DYNARESOURCE INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ]
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended: December 31, 2017
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 registrant 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 1910 North Tower, Irving, Texas
75039
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (
972) 868-9066
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock; $0.01 Par Value
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No
[X]
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
preceding 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 has submitted
electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (p. 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes [X]
No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (p. 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[X]
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer”, “smaller reporting company” and "emerging
growth company" in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large accelerated filer
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☐
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Accelerated filer
|
☐
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Non-accelerated
filer
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☐
(Do not check if a smaller reporting
company)
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Smaller reporting company
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☒
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|
Emerging
growth company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13 (a) of the Exchange Act.
Yes [ ]
No [X]
Indicate
by check mark whether the registrant is a shell company (as defined
by Rule 12b-2 of the Exchange Act):
Yes [ ]
No [X]
The
aggregate market value of the voting and non-voting common equity,
par value $0.01 per share, held by non-affiliates computed by
reference to the price at which the common equity was last sold, as
of the last business day of the registrant’s most recently
completed fiscal year end, December 31, 2017, was $13,645,148 based
on the closing price of $1.11 per share as reported on the
OTCQB. For purposes of this computation, all officers,
directors, subsidiaries, and 10% beneficial owners of the
registrant are deemed to be affiliates. Such determination
should not be deemed an admission that such officers, directors or
10% beneficial owners are, in fact, affiliates of the
registrant.
There
were 17,722,825 shares outstanding of each of the
registrant’s classes of common stock (only 1 class) as of the
latest practicable date (April 10, 2018).
DOCUMENTS INCORPORATED BY REFERENCE
Listed
below are documents incorporated herein by reference.
None.
TABLE OF CONTENTS
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PART I
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ITEM
1.
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BUSINESS
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4
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ITEM
1A.
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RISK
FACTORS
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8
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ITEM
1B.
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UNRESOLVED STAFF
COMMENTS
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15
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ITEM
2.
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PROPERTIES
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16
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ITEM
3.
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LEGAL
PROCEEDINGS
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30
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ITEM
4.
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MINE
SAFETY DISCLOSURES
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33
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PART II
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ITEM
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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34
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ITEM
6.
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SELECTED FINANCIAL
DATA
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34
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ITEM
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
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35
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ITEM
7A.
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QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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48
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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49
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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74
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ITEM
9.
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CONTROLS AND
PROCEDURES
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74
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ITEM
9B.
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OTHER
INFORMATION
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75
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PART III
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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76
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ITEM
11.
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EXECUTIVE
COMPENSATION
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80
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ITEM
12.
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SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
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82
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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83
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ITEM
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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84
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PART IV
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ITEM
15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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85
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SIGNATURES
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87
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EXHIBIT INDEX
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Exhibit
31.1
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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
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Exhibit
31.2
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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
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Exhibit
32.1
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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
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2
FORWARD-LOOKING STATEMENTS
This
annual report on Form 10-K 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 headings “Risk
Factors” and “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.
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, certain
disclosures 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.
While
these terms are recognized and required by Canadian securities
legislation (under National Instrument 43-101 (“NI
43-101”), entitled
Standards
of Disclosure for Mineral Projects
), the SEC does not
recognize these terms. Investors in the United States 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 NI 43-101. 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 in the NI 43-101
Technical Report and Mineral Resource Estimate (compiled for
DynaResource de Mexico SA de CV) are economically or legally
mineable.
Under U.S. standards, as set forth in SEC Industry Guide 7,
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.
The SJG Property as described
in this Annual Report on Form 10-K is without known reserves.
Mineral resources which are not classified as mineral reserves have
not “demonstrated economic viability.” The quantity of
resources and the quality (grade) of resources reported as
“Indicated” and “Inferred” mineral
resources in the mineral resource estimate compiled for
DynaResource de Mexico SA de CV, under the NI 43-101 Mineral
Resource Estimate filed by the Company on SEDAR, are
not disclosed in this Form
10-K
. SEDAR is Canada’s
System for Electronic
Document Analysis and Retrieval, the mandatory document filing and
retrieval system for Canadian public companies.
There has
been insufficient exploration to define any mineral reserves on the
SJG Property, and it is not certain if further exploration will
result in the definition of mineral reserves.
3
ITEM
1.
BUSINESS
History and Organization
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 originally 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”).
We
currently own 80% of the outstanding shares of
DynaMéxico, and DynaMéxico
currently holds a lien on 20% of the outstanding shares of
DynaMéxico.
DynaMéxico owns 100% of the
mining concessions, equipment, camp and related facilities which
comprise the San
Jose de Gracia Property, in northern
Sinaloa State, México. We also own 100% of
Mineras de DynaResource S.A. de C.V.
(“DynaMineras”), the exclusive oper
ator of the
San José de Gracia Project, under contract with
DynaMéxico. DynaMineras currently conducts test mining and
pilot milling operations, and other exploration activities in
México.
In
2000, the Company formed DynaMéxico for the purpose of
acquiring and holding mineral properties and mining concessions in
México. DynaMéxico owns a portfolio of mining concessions
which comprise the San José de Gracia Project
(“SJG”). The mining concessions which comprise the SJG
District cover 69,121 hectares (170,802 acres) on the west side of
the Sierra Madre mountain range. At the incorporation of
DynaMéxico, 100 shares of Fixed Capital Series “A”
shares were issued, with DynaUSA receiving 99 shares and its CEO
receiving 1 share.
In
2005, the Company formed DynaMineras. DynaMineras entered into an
operating agreement with DynaMéxico on April 15, 2005. As a
consequence of that agreement and subsequent amendments to that
agreement, DynaMineras is the exclusive operating entity for the
SJG Project.
Also in
2005, the Company formed another wholly owned subsidiary,
DynaResource Operaciones, S.A. de C.V.
(“DynaOperaciones”). DynaOperaciones entered into a
personnel management agreement with DynaMineras and, as a
consequence of that agreement, is the exclusive management company
for personnel and consultants involved at the SJG
Project.
From
January 2008 through March 2011, DynaMéxico issued 100
Variable Capital Series “B” Shares to Goldgroup
Resources Inc., a wholly owned subsidiary of Goldgroup Mining Inc.,
in Vancouver, BC. (“Goldgroup”), in exchange for
Goldgroup’s total capital contributions of $18,000,000 to
DynaMéxico. At the time of the issuance of the 100 Series B
Shares to Goldgroup, Goldgroup owned 50% of the outstanding capital
shares of DynaMéxico.
On May
17, 2013, DynaUSA agreed to acquire a stock certificate for 300
Series “B” Variable Capital Shares of DynaMéxico,
in exchange for the settlement of accounts receivable from
DynaMéxico in the amount of $31,090,710 Mexican Pesos
(approximately $2.4 million USD). After giving effect to the
issuance of the 300 Series B Shares on June 21, 2013, DynaUSA owns
80% of the total outstanding Capital of DynaMéxico. (See table
representation of the outstanding Capital of DynaMéxico
below). The exchange of shares by DynaMéxico for amounts
payable to DynaUSA was unanimously approved by shareholders at a
meeting of the shareholders of DynaMéxico, held on the second
call for shareholder's meeting on May 17, 2013 in Mazatlán,
Sinaloa, México. The date of issuance of the 300 Series B
Share Certificate was June 21, 2013. As a result of the issuance to
DynaUSA of the 300 Variable Capital shares for amounts owed to
DynaUSA, the accounts payable amount owed by DynaMéxico to
DynaUSA was retired in full.
After
giving effect to the issuance to DynaUSA of the 300 Series B
Variable Capital shares of DynaMéxico as described above, the
current outstanding Capital of DynaMéxico is set forth in the
table below:
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DynaMéxico Shareholder
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Fixed CapitalSeries "A" Shares
|
Variable CapitalSeries "B" Shares
|
Total Capital Shares(Series A and B)
|
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DynaResource,
Inc.
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099
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300
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399
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Koy
W. (“K.D.”) Diepholz
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001
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-
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001
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Goldgroup
Resources Inc.
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-
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100
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100
|
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Total
Capital Issued
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100
|
400
|
500
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4
DynaUSA
currently owns 80% of the outstanding capital shares of
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 below);
●
Entered into
20-year surface Rights agreement with the Santa Maria
Ejido;
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;
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 the following:
(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, 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;
a 2.5% 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 December 31, 2017 are
$6,125,000.
(C)
After items (A) and (B) above, 50% of all gross receipts received
by DynaMéxico from the sale of all minerals produced from SJG,
and throughout the term of the EAA.
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
and DynaMéxico in April 2005, and in which DynaMineras was
named the Exclusive Operating Entity at SJG. The Operating
Agreement was first 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).
5
Our
objective is to increase the value of our shares through the
exploration, development and extraction of gold, silver and other
valuable minerals. We generally conduct our exploration activities
as sole operator and our current flagship property is San Jose de
Gracia.
Our
principal executive office is located at 222 W. Las Colinas Blvd.,
Suite 1910 North Tower, Irving, Texas 75039. We can be reached by
phone at (972) 868-9066 and by fax at (972) 868-9067. The
Company’s website is
www.dynaresource.com
.
In this
report, “DynaResource, Inc.”, the
“Company”, “DynaUSA”, “our” and
“we” refer to DynaResource, Inc. DynaResource de
México SA de CV, the 100% owner of the mining concessions,
camp, equipment, and related interests to San Jose de Gracia
Property, is referred to a “DynaMéxico”. DynaUSA
owns 80% of DynaMéxico. Mineras de DynaResource SA de CV, the
named exclusive operator at San Jose de Gracia Property under
agreement with DynaMéxico, is referred to as
“DynaMineras”. DynaUSA owns 100% of DynaMineras.
DynaResource Operaciones de San Jose de Gracia SA de CV, and the
named manager of personnel and consultants who are actively
involved at San Jose de Gracia under agreement with DynaMineras and
DynaMéxico, is referred to as “DynaOperaciones”.
DynaUSA owns 100% of DynaOperaciones. The San Jose de Gracia
Property is referred to as “SJG”, or the “SJG
Property”, or the “SJG Project”, or the
“SJG District”. DynaMéxico owns 100% of the SJG
District. Further in this report, “Au” represents gold;
“Ag” represents silver; “oz.” represents
ounces; “gpt” represents grams per metric tonne;
“ft” represents feet; “m” represents meter,
“km” represents kilometer; and “sq”
represents square.
Segment Information
Our
only current operating segment is México.
Products
The end
use product produced at our test mining and pilot milling
operations at SJG is either in the form of primarily gold-silver
Dore, or primarily gold-silver concentrates. The end use product
from current activities generally consists of approximately 100%
concentrate and 0% Dore. Dore is an alloy consisting primarily of
gold and silver but also containing other metals. Dore is sent to
refiners to produce bullion that meets the required market standard
of 99.95% gold and 99.9% silver. Gold-silver concentrates, or
simply concentrate, is raw precious metals materials that has been
crushed and ground finely to a sand-like product where gangue
(waste) and non-precious metals are removed or reduced, thus
concentrating the precious metals component. Concentrates processed
and produced from San Jose de Gracia are shipped to third-party
smelters, refineries or third parties for further processing or
re-sale.
During
2017, we reported the delivery and sale of 10,740 net Oz gold
contained in concentrates. All gold-silver concentrate originated
from the San Jose de Gracia Property in México.
6
Gold-silver
concentrates are sold at a small discount to the prevailing spot
market price, based on the price per
ounce of gold and silver
quoted at the London PM fix, with the actual net precious metals
prices received depending on the sales contract. Concentrates are
priced by individual concentrate lots of 36 to 72 tons, or as a
series of lots under contract, whereby the final selling price and
gold-silver quantities are subject to final adjustments at the time
of final purchase settlement.
Gold and Silver Pilot Processing Methods
Gold
and silver are extracted from mined mineralized material, by
crushing, grinding, milling, and further by simple gravity and
flotation recoveries. The mineralized material is extracted by
underground mining methods. The processing plant at the San
José de Gracia mine is composed of conventional crushing and
grinding circuits, and with gravity and flotation recovery methods.
The gravity and flotation concentrates are dewatered or dried, and
shipped to purchasers in semi-trailers.
Gold and Silver Reserves / No Known Reserves
The
Company currently has no mineral “reserves” as defined
by SEC Industry Guide 7 promulgated by the SEC.
General Government Regulations
México
Mining
in México is subject to numerous federal, state and local
laws, regulations and ordinances governing mineral rights,
operations and environmental protection.
Mineral Concession
Rights.
Exploration and exploitation
of minerals in México may be carried out through Mexican
companies incorporated under Mexican law by means of obtaining
mining concessions. Mining concessions are granted by the Mexican
government for a period of fifty years from the date of their
recording in the Public Registry of Mining and are renewable for a
further period of fifty years upon application within five years
prior to the expiration of such concession in accordance with the
Mining Law and its regulations. Mining concessions are
subject to annual work requirements and payment of annual surface
taxes which are assessed and levied on a semi-annual basis. Such
concessions may be transferred or assigned by their holders, but
such transfers or assignments must be registered with the Public
Registry of Mining in order to be valid against third parties. The
holder of a concession must pay semi-annual duties in January and
July of each year on a per hectare basis and in accordance with the
amounts provided by the Federal Fees Law. During the month of May
of each year, the concessionaire must file with the General Bureau
of Mines, the work assessment reports made on each concession or
group of concessions for the preceding calendar year. The
regulations of the Mining Law provide tables containing the minimum
investment amounts that must be made on a concession. This amount
is updated annually in accordance with the changes in the Consumer
Price Index.
Surface Rights.
