incurred. These pre-pilot production costs were nominal in the 2^nd quarter 2014, as initial test operations were in process.

PROPERTY HOLDING COSTS. Property holding costs for the three and nine months ended September 30, 2015 were $178,564 and $414,881, respectively. These costs are concessions taxes, leases on land and other direct costs of maintaining the San Jose de Gracia property. For the three and nine months ended September 30, 2014, the amounts were $104,470 and $391,493, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES. Operating expenses for the three and nine months ended September 30, 2015 were $565,420 and $1,286,064, respectively. For the three and nine months ended September 30, 2014, the amounts were $549,947 and $1,414,065, respectively.

OTHER INCOME (EXPENSE). Other income for the three and nine months ended September 30, 2015 was $(1,628,314) and $(2,633,018), respectively. Currency transaction gain or (loss) was $(1,359,680) and $(2,204,363) for the three and nine months ended September 30, 2015, respectively. The reason for this increased loss is the devaluation of the Mexican Peso in 2015. Other income, exclusive of currency transaction gain or (loss) for the three and nine months ended September 30, 2014 was $(229,889) and $(321,154), respectively. Currency gain/(loss) was $(174,392) and $(167,354) for the three and nine months ended, respectively.

NON-CONTROLLING INTEREST. The non-controlling interest portion of the net loss for the three and nine months ended September 30, 2015 was $(262,976) and $(380,045), respectively.

 

 

COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) includes the Company’s net income (loss) plus other comprehensive income (loss). For the three and nine months ended September 30, 2015, the Company’s comprehensive income (loss) was $(1,435,514) and $(2,506,859), respectively. Comprehensive income (loss) includes unrealized currency translation gain (loss) and accretion expenses related to the issuance of the Preferred Stock, Series C.

Liquidity and Capital Resources

As of September 30, 2015, the Company had working capital of $2,500,714, comprised of current assets of $3,780,297 and current liabilities of $1,279,583. This represents an increase of $3,426,245 from the working capital (deficit) maintained by the Company of $(925,531) as of December 31, 2014, due primarily to the closing of the financing agreement with Golden Post Rail, LLC, and due to sales of common stock during the period. Net cash used in operations for the nine months ended September 30, 2015 was $(5,925,645) compared with $(3,315,899 for the nine months ended September 30, 2014. In the 2014 period, net cash used was primarily related to the preparation of the San Pablo mine and pilot mill facility in order to commence test mining and milling operations; while in the 2015 period, the net cash used was primarily related to pre-pilot production expenses (payroll and activities in the mine and mill), and general and administrative expenses.

As the Company was able to close financing agreements in the second quarter 2015, during the third quarter it utilized financing proceeds to finalize its underground mining plan, make improvements to the pilot mill facility, acquire mining and transportation equipment, engage a contract miner, and add integral management and personnel. As a result, the Company realized the commencement of contract mining at San Pablo at September 15, 2015, and a re-start of pilot mill operations projected for October, 2015.

Net cash used in investing activities for the nine months ended September 30, 2015 and 2014 was $(466,049) and $(37,553), respectively. The current year amount is due to the purchase of approximately $550,000 of machinery and equipment for use in the test mining and milling operations.

Net cash provided by financing activities for the nine months ended September 30, 2015 and 2014 was $6,994,250 and $2,301,002, respectively. The primary components for the current year are for the sale of preferred shares, series C and related notes for $4,000,000 and common share purchases of $2,917,750. Proceeds are utilized to improve mining and milling operations, and to prepare to process bulk mined samples through the mill facility. In the prior year, the primary component was issuance of preferred shares, Series B for cash of $1,743,500.