In México, while mineral rights are
administered by the federal government through federally issued
mining concessions,
Ejidos
(communal owners of land recognized by the federal laws in
México) control surface access rights to the land. An
Ejido
may sell or lease
lands directly to a private entity. While the Company has
agreements or is in the process of negotiating agreements with the
Ejido
that impact all of
its projects in México, some of these agreements may be
subject to renegotiations.
Mining Royalties.
In October 2013,
the Mexican lower house passed a bill levying a tax-deductible
mining royalty of 7.5% on earnings before the deduction of
interest, taxes, depreciation and amortization, along with an
additional 0.5% surcharge on precious metals revenue for mining
companies. The effective date of the law was January 1, 2014.
Although there are a number of uncertainties surrounding the scope,
calculation and enforcement of the royalty, based on the Company's
current interpretation of the bill, the royalty or surcharge was
not material for 2016.
Environmental Law.
The Environmental
Law in México, called the "General Law of Ecological Balance
and Protection to the Environment" ("General Law"), provides for
general environmental policies, with specific requirements for
certain activities such as exploration set forth in regulations
called "Mexican official norms". Responsibility for enforcement of
the General Law, the regulations and the Mexican official norms is
with the Ministry of Environment and Natural Resources, which
regulate all environmental matters with the assistance of
Procuradur’a Federal de
Protección al Ambiente
(known as
"PROFEPA").
The
primary laws and regulations used by the State of Sinaloa, where
our San Jose de Gracia property is located, in order to govern
environmental protection for mining and exploration are: The
General Law, Forestry Law, Residues Law, as well as their specific
regulations on air, water and residues, and the Mexican official
norms (known as "NOM-120"). In order to comply with the
environmental regulations, a concessionaire must obtain a series of
permits during the exploitation and exploration stage. The time
required to obtain the required permits is dependent on a number of
factors including the type of vegetation and trees impacted by
proposed activities.
7
Mining Permits.
The Secretariat of
Environmental and Natural Resources, the Mexican Government
environmental authority ("SEMARNAT"), is responsible for issuing
environmental permits associated with mining. Three main permits
required before construction can begin are: Environmental Impact
Statement (known in México as
Manifesto Impacto Ambiental
) ("MIA"),
Land Use Change (known in México as
Estudio Justificativo Para Cambio Uso
Sueldo
) ("ETJ"), and Risk Analysis (known in México as
Analisis de Riesgo
) ("RA").
A construction permit is required from the local municipality and
an archaeological release letter must be obtained from the National
Institute of Anthropology and History (known as "INAH"). An
explosives permit is required from the ministry of defense before
construction can begin. The Environmental Impact Statement is
required to be prepared by a third-party contractor and submitted
to SEMARNAT and must include a detailed analysis of climate, air
quality, water, soil, vegetation, wildlife, cultural resources and
socio-economic impacts. The Risk Analysis study (which is included
into the Environmental Impact Statement and submitted as one
complete document) identifies potential environmental releases of
hazardous substances and evaluates the risks in order to establish
methods to prevent, respond to, and control environmental
emergencies. The Land Use Change requires that an evaluation be
made of the existing conditions of the land, including a plant and
wildlife study, an evaluation of the current and proposed use of
the land, impacts to naturally occurring resources, and an
evaluation of reclamation/re-vegetation plans.
Customers
The
Company sells its concentrates to the buyer who offers the best
terms based upon price, treatment costs, refining costs, and other
terms of payment. During the year ended December 31, 2017, the
Company sold gold-silver concentrates to the following
purchasers:
|
Dore:
|
None.
|
|
Gold-Silver
Concentrates:
|
Mercuria
Commodities Trading S.A. de C.V.;
and
Trafigura Mexico
S.A de C.V.
|
Employees
As of
March 30, 2018, we had 200 employees, including 195 employees based
in México, and 5 in the United States. Consultants are
retained from time to time. Employees based in México and the
United States include laborers, engineers, geologists, information
technologists, office administrators, managers and executives. None
of our employees in México are covered by union contracts and
the Company believes we have good relations with our
employees.
ITEM
1A.
RISK
FACTORS
This
report, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations, contains
forward-looking statements that may be affected by several risk
factors. The following information summarizes all material risks
known to us at the date of filing this report.
Risks Relating to Our Company
Nature of Mineral Exploration and Mining
The
Company is involved in the business of exploration and development
of resource properties, which carries the inherent risk of
failure.
The
exploration and development of mineral deposits involve significant
risks which a combination of careful evaluation, experience and
knowledge may not eliminate. There is no assurance that the
Company’s exploration programs will result in discoveries of
commercial mineralized bodies.
The
Company’s future is dependent upon the success of its
exploration programs, and the success of its test mining and pilot
milling programs. The exploration and development of mineral
deposits involve significant risks over significant periods of
time. It is impossible to ensure that the current or proposed
exploration programs on the Company’s property will result in
a profitable mining operation.
Whether
a mineralized deposit will be commercially viable depends on many
factors, such as size and grade of the deposit, proximity to
infrastructure, financing costs, regulations, environmental
protection, commodities prices, taxes, and political risks. The
impact of these factors cannot be accurately predicted, but the
combination of factors may result in the Company’s failure to
provide a return on investment.
Competitive Business Conditions
The
Company competes with many larger, well capitalized companies,
which places the Company at a competitive
disadvantage.
8
The
Company competes with many companies in the mining business,
including large, established mining companies with substantial
capabilities, personnel, and financial resources. There is a
limited supply of desirable mineral lands available for
claim-staking, lease, or acquisition in México, where the
Company’s activities are focused. The Company may be at a
competitive disadvantage in acquiring mineral properties, since it
competes with companies which have greater financial resources and
larger technical staffs. From time to time, specific properties or
areas which would otherwise be attractive for acquisition or
exploration are unavailable due to their previous acquisition by
competitors or due to the Company’s lack of financial
resources.
Competition
in the industry extends to the technical expertise to find,
advance, and operate mineral properties; the labor to operate the
properties; and the capital for the purpose of funding exploration
and development activities on such properties. Many competitors
explore for and mine precious metals and conduct refining and
marketing operations on a world-wide basis. Such competition may
make it more difficult for the Company to recruit or retain
qualified employees, to obtain equipment and personnel to assist in
its exploration and production activities, or to acquire the
capital necessary to fund operations.
Government Regulations
The
Company conducts its resource exploration and development
activities in México, subject to rules and regulations for
owning and maintaining mining concessions and surface rights,
environmental protection, water rights, hazardous wastes,
explosives, reclamation, and others. There can be no certainty that
the Company maintains full compliance with all government
regulations.
México.
Exploration and development of minerals in
México may be carried out through Mexican companies
incorporated under Mexican law by means of obtaining exploration
and development (exploitation) concessions. The Company’s
concessions are granted by the Mexican government, or acquired from
previous owners, are filed in the Public Registry of Mining, and
are scheduled to expire from 2028 through 2058. Holders of
exploration concessions may, prior to the expiration of such
concessions, apply for one or more development concessions covering
all or part of the area covered by an exploration
concession.
Environmental
law in México provides for general environmental policies,
with specific requirements set forth under regulations of the
Ministry of Environment, Natural Resources and Fishing, which
regulate all environmental matters with the assistance of the
National Institute of Ecology and the Procuraduria Federal de
Proteccion al Ambiente.
The
primary laws and regulations governing environmental protection for
mining in México are found in the General Law, the Ecological
Technical Standards, and also in the air, water and hazardous waste
regulations, among others. In order to comply with the
environmental regulations, a concessionaire must obtain a series of
permits during the exploration stage. Generally, these permits are
issued on a timely basis after the completion of an application by
a concession holder. The Company believes it is currently in full
compliance with the General Law and its regulations in relation to
its mineral property interests in México.
Commodities Prices
Any
potential economic success of the Company’s properties will
depend to a large extent to the market price of commodities, the
future price of which is impossible to predict.
The
current value and potential value for properties obtained by the
Company is directly related to the market price for gold. The
market price of gold may also have a significant influence on the
market price of the Company’s common stock. If the Company
obtains positive drill results and a property progresses to a point
where a commercial production decision can be made, the decision to
put a mine in production and to commit funds necessary for that
purpose would be made long before any revenue from production would
be received. A decrease in the market price of gold at any time
during future exploration or development may prevent a property
from being economically mined or result in the write-off of assets
whose value is impaired as a result of lower gold
prices.
The
price of gold is affected by numerous factors beyond the
Company’s control, including inflation, fluctuation of the
United States dollar and foreign currencies, global and regional
demand, the purchase or sale of gold by central banks, and the
political and economic conditions of major gold producing countries
throughout the world. During the last five years, the market price
of gold has fluctuated between approximately $1,057 and $1,895 per
ounce. The volatility of gold prices represents a substantial risk
which is impossible to fully eliminate. In the event gold prices
decline and remain low for prolonged periods of time, the Company
might be unable to explore, develop, or produce revenue from its
properties.
The
volatility of mineral prices represents a substantial risk which no
amount of planning or technical expertise can fully eliminate. In
the event mineral prices decline and remain low for prolonged
periods of time, we might be unable to develop our properties,
which may adversely affect our results of operations, financial
performance and cash flows. Our results of operations have been and
could continue to be materially and adversely affected by the
impairment of assets. An asset impairment charge may result from
the occurrence of unexpected adverse events that impact our
estimates of expected cash flows generated from our producing
properties or the market value of our non-producing
properties.
9
The
volatility in gold, silver and copper prices is illustrated by the
following table, which sets forth, for the periods indicated, the
average market prices in U.S. dollars per ounce of gold and silver,
based on the average daily London P.M. fix, and per pound of
copper based on the London Metal Exchange Grade A copper settlement
price.
|
Metal
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
Gold
|
$
1,572.00
|
$
1,669.00
|
$
1,411.00
|
$
1,266.00
|
$
1,175.00
|
$
1,236.00
|
$
1,244.00
|
|
Silver
|
35.12
|
31.15
|
23.79
|
19.08
|
13.90
|
17.14
|
17.77
|
|
Copper
|
4.00
|
3.61
|
3.32
|
3.11
|
2.09
|
2.54
|
2.80
|
As of
April 10, 2018, the price of gold was $1,336 per ounce. Should a
downward trend in prices occur, there is a possibility that we may
record impairment charges in 2018, or in future years.
Revenue
The
Company suspended its test pilot production activity in June 2006
in order to focus on exploration activities. The Company
re-commenced test mining and pilot production work in 2014. There
is a risk that the Company would expend available cash and funding
in test mining and milling activities, and administration costs,
and would not be able to obtain further funding to continue its
work.
In
2007, the Company focused on the exploration of the vast SJG
district. Funds received by DynaMéxico pursuant to the Earn
In/Option Agreement (See Earn In / Option Agreement –
Financing of Drilling – Exploration Programs (2006 –
2011), were utilized for exploration and related
activities.
In
2015, the Company commenced test mining and pilot milling
operations. And during 2017, the Company improved and expanded its
operations in order to increase outputs from the test mining and
pilot milling activities.
The
Company and its subsidiaries have $3,528,735 cash on hand at
December 31, 2017. The Company could incur test pilot production
expenses and corporate expenses greater than the amount of
available cash on hand. The Company may need to raise additional
funds in order to support its activities. If the Company needs to
raise additional capital, its common stock could be diluted.
Further, if the Company is unable to raise funds to meet its
obligations, the value of its common stock may
decline.
Substantial Control of Chairman / Preferred Shares
The
Company’s Chairman / CEO, owns 100% of the outstanding shares
of Series A preferred stock. The Series A preferred shares retain
the right to elect a majority of the members of the Company’s
Board of Directors. Such ownership and concentration of control may
have the effect of delaying, deferring or preventing a change in
control of the Company, even if the transaction could be determined
to be beneficial to Company stockholders as a whole.
Capital Needs
The
Company may need to raise additional capital, which may not be
available or may be too costly, and which, if not obtained, could
cause the Company to cease operations.
The
Company’s capital requirements could be greater than its
operating income. The Company believes it has adequate cash on hand
for the foreseeable future, but it does not have sufficient cash to
indefinitely sustain operating losses. The Company’s
liquidity depends on its ability to raise capital through the sale
of common stock or through debt or equity offerings. Additional
financing may not be available, or, if available, may be on terms
unacceptable or unfavorable. If additional capital is required and
not obtained, or if the Company is not able to produce sufficient
revenue from operations, or otherwise operate at a profit, the
value of investment in the Company could decline or be lost
entirely.
Illiquid Market
The
Company has a limited public market trading on the
Over the Counter Market
(“OTC”)
, and an active trading market may never
materialize, and an investor may not be able to sell
stock.
There
is currently only a limited public market for the Company’s
Common Stock and there can be no assurance that a more robust
trading market will develop further or be maintained in the future.
An active trading market may not develop and if not the market
value could decline to a value below the amount investors paid for
stock. Additionally, if the market is not active or illiquid,
investors may not be able to sell the securities of the
Company.
Penny Stock Classification
If a
public trading market for the Company’s common stock
materializes, it may be classified as a ‘penny stock’
which would result in additional requirements for trading the
stock. These additional requirements could affect the liquidity of
the stock.
10
The SEC
has adopted regulations which generally define a “penny
stock” to be an equity security that has a market price of
less than $5.00 per share, subject to specific exemptions. The
market price of the Company’s Common Stock may trade at less
than $5.00 per share and accordingly may be a “penny
stock.” Brokers and dealers effecting transactions in
“penny stock” must disclose certain information
concerning the transaction, obtain a written agreement from the
purchaser and determine that the purchaser is reasonably suitable
to purchase the securities. These rules may restrict the ability of
brokers or dealers to sell the Common Stock and may affect an
investor’s ability to sell such shares.