Non-Controlling Interest

Under the terms of the Earn In Agreement (September 1, 2006 to March 15, 2011), Goldgroup Mining Inc. through its wholly owned subsidiary Goldgroup Resources, Inc. (Goldgroup), through 2010, had contributed capital to DynaMéxico in order to acquire 25% of the outstanding shares (a shareholder interest) of DynaResource de México, S.A. de C.V. (DynaMéxico). In March 2011, Goldgroup had contributed a total of $18 M USD capital to DynaMéxico in order to acquire a total of 50% of the outstanding shares (a shareholder interest) of DynaMéxico. From March 2011 through May 2013, Goldgroup owned 50% of the outstanding shares of DynaMéxico, and since May 2013 to current date Goldgroup owns 20% of the outstanding shares of DynaMéxico. The applicable portion of the earnings or loss attributable to Goldgroup is offset in this section. For the three and nine months ended September 30, 2015, the portion of the net loss attributable to Goldgroup was $(262,976) and $(380,045), respectively.

Off-Balance Sheet Arrangements

As of September 30, 2015, we did not have any off-balance sheet arrangements (as that phrase is defined by SEC rules applicable to this report) which have or are reasonably likely to have a material adverse effect on our financial condition, results of operations or liquidity.

Plan of Operation

The Plan of operation for the next twelve months includes DynaMineras continuing the improvement and expansion of the pilot production mining and milling operations at SJG, utilizing the proceeds from the recent sale of equity and the proceeds from the financing agreement with Golden Post Rail LLC. The Company funds its general and administrative expenses in the US. The Company’s operating subsidiaries, DynaMineras and DynaOperaciones, receive monthly fees for management of SJG activities and personnel. These amounts are eliminated in consolidation. The Company believes that cash on hand, and including financing arrangements agreed to, is adequate to fund its ongoing general and administrative expenses through 2015. The Company plans to seek additional debt funding during the next 12 months depending on results of pilot production activities, market conditions, and other factors.

Capital Expenditures

The Company’s primary activities relate to the test mining and pilot mill operations at the SJG property through its 100% owned operating subsidiary, DynaMineras. DynaMineras is conducting activities at SJG under the terms of the Exploitation Amendment Agreement (the “EAA”, or, “operating agreement”) with DynaMéxico. The Company utilized financing proceeds to advance funds to DynaMineras in order that DynaMineras could: (a) finalize its underground mining plan; (b) make improvements to the pilot mill facility; (c) acquire mining and transportation equipment; (d) engage a contract miner; and, (e) add integral management and personnel; among other things. As a result, the Company realized the commencement of contract mining at San Pablo at September 15, 2015, and a re-start of pilot mill operations projected for October, 2015.

 

 

No Known Reserves

The SJG property is without known reserves. Under U.S. standards, mineralization may not be classified as a “reserve” unless a determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made.

Capital Advances to Subsidiaries

DynaResource de México S.A. de C.V. (“DynaMéxico”)

Equity Ownership of DynaMéxico

In May 2013, the Company acquired additional shares in the outstanding equity in DynaMéxico in exchange for the retirement of accounts receivable of $2,393,803, which amount was due from DynaMéxico at December 31, 2012. As a result, the Company currently owns 80% of the outstanding equity of DynaMéxico.

Amounts Owed to DynaUSA and DynaMineras

As of September 30, 2015 the Company had advanced $7,600,000 USD to DynaMineras and DynaMineras had advanced $5,350,000 USD to DynaMéxico. On September 5, 2014, the Company issued 1,333,333 shares of its common stock to DynaMineras in exchange for the $4,000,000 receivable from DynaMéxico. As a result of these transactions:

·

DynaMéxico owes $1,350,000 USD to DynaMineras; and,

·

DynaMéxico owes $4,000,000 USD to DynaUSA.

As of December 31, 2012 the Company and DynaMineras agreed with DynaMéxico to accrue interest on the total amount receivable until repaid or otherwise retired. The interest rate to be accrued is agreed to be simple annual interest at the rate quoted by the Bank of México.

DynaResource Operaciones (“DynaOperaciones”)

The Company loaned DynaOperaciones $225,000 in 2012, which amount remains payable to the Company as of September 30, 2015.

Mineras de DynaResource (“DynaMineras”)

At September 30, 2015 DynaMineras owes $7,600,000 to the Company, as described above.

Elimination upon Consolidation

All receivables and payables among all subsidiary companies have been eliminated upon consolidation.