Title Matters
No Guarantee of Title
The
Company has investigated title to all mineral claims and
properties, and, to the best of its knowledge, title to all mineral
claims and properties comprising the SJG District is in good
standing. However, there can be no assurance of complete title, nor
guarantee of title. The mineral claims and properties may be
affected by undetected defects in title, such as the reduction in
size of the mineral claims and other third party claims affecting
the Company's rights.
Our business requires substantial capital investment and we may be
unable to raise additional funding on favorable terms to develop
additional mining operations.
We will
need to obtain additional financing, either in the form of debt or
equity financing, to fund development of additional mining
operations at the San Jose de Gracia project and to continue our
administrative activities. Our ability to obtain necessary funding,
in turn, depends upon a number of factors, including the state of
the economy and applicable commodity prices. We may not be
successful in obtaining the required financing for San Jose de
Gracia or other purposes, on terms that are favorable to us or at
all, in which case, our ability to continue operating would be
adversely affected. Failure to obtain such additional financing
could result in delay or indefinite postponement of further
exploration or potential development and the possible partial or
total loss of our interest in certain properties.
The feasibility of mining at our San Jose de Gracia property has
not been established in accordance with SEC Industry Guide 7, and
any funds spent on exploration and development could be
lost.
A
"reserve," as defined by Industry Guide 7 of the SEC, is that part
of a mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination. A
reserve requires a SEC-compliant feasibility study or other report
demonstrating with reasonable certainty that the deposit can be
economically extracted and produced. Since we have not received a
SEC-compliant report on any of our properties, we currently have no
reserves as defined by SEC Industry Guide 7, and there are no
assurances that we will be able to prove that there are reserves on
our properties.
The
mineralized material identified on our properties, including the
San Pablo mine where we are currently conducting test mining
activities does not and may never demonstrate economic viability.
Substantial expenditures are required to establish reserves through
drilling and additional study and there is no assurance that
reserves will be established. The feasibility of mining at San Jose
de Gracia, or any other property has not been, and may never be,
established. Whether a mineral deposit can be commercially viable
depends upon a number of factors, including the particular
attributes of the deposit, including size, grade, metallurgical
recoveries and proximity to infrastructure; metal prices, which can
be highly variable; and government regulations, including
environmental and reclamation obligations. If we are unable to
establish some or all of our mineralized material as proven or
probable reserves in sufficient quantities to justify commercial
operations, our investment in that property may be lost, and the
market value of our securities may suffer.
There
are significant risks and uncertainty associated with construction,
commencing or expanding test mining and pilot production activities
or changing operational plans without a current feasibility,
pre-feasibility or scoping study. As such, the San Jose de Gracia
property may ultimately be determined to lack one or more
geological, engineering, legal, operating, economic, social,
environmental, and other relevant factors reasonably required to
serve as the basis for a final decision to successfully complete
all or part of these projects.
The figures for our estimated mineralized material are based on
interpretation and assumptions and may yield less mineral
production under actual conditions than is currently
estimated.
Unless
otherwise indicated, mineralization figures presented in our
filings with Canadian securities regulatory authorities (on SEDAR),
news releases and other public statements that may be made from
time to time are based upon estimates made by independent
geologists and our internal geologists. When making determinations
about whether to advance any of our projects to development, we
must rely upon such estimated calculations as to the mineralized
material and grades of mineralization on our properties. Until
mineralized material is actually mined and processed, mineralized
material and grades of mineralization must be considered as
estimates only.
These
estimates are imprecise and depend upon geological interpretation
and statistical inferences drawn from drilling and sampling
analysis, which may prove to be unreliable. We cannot ensure
that:
these
estimates will be accurate;
mineralization
estimates will be accurate; or
this
mineralization can be mined or processed profitably.
11
Any
material changes in mineral estimates and grades of mineralization
may affect the economic viability of placing a property into
production and such property's return on capital. There can be no
assurance that minerals recovered in small scale tests will be
recovered in large-scale tests under on-site conditions or in
production scale. The estimates contained in our public filings in
Canada (on SEDAR) have been determined and valued based on assumed
future prices, cut-off grades and operating costs that may prove to
be inaccurate. Extended declines in market prices for gold and/or
silver may render portions of our mineralization estimates
uneconomic and result in reduced reported mineralization or
adversely affect the commercial viability of one or more of our
properties. Any material reductions in estimates of mineralization,
or of our ability to extract this mineralization, could have a
material adverse effect on our results of operations or financial
condition.
Legislation has been enacted that affects the mining
industry
In
México, in October 2013, the Mexican lower house passed a bill
proposing a tax-deductible mining royalty of 7.5% on earnings
before the deduction of interest, taxes, depreciation and
amortization, along with an additional 0.5% on precious metals
revenue for precious metals mining companies. In addition, the long
term corporate tax rate is expected to remain at 30% rather than
being reduced to 28% as originally planned. The Mexican Senate
approved the provisions of the Tax Reform on October 31, 2013.
The effective date of the law was January 1,
2014.
Dependence upon Key Personnel
The
Company is dependent upon the efforts and abilities of its
management team.
The
loss of any member of the management team could have a material
adverse effect upon the business and prospects of the Company. In
the event of such loss, the Company will seek suitable competent
replacements, but there is no assurance that the Company will be
able to retain such replacements. The Company has obtained a Key
Man Life Insurance program for its Chairman and CEO, which would
pay the proceeds of such policy to the Company in the event of his
death.
Uncertainty of Resource Estimate
There
can be no certainty that any resource estimate by the
Company’s consultants would ever be realized in
production.
The
current formal resource estimate in respect of the SJG Property
(the “NI 43-101 Mineral Resource Estimate") is based on
limited information, such as historical data, drilling programs,
the production activity conducted by the Company in
2003–2006, and various reports, manual calculations and
opinions. No assurance can be given that the anticipated tonnages
and grades will be achieved or that the estimated or indicated
level of recovery will be achieved. The grade of mineralization
actually recovered or produced could differ significantly from the
resource estimates. In addition,
under
U.S. standards, as set forth in SEC Industry Guide 7,
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.
The SJG Property as described
in this Annual Report is without known reserves. Mineral resources
which are not classified as mineral reserves do not have
“demonstrated economic viability.” The quantity of
resources and the quality (grade) of resources reported as
“Indicated” and “Inferred” mineral
resources in the mineral resource estimate compiled for
DynaMéxico, under the NI 43-101 Mineral Resource Estimate
filed by the Company on SEDAR, are
not disclosed in this Form
10-K
. There has been insufficient exploration to define any
mineral reserves on the SJG Property, and it is not certain if
further exploration will result in definition of mineral
reserves.
No Known Reserves
Historical Production of Gold at the San Jose de Gracia Property
May Not Be Indicative of Future Production or Revenue
The SJG
Property is a high-grade mineralized system with reported
historical production of over 1,000,000 Oz. Gold. The production
occurred in the early 1900’s, prior to the Mexican
Revolution. Since that time, the property has seen small scale
mining operations, from small scale local owners, to the
Company’s pilot production activities in 2003–2006 and
2014 to present. Due to the uncertainties associated with
exploration, including variations in geology and structure, there
is no assurance that the Company’s efforts will be successful
in identifying mineralization in sufficient quantities to define
proven or probable reserves, and further there is no assurance that
any such reserves could be developed into a commercial operation.
Investors in the Company’s securities should not rely on
historical operations as an indication that the SJG property will
be developed into a commercial production in the future. The
Company expects to incur losses unless and until such time as one
or more of its properties enters into commercial production and
generates sufficient revenue to fund continuing
operations.
Environmental and Regulatory Concerns
The
Company operates in an industry where there are significant
environmental and regulatory requirements. The inability of the
Company to satisfy these requirements could cause the value of its
common stock to decline.
12
The
current or future operations of the Company, including acquisition,
leasing, and sales activities, involve mineral properties which
require permits from various federal, state and local governmental
authorities. Such future operations are and will be governed by
laws and regulations governing prospecting, development, mining,
production, exports, taxes, labor standards, occupational health,
waste disposal, toxic substances, land use, environmental
protection, mine safety and other matters. Companies engaged
in the development and operation of mines and related facilities
generally experience increased costs, and delays in production and
other schedules as a result of the need to comply with applicable
laws, regulations and permits. Additional permits and studies,
which may include environmental impact studies conducted before
permits can be obtained, are necessary prior to operation of
properties in which the Company has interests. Required
permits could adversely affect the Company's ability to negotiate
agreeable acquisition, lease, or sales terms and therefore
adversely affect the price of the Company’s common
stock.
Our business is subject to U.S. Foreign Corrupt Practices Act and
similar worldwide anti-bribery laws, a breach or violation of which
could lead to civil and criminal fines and penalties, loss of
licenses or permits and reputational harm.
We
operate in certain jurisdictions that have experienced governmental
and private sector corruption to some degree, and, in certain
circumstances, strict compliance with anti-bribery laws may
conflict with certain local customs and practices. For example, the
U.S. Foreign Corrupt Practices Act and anti-bribery laws in other
jurisdictions, generally prohibit companies and their
intermediaries from making improper payments for the purpose of
obtaining or retaining business or other commercial advantage, and
often carry substantial penalties. There can be no assurance that
our internal control policies and procedures always will protect it
from recklessness, fraudulent behavior, dishonesty or other
inappropriate acts committed by the Company's affiliates, employees
or agents. As such, our corporate policies and processes may not
prevent all potential breaches of law or other governance
practices. Violations of these laws, or allegations of such
violations, could lead to civil and criminal fines and penalties,
litigation, and loss of operating licenses or permits, and may
damage the Company's reputation, which could have a material
adverse effect on our business, financial position and results of
operations or cause the market value of our common shares to
decline.
We are subject to foreign currency risk.
While
we transact most of our business in U.S. dollars, expenses, such as
labor, operating supplies, and property and equipment, are
denominated in Mexican pesos. As a result, currency exchange
fluctuations may impact our operating costs. The appreciation of
non-U.S. dollar currencies against the U.S. dollar increases costs
and the cost of purchasing property and equipment in U.S. dollar
terms in México, which can adversely impact our operating
results and cash flows. Conversely, a depreciation of non-U.S.
dollar currencies usually decreases operating costs and property
and equipment purchases in U.S. dollar terms in foreign
countries.
The
value of cash and cash equivalents denominated in foreign
currencies also fluctuates with changes in currency exchange rates.
Appreciation of non-U.S. dollar currencies results in a foreign
currency gain on such investments and a depreciation in non-U.S.
dollar currencies results in a loss. We have not utilized market
risk sensitive instruments to manage our exposure to foreign
currency exchange rates but may in the future actively manage our
exposure to foreign currency exchange rate risk. We also hold
portions of our cash reserves in Mexican currency.
Increased operating and capital costs could affect our
profitability.
Costs
at any particular mining location are subject to variation due to a
number of factors, such as variable ore grade, changing metallurgy
and revisions to mine plans in response to the physical shape and
location of the mineralized bodies, as well as the age and
utilization rates for the mining and processing-related facilities
and equipment. In addition, costs are affected by the price and
availability of input commodities, such as fuel, electricity,
labor, chemical reagents, explosives, steel and concrete and mining
and processing-related equipment and facilities. Reported costs may
also be affected by changes in accounting standards. A material
increase in costs at any significant location could have a
significant effect on our profitability and operating cash
flow.
We
could have significant increases in capital and operating costs
over the next several years in connection with the development of
new projects and in the sustaining and/or expansion of test mining
and pilot processing operations. Costs associated with capital
expenditures have escalated on an industry-wide basis over the last
several years, as a result of factors beyond our control, including
the prices of oil, steel and other commodities and labor, as well
as the demand for certain mining and processing equipment.
Increased capital expenditures may have an adverse effect on the
profitability of and cash flow generated from existing operations,
as well as the economic returns anticipated from new
projects.
Majority Ownership of DynaMéxico
DynaUSA
owns 80% of the outstanding share capital of DynaMéxico
– the 100% owner of the SJG Project. As a consequence of this
shared ownership (80%/20%), any current benefits to be derived from
the ownership of DynaMéxico could be distributed on an 80%/20%
basis.
A
wholly owned subsidiary of DynaResource, Inc. -- Mineras de
DynaResource S.A. de C.V. (“DynaMineras”) -- maintains
an exclusive operating agreement with DynaMéxico.
Additionally, another wholly owned subsidiary of DynaResource, Inc.
-- DynaResource Operaciones de San Jose De Gracia S.A. de C.V.
(“DynaOperaciones”) maintains an exclusive agreement to
manage the personnel registered as employees in
México.
13
The
Company’s Chairman and CEO, is also President of
DynaMéxico and President of DynaMineras, and the CEO holds a
broad power of attorney granted by the shareholders of
DynaMéxico. The power of attorney gives the CEO broad
authority to act for DynaMéxico. The power of attorney held by
the CEO is consistent with the laws in México, whose laws are
based on a civil code.
The nature of mineral exploration and production activities
involves a high degree of risk and the possibility of uninsured
losses that could materially and adversely affect our
operations.
Exploration
for and production of minerals is highly speculative and involves
greater risk than many other businesses. Many exploration programs
do not result in the discovery of mineralization, and any
mineralization discovered may not be of sufficient quantity or
quality to be profitably mined. Few properties that are explored
are ultimately advanced to production. Our current exploration
efforts are, and future development and mining operations we
conduct will be, subject to all of the operating hazards and risks
normally incident to exploring for and developing mineral
properties, such as, but not limited to:
●
economically
insufficient mineralized material;
●
fluctuations in
production costs that may make mining uneconomical;
●
availability of
labor, contractors, engineers, power, transportation and
infrastructure;
●
labor
disputes;
●
potential delays
related to social, public health, and community
issues;
●
unanticipated
variations in grade and other geologic problems;
●
environmental
hazards;
●
difficult surface
or underground conditions;
●
water
conditions;
●
industrial
accidents;
●
metallurgical and
other processing problems;
●
mechanical and
equipment performance problems;
●
failure of pit
walls or dams;
●
unusual or
unexpected rock formations;
●
personal
injury, fire, flooding, cave-ins and landslides; and
●
decrease in
reserves or mineralized material due to a lower gold, silver, or
copper price.