Future Advances to DynaMineras and DynaMéxico from the Company

The Company expects to make additional advances to DynaMineras and DynaMéxico. Future advances from DynaMineras to DynaMéxico will be made under the terms of the Exploitation Amendment Agreement. Other advances are agreed to be accrued in the same manner as previous receivables, until or unless otherwise agreed between DynaMéxico and the Company.

Advances from Goldgroup Mining Inc. (“Goldgroup”) to DynaMéxico

In 2014, Goldgroup advanced $111,500 to DynaMéxico and in 2013 Goldgroup advanced $120,000 USD to DynaMéxico. This total $231,500 is being carried by DynaMéxico at September 30, 2015 as a Due to Non-Controlling Interest.

Note Receivable – Affiliate

DynaResource Nevada, Inc., a Nevada Corporation (“DynaNevada”), with one operating subsidiary in México, DynaNevada de México, S.A. de C.V. (“DynaNevada de México”) have common officers, directors and shareholders. The total amount loaned by the Company to DynaNevada at December 31, 2010 was $805,760. The terms of the Note Receivable provided for a “Convertible Loan,” repayable at 5% interest over a 3-year period, and convertible at the Company’s option into Common Stock of DynaNevada at $0.25 / Share.  On December 31, 2010, the Company converted its receivable from DynaNevada into 3,223,040 Shares of DynaNevada; and as a result, the Company owns 19.92% of the outstanding share capital of DynaNevada. DynaNevada is a related entity, and through its subsidiary in México (DynaNevada de México), (“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”). In March, 2010, DynaNevada de México completed the Option with IMMSA so that it now owns 100% of Santa Gertrudis. In June, 2010, DynaNevada de México acquired an additional 6,000 Hectares in the State of Sinaloa (“the San Juan Property”). The Company has loaned additional funds to DynaNevada since 2010 for maintenance of concessions and other nominal required fees and expenses. The Company currently has a receivable from DynaResource Nevada, Inc. of $160,372 and an investment balance of $70,000 as of September 30, 2015.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The company carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2015. This evaluation was accomplished under the supervision and with the participation of our chief executive officer / principal executive officer, and chief financial officer / principal financial officer who concluded that the company’s disclosure controls and procedures are effective to ensure that all material information required to be filed in the quarterly report on Form 10-Q has been made known to them.

For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seg.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure, controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by in our reports filed under the Securities Exchange Act of 1934, as amended (the "Act") is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based upon an evaluation conducted for the period ended September 30, 2015, our Chief Executive Officer and Chief Financial Officer as of September 30, 2015, and as of the date of this Report, have concluded that as of the end of the period covered by this report, we have identified no material weakness in our internal controls.

Corporate expenditures are processed and paid by officers of the Company. However, the current number of transactions incurred by the Company does not justify additional accounting staff to be retained.

Changes in Internal Controls over Financial Reporting

The Company has not made any changes in its internal controls over financial reporting that occurred during the period covered by this report on Form 10-Q that have materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

 

 

PART II

ITEM 1. Legal Proceedings

US Litigation (Dallas, Texas) – Company as Plaintiff

On December 27, 2012, the Company, and DynaMéxico, filed an Original Petition and Application for Temporary Injunction and Permanent Injunction in the 14^th Judicial District Court of Dallas, Texas (the “Petition”) against Defendants Goldgroup Mining Inc., Goldgroup Resources Inc., and certain individuals acting in concert with Goldgroup (collectively “Goldgroup”). The Petition alleged, among other things, that Goldgroup has wrongfully used property, confidential information and data belonging to DynaMéxico and consistently failed to disclose several matters of material importance to the public.

The Petition requested that Goldgroup be enjoined from: (a) using or disseminating any confidential information belonging to DynaMéxico, (b) asserting that Goldgroup owns any interest in the San Jose de Gracia Project, rather than owning a common shares equity interest in DynaMéxico, (c) improperly disclosing that Goldgroup is the operator of the San Jose de Gracia Project, rather than Mineras de DynaResource S.A. de C.V. (“DynaMineras”), and (d) failing to properly disclose that broad powers of attorney for acting on behalf of DynaMéxico are held by a DynaUSA senior executive.