Any of
these risks can materially and adversely affect, among other
things, the development of properties, production quantities and
rates, costs and expenditures, potential revenues and production
dates. We currently have no insurance to guard against any of these
risks, except in very limited circumstances. If we determine that
capitalized costs associated with any of our mineral interests are
not likely to be recovered, we would incur a write-down of our
investment in these interests. All of these factors may result in
losses in relation to amounts spent which are not
recoverable.
We do not insure against all risks to which we may be subject in
our operations.
While
we currently maintain insurance to insure against general
commercial liability claims and physical assets at our properties
in México, we do not maintain insurance to cover all of the
potential risks associated with our operations. We may also be
unable to obtain insurance to cover other risks at economically
feasible premiums or at all. Insurance coverage may not continue to
be available or may not be adequate to cover liabilities. We might
also become subject to liability for environmental, pollution or
other hazards associated with mineral exploration and production
which may not be insured against, which may exceed the limits of
our insurance coverage, or which we may elect not to insure against
because of premium costs or other reasons. Losses from these events
may cause us to incur significant costs that could materially
adversely affect our financial condition and our ability to fund
activities on our property. A significant loss could force us to
reduce or terminate our operations.
Shortages of critical parts and equipment may adversely affect our
operations and development projects.
The
mining industry has been impacted, from time to time, by increased
demand for critical resources such as input commodities, drilling
equipment, trucks, shovels and tires. These shortages have, at
times, impacted the efficiency of our operations, and resulted in
cost increases and delays in rehabilitation and refurbishing of
projects, thereby impacting operating costs, capital expenditures,
and production and construction schedules.
Our operations are subject to permitting requirements which could
require us to delay, suspend or terminate our operations on our
mining properties.
Our
test mining and pilot milling operations, and including future
exploration and drilling programs, require permits from the state
and federal governments, including permits for the use of water and
for drilling wells for water. We may be unable to obtain these
permits in a timely manner, on reasonable terms or on terms that
provide us sufficient resources to develop our properties, or at
all. Even if we are able to obtain such permits, the time required
by the permitting process can be significant. If we cannot obtain
or maintain the necessary permits, or if there is a delay in
receiving these permits, our timetable and business plan for
exploration of our properties will be adversely affected, which may
in turn adversely affect our results of operations, financial
condition, cash flows and market price of our
securities.
14
Title to mineral properties can be uncertain, and we are at risk of
loss of ownership of one or more of our properties.
Our
ability to explore and operate our properties depends on the
validity of our title to that property. Our concessions in
México are subject to continuing government regulation and
failure to adhere to such regulations could result in termination
of the concessions.
We cannot ensure that we will have an adequate supply of water to
complete desired exploration or development of our mining
properties.
Our
test mining and pilot milling operations require significant
quantities of water for mining, ore processing and related support
facilities. Our operations in México are in areas where water
is scarce and competition among users for continuing access to
water is significant. Continuous operations at our mines is
dependent on our ability to maintain our water rights. Although
each of our operations currently has sufficient water rights and
claims to cover our operational demands, we cannot predict the
future circumstances relating to our water rights, claims and uses.
Water shortages may also result from weather or environmental and
climate impacts out of the Company's control.
We are subject to litigation risks.
All
industries, including the mining industry, are subject to legal
claims, with and without merit. Defense and settlement costs can be
substantial, even with respect to claims that have no merit. Due to
the inherent uncertainty of the litigation process, the resolution
of any particular legal proceeding, including regulatory
proceedings, could have a material adverse effect on our financial
position and results of operations.
Risks Relating to Our Common Stock
A small number of existing shareholders own a significant portion
of DynaResource, Inc. common stock, which could limit your ability
to influence the outcome of any shareholder vote.
The
Chairman/CEO currently owns approximately 10.5% of total
outstanding common shares and the management and members of the
Board of Directors as a group own approximately 30.64% of common
shares outstanding. These blocks of ownership could limit other
stockholders’ ability to influence the outcome of any
shareholder vote.
Our stock price may be volatile, and as a result you could lose all
or part of your investment.
In
addition to other risk factors identified herein and to volatility
associated with equity securities in general, the value of your
investment could decline due to the impact of any of the following
factors upon the market price of our common stock:
●
Changes in the
worldwide price for gold, silver and/or copper;
●
Volatility in the
equities markets;
●
Disappointing
results from our exploration or test mining and pilot milling and
production efforts;
●
Test pilot
production rates lower than those targeted;
●
Political and
regulatory risks;
●
Weather conditions,
including unusually heavy rains;
●
Failure to meet our
revenue or profit goals or operating budget;
●
Decline in demand
for our common stock;
●
Downward revisions
in securities analysts' estimates or changes in general market
conditions;
●
Technological
innovations by competitors or in competing
technologies;
●
Investor perception
of our industry or our prospects;
●
Actions by
government central banks; and
●
General economic
trends.
During
the 2017 calendar year the price of our stock has ranged from a low
of $.90 to a high of $1.75. In addition, stock markets in general
have experienced extreme price and volume fluctuations and the
market prices of securities have been highly volatile. These
fluctuations are often unrelated to operating performance and may
adversely affect the market price of our common stock. As a result,
you may be unable to resell your shares at a desired
price.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
None.
15
ITEM
2.
PROPERTIES
We
classify our mineral property as an "Exploration Property". We do
not suggest that we have proven or probable reserves at our
property as defined by the SEC.
Under
U.S. standards, as set forth in SEC Industry Guide 7,
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.
The SJG Property as described
in this Annual Report on Form 10-K is without known reserves.
Mineral resources which are not classified as mineral reserves do
not have “demonstrated economic viability.” The
quantity of resources and the quality (grade) of resources reported
as “Indicated” and “Inferred” mineral
resources in the mineral resource estimate compiled for
DynaMéxico, under and filed by the Company on SEDAR, are
not disclosed in this Form
10-K
. There has been insufficient exploration to define any
mineral reserves on the SJG Property, and it is not certain if
further exploration will result in the definition of mineral
reserves.
San Jose de Gracia Mineral Property
San
Jose de Gracia Property (“SJG”) is a high-grade
mineralized system which reports historical production of 1,000,000
Oz. gold (“Au”), from a series of underground workings
and is located in the state of Sinaloa, México. The Company is
focused on the exploration and future exploitation of this
vein-hosted, near surface, and over 400 meters down dip gold
potential, that occurs within fault breccia veins; and has been
traced on surface and underground over a 15 Sq. kilometer
area.
DynaMéxico
owns 100% of the mineral concessions at the SJG Property, and all
mineral concessions are contiguous. The SJG Property is currently
the only property in which DynaMéxico retains an interest. The
Company owns 80% of the outstanding capital shares of
DynaMéxico. DynaMéxico holds title to 33 concessions
covering approximately 69,121 hectares (170,802
acres).
Property Location
The
property is located in and around San Jose de Gracia, Sinaloa
State, México which is approximately 100 km northeast of
Guamuchil, near the west coast of México. It is located on the
west side of the Sierra Madre mountain range in the Sierra Madre
Gold-Silver Belt. The topography is generally rugged with
elevations varying from 400 meters in the valley bottoms to over
1,600 meters in the higher Sierra. Several roads on the property
are accessible throughout the year, with the possible exception of
July through September when the rainy season sometimes causes
flooding and runoff to make the roads difficult to
navigate.
Access
The San
José de Gracia Project can be accessed by road, via a sealed
highway from Culiacan, the capital city of the State of Sinaloa
(located to the south of the San José de Gracia Project) or
the city of Guamuchil (located to the southwest of SJG), to the
small town of Sinaloa de Leyva, then by gravel mountainous road to
the village of San José de Gracia.
The San
José de Gracia Project can also be accessed by air. A gravel
airstrip is located adjacent to the village of San José de
Gracia which is located at the southwestern portion of the property
at the SJG Project, and the airstrip is suitable for light
aircraft.
Climate and Operating Season
The
climate is semi-tropical with a rainy season dominating from late
June through September. Operations at the San José de Gracia
Project are, in part, dependent on the weather and some activities
may be suspended during the rainy season.
Infrastructure and Local Resources
Power
A power
line to the San José de Gracia Project has been installed by
the Comisión Federal de Electricidad, the only authorized
power producer in México. The power line was installed in
March 2012 from the municipality of Sinaloa de Leyva (La Estancia
area), a distance of approximately 75 kilometers.
The
power line is currently 220 volts maximum capacity, which supports
domestic use only, including the office and camp facilities at SJG,
such as water pump, air conditioning, refrigeration, lights,
internet, and fans, as well as local residential use. Currently,
the SJG Project produces its own diesel-generated power for
industrial use.
Water
The
water source for the SJG camp is from a well located close to the
river which runs just west of the village of San José de
Gracia. DynaMéxico has obtained the water concession rights
for this water source, which provide for usage of 1,000,000 cubic
meters per year. DynaMéxico estimates its current consumption
of water to be approximately 10,000 liters per week.
16
Accommodations
The
mine site area camp maintains facilities which can accommodate 50
persons. The village of San José de Gracia maintains few
stores, which offer only minimal goods.
Offices – Camp Facilities
DynaMéxico
maintains an administrative and logistics office in Guamuchil,
located 100 kilometers southwest of the SJG property. The SJG
Project sources many of its supplies from Guamuchil, and from Los
Mochis and Culiacan. A satellite dish installed at the SJG Property
provides communications from the SJG Property to
Guamuchil.
Lab
A field
laboratory is maintained within the camp facility. The Company
utilized the lab for assaying services during its production
activities in 2003-2006. In the second half of 2016, the laboratory
has been refurbished by DynaMineras and is currently utilized by on
site personnel to provide assays for mined material, feed material,
gravity and flotation concentrates, and tailings. DynaMineras
anticipates utilizing the lab facility in the future for providing
internal assays to support the exploration, test mining, and pilot
milling activities.
Regional Geology & Mineral Deposits
San
José de Gracia lies within the Sierra Madre Occidental
(“SMO”) Gold-Silver Belt, in a second-order graben
directly east of the regional-scale Grete Graben. The SMO is
recognized as a highly prospective mineral belt for gold, silver
and poly-metallic deposits. The basement to the Sierra Madre
Occidental consists of deformed Paleozoic sedimentary strata, which
are non-conformably overlain by Tertiary mafic to felsic volcanic
and volcanoclastic strata known as the Lower Volcanic Series
(“LVS”). Strata of the LVS are recognized as being
spatially related to gold and silver mineralization in the region.
Volcanic and sedimentary strata are capped by a thick
sequence of non-deformed Late Tertiary ignimbrites, known as the
Upper Volcanic Series (“UVS”).
Property Geology
The
oldest rocks exposed at San José de Gracia are deformed
Paleozoic shale, sandstone, conglomerate and minor limestone, which
are non-conformably overlain by andesite and rhyodacite flows and
tuffs of the LVS. Volcanic and sedimentary strata are cut by
quartz-feldspar porphyry, porphyritic diorite bodies and
fine-grained mafic dykes, which may be co-temporal with the LVS.
Ignimbrites of the UVS are exposed at higher elevations on
the property and are thought to act as a post mineralization cap
rock, thereby indicating an Early to Mid-Tertiary (Paleocene to
Eocene) age for gold mineralization at San José de
Gracia.
Geologic Structure
Detailed
mapping within the project area has defined several stages of
deformation, beginning with compression during the Laramide Orogeny
which affected the Paleozoic basement and formed flat-lying reverse
faults, which have been reactivated as conduits for gold-bearing
fluids in the La Prieta trend. Extension in Tertiary time led
to the development of second order structures, trending south,
southwest and southeast; which formed the major structural
orientations for mineralization at San José de Gracia.
The latest phase of deformation is characterized by
late-stage extension and southwest tilting.
Property Mineralization
High
grade gold mineralization at San José de Gracia is found in
vein structures hosted within andesite and rhyodacite of the Lower
Volcanic Series (“LVS”) and underlying Paleozoic
sediments as fault breccia veins and crackle breccias that exhibit
multiple stages of reactivation and fluid flow, as evidenced by
crustiform/colloform textures and cross cutting veins.
Locally, veins exhibit sharp, clay gouge hanging wall and
footwall contacts with slickensides, indicating reactivation of
structurally-hosted veins subsequent to mineralization. Gold
grades can also be carried within the mineralized halo adjacent to
the principal veins as quartz-chlorite stockwork. In addition
to vein-hosted mineralization, broad zones of un-mineralized clay
alteration, developed southwest of the main mineralized trends, may
overlie lower-grade, disseminated gold mineralization at
depth.
Alteration
at San José de Gracia is laterally and vertically zoned from
discrete zones of silicification to broad zones of illite to clay
alteration with increasing elevation and/or distance from the main
feeder structures. Faulting and tilting of the mineralization
system has affected the surface distribution of alteration and in
general has exposed deeper portions of the system in the northeast
and exposed shallower, more distal portions of the hydrothermal
system in the southwest part of the property.
17
The
characterization of the mineralization at San Jose de Gracia can be
described as low sulphidation polymetallic epithermal gold type.
Six principal mineralized trends have been identified at San
José de Gracia, from south to north. These consist of
the:
1.
La Purisima Ridge trend;
2.
Palos Chinos trend;
3.
La Parilla to Veta Tierra trend (Including San Pablo
East);
4.
San Pablo trend;
5.
La Prieta trend, and
6.
Los Hilos to Tres Amigos
trend
.
Licenses and Concessions
The SJG
District is comprised of 33 mining concessions covering 69,121
hectares (170,802 acres) and is located within the Sierra Madre
gold-silver belt, where the majority of hydrothermal deposits in
México are located. The Company’s mining concessions,
all of which are formally held by DynaMéxico, are granted by
the Mexican government, or acquired from previous owners. The
Company’s concessions are comprised of a combination of
exploration concessions and development concessions, are filed in
the Public Registry of Mining, and are scheduled to expire from
2028 through 2058. The concessions can be renewed prior to the
expiry dates. The table below contains a listing of the mineral
concessions currently held by DynaMéxico.
Under
amendments to the
Mining
Act
of México that came into effect on December 2006,
the classifications of Mining Exploration Concessions and Mining
Exploitation Concessions were replaced by a single classification
of Mining Concessions valid for a renewable term of 50 years,
commencing from the initial issuance date. To be converted into
Mining Concessions at the time these amendments came into force,
former exploration and exploitation concessions had to be in good
standing at the time of conversion. All of the SJG concessions were
converted to 50-year Mining Concessions at the time the amendments
to the Mining Act came into effect. To renew the 50-year term,
Mining Concessions must be in good standing at the time application
is filed. An application for renewal must be filed within 5 years
prior to expiration of the term.
To
maintain Mining Concessions in good standing, the registered owner
must (a) pay bi-annual mining duties (“assessment
taxes”) in advance, by January 31 and July 31 each year, (b)
file assessment work reports by May 30 each year, for the preceding
year (some exception rules apply), and (c) file by January 31 each
year, statistical reports on exploration / exploitation work
conducted for the preceding year.
The
Notice of Commencement of Production Activities and Annual
Production Reports must be filed annually by January 31 each year
for those concessions where mineral ore extraction is taking place.
As a general provision, registered owners of Mining Concessions
must follow environmental and labor laws and regulations in order
to maintain their Mining Concessions in good standing.
As of
the date of this Form 10-K, the 33 mining concessions comprising
the SJG Property are in good standing with respect to the payment
of taxes and the filing of assessment work obligations imposed by
the
Mining Act
of
México and its Regulations. Included among the 33 mining
concessions are 32 currently registered in the sole name of
DynaMéxico. DynaMéxico holds one mining concession (San
Miguel t.183504) that in order to produce legal effects requires
the consent or relinquishment of first rights of refusal from
registered owners to the 50% undivided title. See the note
following the table of mining concessions below, describing the
steps needed to be taken by DynaMéxico to obtain title to the
San Miguel mining concession.
18
Current Mining Concessions - San José de Gracia
|
Claim Name
|
ClaimNumber
|
Staking date
|
Expiry
|
Hectares
|
Taxes / ha (pesos)
|
|
AMPL.
SAN NICOLAS
|
183815
|
22/11/1988
|
21/11/2038
|
17.4234
|
111.27
|
|
AMPL.
SANTA ROSA
|
163592
|
30/10/1978
|
29/10/2028
|
25.0000
|
111.27
|
|
BUENA
VISTA
|
211087
|
31/03/2000
|
30/03/2050
|
17.9829
|
63.22
|
|
EL
CASTILLO
|
214519
|
02/10/2001
|
01/10/2051
|
100.0000
|
31.62
|
|
EL REAL
2
|
216301
|
30/04/2002
|
29/04/2052
|
280.1555
|
31.62
|
|
FINISTERRE
FRACC. A
|
219001
|
28/01/2003
|
27/01/2053
|
18.7856
|
31.62
|
|
FINISTERRE
FRACC. B
|
219002
|
28/01/2003
|
27/01/2053
|
174.2004
|
31.62
|
|
GUADALUPE
|
189470
|
05/12/1990
|
04/12/2040
|
7.0000
|
111.27
|
|
LA
GRACIA I
|
215958
|
02/04/2002
|
01/04/2052
|
300.0000
|
31.62
|
|
LA
GRACIA II
|
215959
|
02/04/2002
|
01/04/2052
|
230.0000
|
31.62
|
|
LA
LIBERTAD
|
172433
|
15/12/1983
|
14/12/2033
|
97.0000
|
111.27
|
|
LA
NUEVA AURORA
|
215119
|
08/02/2002
|
07/02/2052
|
89.3021
|
31.62
|
|
LA
NUEVA ESPERANZA
|
226289
|
06/12/2005
|
05/12/2055
|
40.0000
|
7.6
|
|
LA
UNION
|
176214
|
26/08/1985
|
25/08/2035
|
4.1098
|
111.27
|
|
LOS
TRES AMIGOS
|
172216
|
27/10/1983
|
26/10/2033
|
23.0000
|
111.27
|
|
MINA
GRANDE
|
163578
|
10/10/1978
|
09/10/2028
|
6.6588
|
111.27
|
|
NUEVO
ROSARIO
|
184999
|
13/12/1989
|
12/12/2039
|
32.8781
|
111.27
|
|
PIEDRAS
DE LUMBRE 2
|
215556
|
05/03/2002
|
04/03/2052
|
34.8493
|
31.62
|
|
PIEDRAS
DE LUMBRE 3
|
218992
|
28/01/2003
|
27/01/2053
|
4.3098
|
31.62
|
|
PIEDRAS
DE LUMBRE No.4
|
212349
|
29/09/2000
|
28/09/2050
|
0.2034
|
63.22
|
|
PIEDRAS
DE LUMBRE UNO
|
215555
|
05/03/2002
|
04/03/2052
|
40.2754
|
31.62
|
|
SAN
ANDRES
|
212143
|
31/08/2000
|
30/08/2050
|
385.0990
|
63.22
|
|
SAN
JOSÉ
|
208537
|
24/11/1998
|
23/11/2048
|
27.0000
|
111.27
|
|
SAN
MIGUEL
(1)
|
183504
|
26/10/1988
|
25/10/2038
|
7.0000
|
111.27
|
|
SAN
NICOLAS
|
163913
|
14/12/1978
|
13/12/2028
|
55.5490
|
111.27
|
|
SAN
SEBASTIAN
|
184473
|
08/11/1989
|
07/11/2039
|
40.0000
|
111.27
|
|
SANTA
MARIA
|
218769
|
17/01/2003
|
16/01/2053
|
4.2030
|
31.62
|
|
SANTA
ROSA
|
170557
|
13/05/1982
|
12/05/2032
|
31.4887
|
111.27
|
|
SANTO
TOMAS
|
187348
|
13/08/1986
|
12/08/2036
|
312.0000
|
111.27
|
|
TRES
AMIGOS 2
|
212142
|
31/08/2000
|
30/08/2050
|
54.4672
|
63.22
|
|
FINISTERRE
4
|
231166
|
18/01/2008
|
17/01/2058
|
2142.1302
|
5.08
|
|
FRANCISCO
ARTURO
|
230494
|
06/09/2007
|
27/03/2057
|
62,481.3815
|
5.08
|
|
TOTAL
|
|
|
|
69,121.4010
|
|
(1)
According to the records of the Mines Registry Office, the
registered owners to 100% undivided title to the San Miguel
(t.183504) mining concession are: Mar’a Trinidad Acosta
Salazar (25%), Miguel López Medina (25%), Josefa González
Castro (25%) and Otilia Tracy Vizcarra (25%). On October 17, 2000
and March 8, 2001, DynaMéxico signed with each of Miguel Lopez
Medina and Josefa Gonzalez Castro, respectively, agreements for the
transfer to DynaMéxico of 50% undivided title to the San
Miguel (t.183504) mining concession (the “San Miguel Transfer
Agreements”).
19
In
respect to the San Miguel Transfer Agreements, DynaMéxico has
been advised that in order for the San Miguel Transfer Agreements
to produce legal effects and be eligible for registration before
the Mines Registry Office, DynaMéxico is required to first
obtain the legal consent to such transfers, or the written
relinquishment of first rights of refusal, from Mar’a
Trinidad Acosta Salazar and Otilia Tracy Vizcarra (or
court-appointed estate executor). In addition to the San Miguel
Transfer Agreements, DynaMéxico has entered into the following
Promise to Sell and Purchase Agreements (the “San Miguel
Promise to Sell and Purchase Agreements”):
(a)
Promise to Sell and Purchase Agreement signed on March 8, 2001
among DynaMéxico and Maria Trinidad Acosta Salazar, the
registered owner to 25% undivided title to the San Miguel
(t.183504) mining concession, and
(b)
Promise to Sell and Purchase Agreement signed on December 15, 2000
among DynaMéxico and Margarita Tracy Vizcarra, the sister of
the deceased Otilia Tracy Vizcarra.
In
respect to the San Miguel Promise to Sell and Purchase Agreements,
DynaMéxico has been advised that:
(a)
with respect to the Promise to Sell and Purchase Agreement signed
on March 8, 2001 among DynaMéxico and Maria Trinidad Acosta
Salazar, to contact Ms. Mar’a Trinidad Acosta Salazar to
demand compliance with such agreement by executing the definitive
transfer to DynaMéxico of the 25% undivided title to the San
Miguel (t.183504) mining concession registered in her name,
and
(b)
with respect to the Promise to Sell and Purchase Agreement signed
on December 15, 2000 among DynaMéxico and Margarita Tracy
Vizcarra, the sister of the deceased Otilia Tracy
Vizcarra,
the
estate of Otilia Tracy Vizcarra requires the appointment of a
court-appointed executor that would be capable under Mexican law to
formally grant the estate´s consent for the execution of the
San Miguel Transfer Agreements, to relinquish the estate´s
first rights of refusal or to request court approval for the
transfer to DynaMéxico of the 25% undivided interest in the
San Miguel (t.183504) mining concession registered in the name of
the deceased Otilia Tracy Vizcarra.
Surface Lease Rights
In
addition to the surface rights held by DynaMéxico pursuant to
the
Mining Act
of
México and its Regulations (
Ley Minera y su Reglamento
),
DynaMineras maintains access and surface rights to the SJG Project
pursuant to the 20-year Land Lease Agreement (above). The
20 Year
Land Lease Agreement with the Santa Maria Ejido Community
surrounding San Jose de Gracia is 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.
$74,000 USD as of April 10, 2018), commencing in 2014.
Additionally, under the description of the 20 Year Land Lease,
DynaMineras constructed a Medical Facility at SJG in year
2017.
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, pilot production and exploration activities from
the owners of the surface rights (Santa Maria Ejido
community).
The
Company expects DynaMineras will be successful in expanding the
size and scope of the resources at SJG through continued drilling
and development programs at San Pablo, Tres Amigos, La Ceceña,
Palos Chinos, La Union, La Purisima, and La Prieta. The Company
expects extensions to mineralization in all directions and down dip
from the main target areas.
Mineral Reserves / No Known Reserves
Under U.S. standards, as set forth in SEC Industry Guide 7,
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.
The SJG property is without
known reserves. Mineral resources which are not classified as
mineral reserves do not have “demonstrated economic
viability.” The quantity of resources and the quality (grade)
of resources reported as “Indicated” and
“Inferred” mineral resources in the mineral resource
estimate compiled for DynaMéxico is
not disclosed in this Form
10-K
. There has been insufficient exploration to define any
mineral reserves on the property, and it is not certain if further
exploration will result in the definition of mineral
reserves.
Sierra Madre Gold-Silver Belt in México
20
San Jose de Gracia - History
Historical
production records from San Jose de Gracia (“SJG”)
reported 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.
Lack of Historical Surface Disturbance or
Contamination
Historical
production at San Jose de Gracia occurred prior to the Mexican
Revolution (pre-1910). The Company is not aware of any surface
disturbance or contamination issues found on the surface or in the
groundwater due to historical mining activities.
Since
acquisition and consolidation of the project under
DynaResource
de Mexico
SA de CV. (“DynaMéxico”), all activities conducted
at San Jose de Gracia have been permitted in accordance with Mexico
regulations, the specifics of which are described
below:
On June
17, 2013, DynaResource de Mexico received from the Secretaria de
Medio Ambiente Y Recursos Naturales (“Semarnat”), the
federal environmental authority in Mexico, the approval and
permission which allows for the rehabilitation and operation of the
pilot mill facility at San Jose de Gracia (the “Semarnat
Permit”). Under the terms of the Semarnat Permit,
DynaMéxico is responsible for maintaining the San Jose de
Gracia pilot mill facility, as well as the adjacent tailings pond
area, in compliance with Semarnat regulations.
On
September 30, 2013 DynaResource de Mexico also received from
Semarnat, the approval and permission which allows for the
exploitation and mining activities at the San Pablo Area of San
Jose de Gracia (the “Semarnat Exploitation Permit”).
Under the terms of the Semarnat Exploitation Permit,
DynaMéxico’s exploitation and mining activities are
restricted to the San Pablo Area of San Jose de
Gracia.
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.
Pilot Production Activities (2003 – 2006)
DynaMéxico,
conducting activities through its operating sister companies
DynaMineras and DynaOperaciones, 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. The small-scale mining and production
activities at SJG consisted of improvements to an existing mill,
including the installation of a gravity / flotation processing
circuit, and initial test runs with tailings were completed in
2002. Actual mining at the high-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 Pilot Operations (2006)
The
Company initiated the test mining and pilot mill operations 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
rising and the Company was able to negotiate acceptable financing
in order to fund exploration activities. Therefore, the Company
suspended its test mining and pilot mill operations 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), small scale operations
were not expected to provide the necessary capital in order to fund
exploration of a project the size of SJG.