The Petition further requested, among other things: (a) a temporary and permanent injunction; (b) declaratory relief; (c) disgorgement of funds alleged to have been improperly raised as a consequence of Goldgroup’s wrongful actions; (d) cancellation of shares of DynaMéxico stock held by Goldgroup; and, (d) actual and punitive damages.

At the time of the filing, the Company believed the Petition to be necessary in order to protect its shareholder interests in DynaMéxico and in order to protect the property, data, and assets of DynaMéxico.

Although Goldgroup challenged the jurisdiction to the filed litigation in Texas, Goldgroup has acknowledged that it owns no direct interest in the San Jose de Gracia Property, and it has acknowledged that Mineras de DynaResource SA de C.V. (“DynaMineras”), which is 100% owned by DynaUSA, is the exclusive operator of the San Jose de Gracia Project.  Additionally, recent developments in México in 2013, including: (1) the signing of the Exploitation Amendment Agreement (“EAA”) between DynaMineras and DynaMéxico; (2) the signing of a 20 year land lease agreement between DynaMineras and the Santa Maria Ejido Community surrounding the San Jose de Gracia Project; and (3) the acquisition by DynaUSA of a majority interest in DynaMéxico; protect against Goldgroup’s wrongfully obtaining and/or disseminating confidential data and information of DynaMéxico.  These recent developments in México provided that the DynaResource Parties non-suited the Texas action as announced by the Company on March 14, 2014, without prejudice to asserting or consolidating claims in México, as well as to contemplate additional claims or regulatory actions against Goldgroup in Canada.

Litigation(s) in México – Company is Plaintiff

The Company, and DynaMéxico have filed several legal actions in México against Goldgroup Mining Inc, Goldgroup Resources Inc., certain individuals employed or previously employed by Minop, S.A. de C.V. (a Company operating in México and associated with Goldgroup Mining Inc.), and certain individuals retained as agents of Goldgroup Mining Inc. The Company and DynaMéxico are plaintiffs in the actions filed in México and the outcomes are pending.

Arbitration filed by Goldgroup

On March 14, 2014, Goldgroup filed for arbitration, citing the Earn In Agreement dated September 1, 2006. The Company filed an answer on April 10, 2014 disputing that any issues exist which provide for arbitration.

On December 9, 2014, DynaMéxico filed a legal complaint against Goldgroup and the American Arbitration Association (“AAA”), which seeks to terminate the arbitration proceedings. (See “DynaMéxico filed complaint against Goldgroup” below).

Ruling against Arbitration by The Thirty Sixth Civil Court of the Superior Court of Justice of the Federal District of México

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 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-defendants Goldgroup against DynaResource;

(b)

The 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; and,

(c)

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.

See $48 M USD in Damages Awarded to DynaMéxico in México Litigation, below.

 

 

Complaint filed by Goldgroup against the May 17, 2013 Shareholders Meeting of DynaMéxico

On February 2, 2014, Goldgroup Resources Inc. filed a petition with the judge, tenth district Mazatlan, according to record 08/2014, in the ordinary commercial action, against DynaResource Inc. and DynaResource de México, S.A. de CV. Goldgroup complains against the results of the shareholders meeting 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.

DynaResource, Inc. and DynaMéxico expect to vigorously defend all such complaints by Goldgroup, as there exists no legal basis for the complaint against the May 17, 2013 shareholders meeting of DynaMéxico.

DynaMéxico filed Complaint against Goldgroup

On December 9, 2014 DynaMéxico filed an Ordinary commercial lawsuit (Civil Claims), against Goldgroup Mining Inc., Goldgroup Resources Inc. ("Goldgroup", a shareholder of DynaMéxico); and, against the American Arbitration Association ("AAA"); based at the Thirty Sixth Civil Court in the Federal District of México, under file 1120 number / 2014 ("the DynaMéxico Trial"). The DynaMéxico Trial seeks to terminate the arbitration proceedings as DynaMéxico believes there is no legal basis for arbitration, and the DynaMéxico Trial requests substantial damages are awarded DynaMéxico from and 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 Gracia Project in northern Sinaloa, México (“SJG Project”), 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 Gracia 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.