The
earlier, limited-scope pilot operations provided significant
benefits in terms of confirming production test mining and milling
grades, metallurgy and process, efficiency of recoveries, and
operational costs – all of which is valuable for larger scale
production plans.
21
Earn In / Option Agreement – Financing of Drilling –
Exploration Programs (2006 – 2011)
The
Company entered into an Earn In / Option Agreement with Goldgroup
Resources Inc., a subsidiary of Goldgroup Mining Inc., Vancouver,
BC. (“Goldgroup”), dated September 1, 2006 (the
“Goldgroup Earn In”). The terms of the Goldgroup Earn
In provided for Goldgroup to contribute $18,000,000
financing to DynaMéxico, in
stages over the 5-year period, for exploration expenditures at SJG,
in exchange for 50% of the outstanding share capital of
DynaMéxico. The Goldgroup Earn In was completed March 15,
2011, and Goldgroup held 50% of outstanding capital of
DynaMéxico at that date.
On June
21, 2013, DynaResource acquired a Certificate for 300 Series
“B” Variable Capital Shares of DynaMéxico, in
exchange for the settlement of accounts receivable from
DynaMéxico in the amount of $31,090,710 Mexican Pesos
(approximately $2.4 M USD). After the issuance and receipt of the
300 Series B Shares, DynaUSA holds 80% of the total outstanding
share capital of DynaMéxico.
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://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.
Magnetic and IP Surveys (2009)
Magnetic
and IP (“Induced Polarization”) surveys were conducted
throughout the SJG district in 2009, covering an area of
approximately 15 Sq. kilometers. IP is the primary geophysical
target at SJG, and is expected to identify pyrite-based
mineralization hosting gold. Initial Survey Grid lines were located
approximately perpendicular to inferred geologic strike. The data
response from these grid lines indicate one or more IP sources that
dip northwest. Additional grid lines were crossed with the initial
lines, and appear to identify two separate IP sources. Grid lines
to the South appear to indicate an IP source at > 250
Meters.
Correlation between ground magnetic and IP--
In general the
correlation between the Magnetic and IP response and data was
excellent.
Correlation with recent Drilling Programs and known
Mineralization--
The data response of the surveys correlated
to the recent drilling programs and to the areas of known
mineralization at SJG was excellent. Considering this excellent
correlation to known mineralization, additional areas of SJG
showing similar data response could be indicative of additional
target areas.
Identification of Additional Resource Target
Areas--
Significant survey responses were reported for the
following areas and are projected for follow up
drilling:
San
Pablo-Up Dip; San Pablo-Displacement Zone;
Tres
Amigos-Down Dip and Northwest; Tres Amigos-Extension
Northeast;
Orange
Tree-Down Dip; La Prieta
La
Ceceña, Los Hilos, and Tepehauje;
Palos
Chinos;
La
Purisima; Down dip at Southeast end;
Argillic Zone; +
250 M. down dip;
Technical Report According to Canadian National Instrument 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 NI 43-101 Mineral Resource Estimate, prepared in 2012,
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., 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.
22
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.
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.
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 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 included Indicated Resources at Tres Amigos and
San Pablo. Table summaries of Indicated and Inferred Resources are
contained in the 2012 DynaMéxico-CAM Mineral Resource
Estimate. The Resource Estimate has been filed, along with the
Technical Report on SEDAR; but is
not disclosed in this Form
10-K
.
23
Selected Drill Hole Intercepts by Target Area (Excerpt from The
Updated 2012 DynaMéxico Luna-CAM SJG Technical
Report)
Tres Amigos
|
Drill
hole
|
Area
|
From m
|
To m
|
length (m)
|
Au g/t
|
Ag g/t
|
Cu%
|
Pb%
|
Zn%
|
|
97-013
|
Tres Amigos
|
95.00
|
107.50
|
12.50
|
20.80
|
21.80
|
0.43
|
0.06
|
0.15
|
|
97-039
|
Tres Amigos
|
40.20
|
43.20
|
3.00
|
29.50
|
44.60
|
0.58
|
0.95
|
7.45
|
|
97-045
|
Tres Amigos
|
100.00
|
106.00
|
6.00
|
11.46
|
3.40
|
0.03
|
0.02
|
0.17
|
|
97-047
|
Tres Amigos
|
124.94
|
132.00
|
7.06
|
7.51
|
15.40
|
0.09
|
0.27
|
3.42
|
|
08-115
|
Tres Amigos
|
153.30
|
159.00
|
5.70
|
8.31
|
8.30
|
0.17
|
0.00
|
0.07
|
|
08-116
|
Tres Amigos
|
134.80
|
138.10
|
3.30
|
21.74
|
9.90
|
0.06
|
0.04
|
0.15
|
|
10-150
|
Tres Amigos
|
285.61
|
288.49
|
2.88
|
10.93
|
14.24
|
0.32
|
0.01
|
0.03
|
|
10-150
|
Tres Amigos
|
312.80
|
321.81
|
9.01
|
3.97
|
2.35
|
0.09
|
0.00
|
0.03
|
|
10-151
|
Tres Amigos
|
208.38
|
216.20
|
7.82
|
22.19
|
14.70
|
0.36
|
0.01
|
0.06
|
|
10-154
|
Tres Amigos
|
73.00
|
74.75
|
1.75
|
21.89
|
9.30
|
0.00
|
0.00
|
0.02
|
|
10-175
|
Tres Amigos
|
241.59
|
245.40
|
3.81
|
6.37
|
3.41
|
0.02
|
0.00
|
0.03
|
|
10-177
|
Tres Amigos
|
228.63
|
245.00
|
16.37
|
10.58
|
9.75
|
0.25
|
0.02
|
0.09
|
|
10-179
|
Tres Amigos
|
75.3
|
77.02
|
1.72
|
105.51
|
49.60
|
0.03
|
0.01
|
0.06
|
|
10-179
|
Tres Amigos
|
174.85
|
179.52
|
4.67
|
5.70
|
15.89
|
0.11
|
0.00
|
0.16
|
|
10-226
|
Tres Amigos
|
205.05
|
213.09
|
8.04
|
18.47
|
19.77
|
0.42
|
0.13
|
0.22
|
|
10-227
|
Tres Amigos
|
176.95
|
186.75
|
9.80
|
8.42
|
11.92
|
0.41
|
0.04
|
0.33
|
|
10-230
|
Tres Amigos
|
244.91
|
249.45
|
4.54
|
18.09
|
15.48
|
0.53
|
0.02
|
0.03
|
|
10-234
|
Tres Amigos
|
214.61
|
217.97
|
3.36
|
15.05
|
13.45
|
0.23
|
0.01
|
0.01
|
|
10-237
|
Tres Amigos
|
92.44
|
92.84
|
0.40
|
883.91
|
195.00
|
0.24
|
0.77
|
5.35
|
|
11-257
|
Tres Amigos
|
60.84
|
63.33
|
2.49
|
5.37
|
9.28
|
0.25
|
0.01
|
0.40
|
|
11-257
|
Tres Amigos
|
92.00
|
94.66
|
2.66
|
5.00
|
6.74
|
0.25
|
0.02
|
1.16
|
|
11-260
|
Tres Amigos
|
63.40
|
71.15
|
7.75
|
7.84
|
10.68
|
0.16
|
0.12
|
2.28
|
|
11-271
|
Tres Amigos
|
115.40
|
120.15
|
4.75
|
13.93
|
18.56
|
0.54
|
0.02
|
0.14
|
24
San Pablo
|
Drill
hole
|
Area
|
From m
|
To m
|
length (m)
|
Au g/t
|
Ag g/t
|
Cu%
|
Pb%
|
Zn%
|
|
07-012
|
San Pablo
|
19.70
|
23.90
|
4.20
|
10.45
|
10.00
|
0.15
|
0.00
|
0.01
|
|
07-026
|
San Pablo
|
65.90
|
67.80
|
1.90
|
34.00
|
18.70
|
0.21
|
0.01
|
0.05
|
|
07-027
|
San Pablo
|
142.80
|
148.85
|
6.05
|
13.72
|
28.60
|
1.06
|
0.02
|
0.04
|
|
07-031
|
San Pablo
|
94.25
|
98.05
|
3.80
|
31.32
|
69.60
|
1.01
|
0.23
|
0.74
|
|
08-051
|
San Pablo
|
183.55
|
192.60
|
9.05
|
22.95
|
13.60
|
0.40
|
0.00
|
0.03
|
|
08-090
|
San Pablo
|
190.70
|
191.90
|
1.20
|
11.55
|
48.50
|
1.00
|
0.02
|
0.02
|
|
08-092
|
San Pablo
|
124.80
|
125.80
|
1.00
|
23.31
|
0.50
|
0.00
|
0.01
|
0.00
|
|
08-097
|
San Pablo
|
227.69
|
229.75
|
2.06
|
17.04
|
20.00
|
0.56
|
0.03
|
0.04
|
|
09-133
|
San Pablo
|
126.80
|
129.80
|
3.00
|
13.10
|
10.25
|
0.32
|
0.00
|
0.02
|
|
09-138
|
San Pablo
|
150.62
|
153.59
|
2.97
|
8.80
|
10.46
|
0.28
|
0.00
|
0.02
|
|
09-139
|
San Pablo
|
132.18
|
137.68
|
5.50
|
20.51
|
25.82
|
0.70
|
0.00
|
0.01
|
|
10-197
|
San Pablo
|
48.15
|
51.82
|
3.67
|
7.96
|
13.18
|
0.49
|
0.00
|
0.03
|
|
10-203
|
San Pablo
|
70.65
|
76.15
|
5.50
|
332.86
|
143.90
|
0.02
|
0.00
|
0.01
|
|
10-207
|
San Pablo
|
80.15
|
83.20
|
3.05
|
16.74
|
24.17
|
0.54
|
0.01
|
0.02
|
|
10-215
|
San Pablo
|
186.80
|
190.27
|
3.47
|
15.82
|
14.68
|
0.41
|
0.03
|
0.02
|
|
10-221
|
San Pablo
|
69.98
|
71.98
|
2.00
|
13.14
|
23.93
|
0.62
|
0.00
|
0.01
|
|
10-224
|
San Pablo
|
122.82
|
125.05
|
2.23
|
5.29
|
18.70
|
0.69
|
0.02
|
0.04
|
|
10-224
|
San Pablo
|
148.60
|
154.95
|
6.35
|
7.04
|
13.31
|
0.57
|
0.00
|
0.01
|
|
10-236
|
San Pablo
|
112.96
|
117.03
|
4.07
|
11.38
|
22.92
|
0.68
|
0.00
|
0.01
|
|
11-249
|
San Pablo
|
108.20
|
109.93
|
1.73
|
8.21
|
30.29
|
0.80
|
0.00
|
0.02
|
|
11-250
|
San Pablo
|
101.72
|
104.81
|
3.09
|
20.15
|
53.44
|
0.88
|
0.24
|
0.54
|
|
11-268
|
San Pablo
|
92.65
|
94.25
|
1.60
|
11.74
|
21.13
|
0.37
|
0.01
|
0.04
|
San Pablo East
|
Drill hole
|
Area
|
From m
|
To m
|
length (m)
|
Au g/t
|
Ag g/t
|
Cu%
|
Pb%
|
Zn%
|
|
08-076
|
San Pablo E
|
32.75
|
34.85
|
2.10
|
36.09
|
47.80
|
0.43
|
0.80
|
1.06
|
|
10-208
|
San
Pablo E
|
150.61
|
152.67
|
2.06
|
6.60
|
10.30
|
0.40
|
0.00
|
0.01
|
|
11-252
|
San Pablo E
|
55.25
|
59.70
|
4.45
|
4.26
|
12.05
|
0.37
|
0.01
|
0.04
|
|
11-256
|
San Pablo E
|
51.61
|
52.85
|
1.24
|
144.08
|
138.60
|
1.06
|
1.61
|
1.78
|
|
11-256
|
San Pablo E
|
99.93
|
101.29
|
1.36
|
9.04
|
3.30
|
0.01
|
0.00
|
0.01
|
|
11-298
|
San Pablo E
|
49.15
|
49.85
|
0.7
|
49.39
|
20.80
|
0.20
|
0.01
|
0.03
|
25
La Purisima
|
Drill hole
|
Area
|
From m
|
To m
|
length (m)
|
Au g/t
|
Ag g/t
|
Cu%
|
Pb%
|
Zn%
|
|
07-021
|
La Purisima
|
158.70
|
160.80
|
2.10
|
75.90
|
76.00
|
1.61
|
0.07
|
0.00
|
|
07-039
|
La Purisima
|
197.55
|
200.80
|
3.25
|
10.93
|
4.60
|
0.04
|
0.00
|
0.01
|
|
10-161
|
La Purisima
|
87.70
|
99.67
|
11.97
|
3.12
|
4.86
|
0.36
|
0.00
|
0.01
|
|
10-204
|
La Purisima
|
128.02
|
131.86
|
3.84
|
4.06
|
3.15
|
0.09
|
0.00
|
0.00
|
|
10-204
|
La Purisima
|
173.15
|
174.58
|
1.43
|
7.21
|
5.57
|
0.08
|
0.00
|
0.01
|
|
10-206
|
La Purisima
|
121.73
|
124.04
|
2.31
|
14.63
|
3.45
|
0.02
|
0.00
|
0.00
|
|
11-282
|
La Purisima
|
152.40
|
153.92
|
1.52
|
7.79
|
1.40
|
0.04
|
0.00
|
0.00
|
|
11-285
|
La Purisima
|
85.06
|
87.92
|
2.86
|
3.93
|
0.80
|
0.03
|
0.00
|
0.00
|
|
11-285
|
La Purisima
|
98.50
|
102.15
|
3.65
|
6.70
|
3.87
|
0.20
|
0.00
|
0.01
|
|
11-289
|
La Purisima
|
109.73
|
112.78
|
3.05
|
9.50
|
7.05
|
0.11
|
0.02
|
0.00
|
|
11-293
|
La Purisima
|
38.11
|
39.27
|
1.16
|
10.06
|
0.50
|
0.01
|
0.00
|
0.00
|
|
11-293
|
La Purisima
|
158.75
|
160.55
|
1.80
|
12.65
|
2.84
|
0.10
|
0.00
|
0.01
|
Block Model Calculation in Surpac Software--
The Company has
compiled its manual calculation and internal interpretation of the
mineralization at SJG defined by drilling and production to date.
The Company has also built the block model of mineralization at SJG
using Surpac (Gemcom) software. The current block model at SJG
confirms mineralization at San Pablo, Tres Amigos, La Union, Palos
Chinos, and La Purisima, with portions of the mineralization in a
high-grade category, and including mineralization at San Pablo and
Tres Amigos, and is consistent with the CAM SJG Mineral Resource
Estimate described above. The Company will continue this Surpac
modeling work as additional drill programs are planned and
completed.
Exploration and Mining Permit Requirements
(México)
In
respect of permit requirements for mineral exploration and mining
in México, the most relevant applicable laws, regulations and
official technical norms are the following: The
Federal Mining Act
, and its
Regulations, the
Federal
Environmental Protection and Ecological Equilibrium Act
, and
its Regulations, the
Federal
Sustainable Forestry Development Act
and its Regulations,
the
Federal Explosives and
Firearms Act
, the
National
Waters Act
and the
Mexican
Official Norm 120
.
To
carry out mineral exploration activities, holders of mining
concessions in México are required to file at the offices of
the Secretaria de Medio Ambiente Y Recursos Naturales, the Federal
Environmental Authority in México (“SEMARNAT”) a
“Notice of Commencement of Exploration Activities”
under the guidelines of the
Mexican Official Norm 120
(“Norm
120”). SEMARNAT is the office of the Federal Government of
México responsible for the review and issuance of a Change of
Soil Use Permit (“CSUP”), the review of a Technical
Justification Study (referenced below) and the filing of Norm 120.
Norm 120 is a notice to SEMARNAT only and has no processing
time.
If
contemplated mineral exploration activities fall outside of the
parameters defined under Norm 120, a CSUP Application is required
to be filed at the SEMARNAT under the guidelines of the
Federal Sustainable Forestry
Development Act
and its Regulations. To meet the
requirements for issuance of a CSUP, the applicant must also file a
Technical Study (“Technical Justification Study”) to
justify the change of soil use from forestry to mining, to
demonstrate that biodiversity will not be compromised, and to
demonstrate that there will be no soil erosion or water quality
deterioration on completion of the mineral exploration
activities.
As a
pre-requisite for issuance of a CSUP, Article 118 of the
Federal Sustainable Forestry
Development Act
provides for the posting of a bond to the
Mexican Forestry Fund for remediation, restoration and
reforestation of the areas impacted by the mineral exploration
activities.
To
carry out mining activities in México, holders of mining
concessions are also required to file an “Environmental
Impact Assessment Study” (“Environmental Impact
Study”) under the guidelines of the
Federal Environmental Protection and
Ecological Equilibrium Act
and its Regulations, in order to
evaluate the environmental impact of the contemplated mining
activities.
As a
pre-requisite for approval of an Environmental Impact Study, the
Federal Environmental Protection
and Ecological Equilibrium Act
and its Regulations require
the posting of a bond to guarantee remediation and rehabilitation
of the areas impacted by the mining activities.
If the
use of explosives materials is required for execution of mineral
exploration or mining activities, an Application for General Permit
for Use, Consumption and Storage of Explosive (“Explosives
Permit”) is required to be filed at the offices of the
Secretariat of National Defense (“SEDENA”) under the
guidelines of the
Federal
Explosives and Firearms Act.
26
Under
the
Federal Mining Act,
holders of mining concessions in México have the right to the
use of the water coming from the mining works. However,
certification of water rights and/or issuance of water rights
concessions are required from the National Water Commission
(“CONAGUA”) under the guidelines of the
National Waters Act.
DynaMéxico
Permit Filings / Permits History (2003 – 2017)
●
On February 10,
2003, SEDENA granted DynaMéxico an Explosives Permit for use
and storage of explosives materials in SJG.
●
In June 2006,
DynaMéxico ceased use of explosives materials in its mining
activities at SJG, and requested suspension of the Explosives
Permit. The Explosives Permit has been temporarily suspended by
SEDENA and DynaMéxico will be required to file a re-activation
application to re-activate the Explosives Permit.
●
On June 28, 2010,
DynaMéxico filed a Preventive Exploration Notice at the office
of SEMARNAT in connection with contemplated mineral exploration
activities at the
La
Prieta
,
San Pablo
,
La Pur’sima
,
La Unión
,
Tres Amigos
and
La Ceceña
areas of the San
José de Gracia Project.
●
On July 21, 2010,
SEMARNAT authorized DynaMéxico to conduct the mineral
exploration activities referenced in the Preventive Exploration
Notice, for a term of 36 months, as SEMARNAT determined that such
activities fall within the framework of Norm 120. SEMARNAT’s
approval was subject to the following conditions: (a)
DynaMéxico’s filing of a CSUP Application (referenced
below) and approval thereof by SEMARNAT, and (b) posting of a bond
in the amount of $134,487 Mexican Pesos to guarantee remediation
and rehabilitation measures following the conclusion of the mineral
exploration activities referenced in the Preventive Exploration
Notice. The bond was timely posted by DynaMéxico.
●
On August 9, 2010,
DynaMéxico filed a CSUP Application and a Technical
Justification Study at the offices of SEMARNAT to carry out certain
mineral exploration activities at the La Prieta, San Pablo, La
Pur’sima, La Unión, Tres Amigos and La Ceceña areas
of the San José de Gracia Project.
●
On December 20,
2010, SEMARNAT approved the CSUP Application and Technical
Justification Study filed by DynaMéxico with respect to the
San José de Gracia Project and authorized DynaMéxico to
conduct mineral exploration activities on 5.463 hectares of the San
José de Gracia Project for a term of 36 months.
●
On March 8, 2012,
the Director of Water Administration of CONAGUA certified in
writing the rights of DynaMéxico to use exploit and extract
1,000,000 cubic meters of water per year from the extraction
infrastructure located in San José de Gracia. CONAGUA
determined that DynaMéxico’s water rights are not
subject to any water rights concession or any other water
extraction restriction. Water extracted by DynaMéxico will be
subject to applicable levies imposed by the Mexican tax authorities
under applicable tax laws.
●
On June 17, 2013,
DynaMéxico received from SEMARNAT, the approval and permission
which allows for the rehabilitation and operation of the pilot mill
facility at SJG ("the SEMARNAT-SJG Mill Permit," and, the "SEMARNAT
Permit"). Under the terms of the SEMARNAT-SJG Mill Permit,
DynaMéxico will be responsible to maintain the SJG pilot mill
facility, and including the adjacent tailings pond area, in
compliance with the regulations described in la Norma Oficial
Mexicana ("NOM-141-SEMARNAT-2003).
●
On July 31, 2013,
SEMARNAT authorized DynaMéxico to conduct the mineral
exploration activities referenced in the Preventive Exploration
Notice, for a term of an additional 18 months, extending the
initial term of 36 months as SEMARNAT had determined on July 10,
2010. SEMARNAT determined that such activities fall within the
framework of Norm 120.
●
On December 31,
2013, DynaMéxico received from SEMARNAT the approval and
permission which allows for mining activities and the exploitation
of the San Pablo area of San Jose de Gracia.
●
On January 6, 2014,
DynaMineras entered
into a 20 Year Land
Lease Agreement with the Santa Maria Ejido Community surrounding
San Jose de Gracia. The 20 Year Land Lease Agreement is 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. $74,000 USD as of April 10, 2018), commencing in
2014. Additionally, under the description of the Land Lease
Agreement, DynaMineras constructed a Medical Facility at SJG during
2017.
The land lease agreement provides DynaMineras with
surface access to the core resource areas of SJG (4,399 hectares),
and allows for all permitted test mining, pilot production and
exploration activities from the owners of the surface rights (Santa
Maria Ejido community).
DynaMéxico
Bonding Requirements (2010)
●
Under the
Exploration Permit issued to DynaMéxico on July 21, 2010,
SEMARNAT imposed upon DynaMéxico a bonding obligation in the
amount of $134,487 Mexican Pesos to guarantee remediation and
rehabilitation measures following the conclusion of the mineral
exploration activities referenced in the Preventive Exploration
Notice. The bond was timely posted by DynaMéxico.
27
●
Under the CSUP
issued to DynaMéxico on December 20, 2010, SEMARNAT imposed
upon DynaMéxico a bonding obligation of $116,911 Mexican Pesos
for reforestation and remediation measures with respect to the San
José de Gracia Project. The bond was timely posted by
DynaMéxico.
Water Concession
The
Company has secured the Water Rights Concession for the area
surrounding SJG. The Director of Water Administration of the
National Water Commission of México (CONAGUA) formally
certified in writing the rights of DynaResource de México,
S.A. de C.V. to legally “use”, exploit and extract
1,000,000 cubic meters of water per year from the DynaMéxico
extraction infrastructure located within the perimeter of the
mining concessions comprising the San Jose de Gracia Mining
Property in Sinaloa State, México. CONAGUA determined that the
DynaMéxico water rights are not subject to any water rights
concession or any other water extraction restriction. Water
extracted by DynaMéxico will be subject to applicable levies
imposed by the Mexican tax authorities in accordance with current
Mexican tax laws.
Test Underground Mining and Pilot Mill Operations
(2015)
In July
2015, the Company commenced a capital investment program designed
to increase tonnage and output from the test mining operations, and
to increase volume and output through the pilot mill facility.
Through DynaMineras, the Company was engaged in the implementation
of this capital investment program from July through December
2015.
Capital Investment (2015
)
The
capital investment program consisted of a net total of $3,565,000
USD and is generally described below:
●
Contract Mining ($713,000);
including
$250,000 Deposit (advance for services), and $513,000 in direct
mining costs, explosives, and payments to contractor;
●
Mine related costs ($290,000
); including
mine plan development, permits, assays, consulting, mine supplies,
and equipment items expensed;
●
Mill and Camp ($613,000);
Improvements
to the Mill and Camp, including pre-operation
expenses;
●
Personnel Costs ($673,000
); including
payroll and consulting expenses;
●
Equipment ($636,000
); long term
equipment purchases including transportation, mine loading and
hauling, generators, compressors and pumps;
●
Overhead ($285,000
); including legal
expenses, consulting, and administration;
●
IVA ($272,000);
Value added taxes paid,
and refundable;
●
Land Use and Rental
($83,000)
;
Year 2017 Improvements and Expansion
During
2017 the Company initiated and completed the following capital
projects at SJG to improve and expand test mining and pilot milling
operations:
●
Medical facility (SJG Clinic):
$107,500;
●
Expanding camp, office, and infrastructures:
$145,500;
●
Expanding tailings pond, installing liners:
$265,000;
●
Improving, setting new foundation, and re-installing the Denver
Mill: $257,500;
●
Installing Mill #3:
$258,000;
●
Machinery &
Equipment:
$200,000;
●
Transportation:
$40,000;
Total:
$1,273,500;
28
Summary of Test Mining and Pilot Mill Operations for 2015, 2016,
and 2017:
|
Year
|
Total Tonnes
Mined & Processed
|
Reported Mill Feed Grade
(g/t Au)
|
Reported Recovery
%
|
Gross Gold Concentrates Produced
(Au oz.)
|
Net Gold Concentrates Sold
(Au oz.)
|
|
2015
|
7,180
|
8.30
|
78.0%
|
1,495
|
1,308
|
|
2016
|
33,172
|
12.70
|
79.7 %
|
10,836
|
8,668
|
|
2017
|
35,170
|
12.95
|
85 %
|
12,636
|
10,740
|
DynaMineras
expects to continue to increase its test underground mining
activity and pilot milling operations in 2018; and projects the
increased output to 250 tons/day from the mine and mill during
2018.
Additional Test Mining and Mill Operations Disclosure
The
flow sheet for obtaining and processing mineralized material is
described below:
Contract Mining
: Mineralize material is
mined from San Pablo mine by the contract miner, and according to
the formal mine plan developed by the Company.
Mining Patio:
Freshly mined mineralized
material is transported by the contract miner outside the San Pablo
Mine to the mine patio;
Pilot
Mill Facility – General Description and Flow
Sheet;
Mill Patio:
Mineralized material is
transported by Company dump trucks and articulated dump truck to
the mill patio.
Crushing Circuit:
Freshly mined
mineralized material is loaded from the mill patio into the
crushing circuit, comprised of a jaw crusher and cone crusher; and
1/2” crushed material is fed by conveyor belt to the fine
mineralized material bin. The mineralized material is then sent by
conveyor belt to the primary ball mill, which is a Hardinge conical
mill.
Hardinge Mill:
The mineralized material
is then ground to -100 mesh particle size; and then fed to a
holding tank;
Holding Tank:
The mineralized material
is pumped from the holding tank to the cyclone;
Cyclone:
The course material plus (-100
Mesh) is fed to the Ball Mill #2, the Denver Mill; and fine
material less (-100 Mesh) is fed to another holding
tank.