DynaMéxico believes the filing of the DynaMéxico Trial to be necessary in order to protect the property and interests of DynaMéxico, and in order to seek fair retribution and substantial damage amounts caused by Goldgroup against DynaMéxico and the SJG Project.

$48 M USD in Damages Awarded to DynaMéxico in México Litigation

On October 5, 2015 DynaResource de México SA de C.V. (“DynaMéxico”), was awarded in excess of $48 M USD (Forty-Eight Million Dollars) in damages from Goldgroup Resources, Inc. (the “Goldgroup Damages”) by virtue of a Sentencia Definitiva (the “Definitive Sentence”) issued by the Thirty Sixth Civil Court of the Superior Court of Justice of the Federal District of México (Tribunal Superior de Justicia del Distrito Federal), File number 1120/2014. The Definitive Sentence included the considerations and resolutions by the Court, and additional Resolutions were also ordered in favor of DynaMéxico (together the Goldgroup Damages and the additional Resolutions are referred to as, the “Oct. 5, 2015 Resolution”).

The Oct. 5, 2015 Resolution affects DynaResource, Inc., which currently holds 80% of the outstanding share capital of DynaMéxico. A concise translation to English of the Oct. 5, 2015 Resolution issued in Spanish (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 Gracia 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 Gracia 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 Gracia 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 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 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 record.

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 reviewed through the Courts in México City.

The Company believes that no material adverse change will occur as a result of the legal actions taken, and the Company further believes that there is little to no potential for the assessment of a material monetary judgment against the Company for legal actions it has filed in México. For purposes of confidentiality, the Company does not provide more specific disclosure in this Form 10-Q.

DynaMéxico Statements of Fact

In recent years, Goldgroup has continuously and consistently misrepresented its interest, ownership, and position related to DynaMéxico and the SJG Project. DynaMéxico does herein state and represent the following:

1.

At no time has Goldgroup owned any interest in the SJG Project; rather its only ownership interests have been earned under agreement as a common shares equity interest (shareholder’s interest) of DynaMéxico;

2.

Goldgroup currently owns 20% of the outstanding share capital of DynaMéxico;

3.

Goldgroup does not currently own 50% of the outstanding share capital of DynaMéxico as Goldgroup has recently stated in numerous public disclosures and public filings;

4.

Goldgroup’s 20% ownership of DynaMéxico was ordered to be maintained and represented as such (the “status quo”) by a Mexican Judge overseeing certain claims by Goldgroup;

5.

At no time during its involvement as a common shares equity interest holder (shareholder) of DynaMéxico, has Goldgroup been an operator at the SJG Project;

6.

Since the earning of its shareholder’s interest in DynaMéxico (March, 2011), Goldgroup has continuously refused to contribute funds to the ongoing maintenance, advance, and further development of the SJG Project;

7.

Consistently and continuously since March 2011, Goldgroup has sought and threatened to stop, delay, or otherwise impair the financing, maintenance, advance and further development of the SJG Project.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company reports the following sales of equity securities during the quarterly period ending September 30, 2015:

The Company converted notes, accrued interest and advances in exchange for 407,162 common shares for cash at $2.50 per share. These stock issuances were accompanied by the issuance of 407,162 warrants, which are exercisable at $2.50 per share expiring December 31, 2017.

The sales/conversions of the securities identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly, the Company believes that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. Each investor represented that such investor either (A) is an “accredited investor,” (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 shares of the Company’s common stock or preferred stock, or (C) has appointed an appropriate person to act as the investor’s purchaser representative in connection with evaluating the merits and risks of acquiring the securities. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.

ITEM 3. Default Upon Senior Securities

None.

 

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

Exhibit Number; Name of Exhibit

31.1

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 United States Code Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DynaResource, Inc.

 

By /s/ K.W. (“K.D.”) Diepholz

 

/s/  K.W. (“K.D.”) Diepholz, Chairman / CEO

 

K.W. (“K.D.”) Diepholz, Chairman / CEO

 

Date: November 15, 2015