Fine Screening System (Sweco Screen):
The fine mineralized material is fed from the holding tank to the
Sweco Screen; the fine mineralized material less (-200 Mesh) is fed
to the spirals; the oversized material is fed to Ball Mill#
2.
Denver Mill:
All mineralized material
reground in the Denver Mill, is then fed to the holding tank prior
to the Cyclone.
Spiral Gravity Concentration
:
Approximately 25% of the mineralized material is fed from the
spirals to the Wifley table. Approximately 75% of the mineralized
material is fed from the spiral concentration to the flotation
conditioning tank.
Wifley Shaking Table:
The concentrate
from the spirals feed the Wifley shaking table, producing a
high-grade gravity concentrate. The high-grade gravity concentrate
is bagged and shipped for sale. (There are no chemicals present in
the gravity concentrate.) It is estimated that the gravity
concentrate produced is approx. 40% of the total recovered gold;
and estimated that a 300-400 g/t Au would be the final gravity
concentrate grade.
Flotation Conditioning Tank:
The
tailings from spirals and from the Wifley table are fed to the
flotation conditioning tank. A low calculation of chemicals is
added, with metered feeder, directly to the flotation feed tank.
Sodium sulfide, a granular solid, is added also to the agitated
flotation feed tank.
Flotation Chemicals
: The following
chemicals are added to the flotation feed tank: Na
2
S (Sodium
Sulfide), 400 g/mt (solid); Aero 343 Xanthate Collector 40-80 g/mt
(liquid); Cytec 7249 conditioner 50 g/mt (liquid); Cytec 4037
Conditioner 20–40 g/mt (liquid); and Aerofroth 70 or 73
Frother 30 g/mt (liquid).
Rougher Flotation:
The Rougher flotation
consists of a bank of 8 flotation cells (or Hybrid float cell),
which is fed by the conditioning tank. The rougher concentrate
recovered from the rougher float cells or the first hybrid cell is
bagged for shipment and sale. A very low percentage of chemicals
remains in the rougher concentrate.
29
Scavenger and Cleaner Concentrate:
The
tailings of the rougher concentrate could be fed to the scavenger
and cleaner float cells (or, a second hybrid cell). The cleaner
concentrate would then be bagged and shipped for sale. A very low
percentage of chemicals remains in the cleaner
concentrate.
Circuit Tailings:
The tailings from the
flotation area are fed to the tailings impoundment area. Less than
10% of chemicals added at the conditioning tank remain in the
tailings slurry. Chemicals do not appear in the water of the
tailings; as confirmed by analysis.
Power:
A 45 KW efficient diesel
generator will supply power to the camp, mill lights and to the
laboratory. Two 50 KW back-up diesel generators (Selmec, Kamag) are
also available for camp use.
The
mill primary generator is a 310 KW Cat Diesel and there is a 455 KW
Cat Diesel mill back-up generator.
Diesel
fuel is stored in a 10,000-liter storage tank that feeds the two
large generators by gravity flow to a common 500-liter head tank.
The fuel storage tank is contained within a secondary cement
impoundment with controlled and oil-trapped drainage.
Electrical:
The Company is in process of
connecting electrical power sufficient to supply electrical power
for the camp and mill.
ITEM
3.
LEGAL
PROCEEDINGS
Arbitration filed by Goldgroup
/
DynaMéxico Complaint against Goldgroup
On March 14, 2014, Goldgroup filed for arbitration in the United
States with
the American Arbitration Association
("AAA")
, citing the Earn In Agreement
dated September 1, 2006 as the basis for the arbitration filing.
The Company filed an answer on April 10, 2014, disputing that any
issues exist which provide for arbitration.
On
December 9, 2014, DynaMéxico filed an Ordinary commercial
lawsuit (Civil Claims) against Goldgroup Mining Inc., its parent
company Goldgroup Resources Inc., and the AAA, in the Thirty Sixth
Civil Court in the Federal District of México, under file 1120
number / 2014 ("the DynaMéxico Trial"). The DynaMéxico
Trial seeks to terminate the U.S.-based arbitration proceedings, as
DynaMéxico believes there is no legal basis for arbitration,
and to nullify the arbitration proceedings since Goldgroup
previously sought recourse in the Mexican courts. In the
DynaMéxico Trial, DynaMéxico also requests that
substantial damages (in the amount of US $50 million) be awarded to
DynaMéxico against Goldgroup for:
a)
wrongfully using
and disseminating confidential information and data belonging to
DynaMéxico;
b)
asserting that
Goldgroup owns any interest in the San Jose de Gracia Project in
northern Sinaloa, México, rather than accurately disclosing
that Goldgroup owns a common shares equity interest
(shareholder’s interest) in DynaMéxico;
c)
improperly
disclosing the percentage of common shares equity interest
(shareholder’s interest) owned by Goldgroup in
DynaMéxico;
d)
improperly
disclosing or implying that Goldgroup is the operator of the San
Jose de 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.
On
October 5, 2016, in an appellate ruling, the Thirty Sixth Civil
Court of the Superior Court of Justice of the Federal District of
México (Tribunal Superior de Justicia del Distrito Federal),
file number 1120/2014 declared, among other resolutions,
that:
(a)
The AAA must
“cease and desist” from the arbitration
proceeding;
(b)
The AAA does not
have jurisdiction to hear any conflict and/or interpretation
arising from the Earn In/Option Agreement, dated September 1, 2006;
and
(c)
The AAA does not
have jurisdiction to hear disputes arising between shareholders of
DynaMéxico, which disputes do
(d)
not arise
directly and immediately from the Earn In/Option Agreement, dated
September 1, 2006.
$48M Damages Award to DynaMéxico
Also on
October 5, 2015, in an appellate ruling, DynaMéxico was
awarded in excess of US $48 million in damages from Goldgroup
Resources, Inc. by virtue of a Sentencia Definitiva (the
“Definitive Sentence”) issued by the Thirty Sixth Civil
Court of the Superior Court of Justice of the Federal District of
México (Tribunal Superior de Justicia del Distrito Federal),
File number 1120/2014. The Definitive Sentence included the
considerations and resolutions by the Court, and additional
Resolutions were also ordered in favor of DynaMéxico (together
the damages award and the additional Resolutions are referred to
as, the “Oct. 5, 2015 Resolution”).
A
concise translation to English of the Oct. 5, 2015 Resolution (the
resolution portion of the Definitive Sentence) is set forth
below:
30
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.
Mexico City Court Approves Lien on Shares of DynaMéxico owned
by Minority Interest Holder
On
October 5, 2016, the Thirty-Sixth Civil Court of the Superior Court
of Justice of the Federal District of Mexico (Tribunal Superior de
Justicia del Distrito Federal) approved a Lien (referred to by the
court as an “Embargo”), in favor of DynaMéxico,
upon Stock Certificates in the name of Goldgroup Resources Inc.
(“Goldgroup”). The Stock Certificates subject to the
Lien (“Embargo”) constitute Shares of DynaMéxico
(“the Goldgroup DynaMéxico Shares”).
The
Goldgroup DynaMéxico Shares were seized as a partial recovery
of assets by DynaMéxico after DynaMéxico was awarded more
than $ 48 M USD (Forty-Eight Million Dollars) in damages against
Goldgroup (the “Damages against Goldgroup”) on October
05, 2015, as described in a Sentencia Definitiva (the
“Definitive Sentence”) issued by the same court, the
Thirty Sixth Civil Court of the Superior Court of Justice of the
Federal District of México, File number 1120/2014. Excerpts
from the Definitive Sentence appear below. In addition to the
Damages against Goldgroup, the Definitive Sentence also included
additional Resolutions ordered in favor of DynaMéxico (the
Damages against Goldgroup and the additional Resolutions are
together referred to as the “Oct. 5, 2015
Resolution”).
31
Denial of Amparo Appeal
On
August 24, 2017 a Federal Amparo Judge (“Juzgado de
Distrito”) in the State of Vera Cruz, Mexico, dismissed
Goldgroup Resources Inc’s Amparo Trial Challenge to the $48 M
USD damages award previously granted in favor of DynaMéxico.
Pursuant to the dismissal ruling, the $48M USD damages award,
previously granted to DynaMéxico by the Thirty-Sixth Civil
Court of the Superior Court of Justice of the Federal District of
Mexico on October 5, 2015 – was effectively
confirmed.
Arbitration Ruling
In
direct contradiction to the October 5, 2015 Definitive Sentence
issued by court in México, on August 25, 2016 the American
Arbitration Association - International Centre for Dispute
Resolution, Denver office (the “AAA”) issued an
Arbitration Ruling (the “Arbitration Ruling”) in favor
of Goldgroup Resources Inc. against DynaMéxico and
DynaResource, Inc. The Arbitration Ruling was the result of a
proceeding in which neither DynaMéxico nor DynaResource
participated, since the Definitive Sentence issued by the court in
México effectively prohibited their participation in the
Arbitration proceeding and should have prohibited Goldgroup
Resources Inc. participation as well.
The
Arbitration Ruling provides the following: (i) the Earn In/Option
Agreement is still in force, and consequently Goldgroup may appoint
two directors to the DynaMéxico board, and may participate in
the appointment of a fifth director; (ii) the DynaMéxico
Management Committee is reinstated, and must approve all budgets
and expenditures; (iii) amounts expended by DynaMéxico that
were not approved by the Management Committee are subject to
repayment by DynaResource; (iv) the issuance of additional shares
by DynaMéxico (and consequent dilution of Goldgroup’s
equity interest) was in violation of the Earn In/Option Agreement;
and (v) DynaResource and DynaMéxico are responsible for
Goldgroup’s costs and professional fees associated with the
Arbitration Ruling.
Unlike
the vast majority of arbitration proceedings in the U.S., the
Arbitration Ruling is not final. Since the Arbitration Ruling is
subject to international rules, the ruling may be vacated by U.S.
courts, or simply not recognized by U.S. courts, on a number of
grounds. Accordingly, both DynaMéxico and DynaResource have
timely requested relief from the United States Federal District
Court in Colorado, via the filing of a Petition for Nonrecognition
of Foreign Arbitral Award and/or Motion to Vacate Arbitration Award
(the “Petition for Nonrecognition”), and a supporting
brief. The Petition for Nonrecognition relies heavily upon the
Mexican court’s Definitive Sentence, key excerpts of which
appear immediately below.
The
Mexican court has already ruled that “any controversy arising
from the Earn In/Option Agreement must be brought and resolved
under Mexican Law and by competent Mexican Courts with proper
jurisdiction.” Consequently, the monetary awards against
DynaResource – which are based upon a finding that the Earn
In/Option Agreement is still in force – will not be
enforceable if the Mexican court rules that the Earn In/Option
Agreement is terminated. T
he Company
believes that the potential for the assessment of a material
monetary judgment against
DynaResource
is remote.
SIXTH:
Pursuant to Article
1424 of the Commercial Code of México, the arbitration
provision established under clause 8.16 of the Earn In/Option
Agreement, dated as of September 1, 2006, is ineffective and
impossible to execute.
SEVENTH:
This
Court declares that any controversy arising from the Earn In/Option
Agreement must be brought and resolved under Mexican Law and by
competent Mexican Courts with proper jurisdiction, in recognition
of the waiver and exclusion of the arbitration clause (contained in
the Earn In/Option Agreement) by both parties.
EIGHT:
This
Court declares that the American Arbitration Association must
abstain from hearing arbitration procedure number 50 501 T 00226
14, or any other ongoing and/or future ongoing arbitration already
filed or to be filed by the defendant Goldgroup, based on the Earn
In/Option Agreement dated September 1, 2006.
NINTH:
This
Court declares that the American Arbitration Association does not
have jurisdiction to hear any conflict and/or interpretation
arising from the Earn In/Option Agreement, dated September 1,
2006.
TENTH:
This
Court declares, that the American Arbitration Association does not
have jurisdiction to hear disputes arising between shareholders of
DynaMéxico, which disputes do not arise directly and
immediately from the Earn In/Option Agreement, dated September 1,
2006.
ELEVENTH:
This
Court declares, that the American Arbitration Association does not
have jurisdiction to hear any matters where Koy Wilber Diepholz,
who is the President of the Board of Directors of DynaMéxico,
and has been personally sued in relation to the arbitration clause
established under clause 8.16 of the Earn In/Option Agreement,
dated September 1, 2006, since he signed the mentioned instrument
in representation of the Company and not in his personal
capacity.
(C)
The Arbitration Ruling contains an acknowledgement by the AAA that
the AAA was named as a defendant in the legal demand filed by
DynaMéxico in the Thirty Sixth Civil Court of the Superior
Court of Justice of the Federal District of México (the
“DynaMéxico Legal Demand”). The Arbitration Ruling
also contains a statement that the AAA was not properly served
notice of the DynaMéxico Legal Demand.
(D)
DynaMéxico obeyed the October 5, 2015 Court Order, and did not
attend the Arbitration hearing.
32
(E)
DynaMéxico will pursue all legal remedies in order to obtain a
full dismissal of the Arbitration Ruling.
(F)
The October 5, 2015 Court Order and the $48 million USD award of
damages against Goldgroup Resources Inc. remains in full force and
effect as issued. DynaMéxico is currently pursuing all
available remedies in order to collect $48 million USD in damages
from Goldgroup Resources Inc. (See Court Approves Lien on Shares of
DynaMéxico owned by Goldgroup Resources, above).
DynaUSA and DynaMéxico filed Motion to Vacate Arbitration
Ruling
On
November 17, 2016, DynaUSA and DynaMéxico filed a Motion to
Vacate the Arbitration Ruling in United States District Court,
District of Colorado.
Recommendation to Vacate Arbitration Ruling issued by United States
Magistrate Judge
On
February 13, 2018 a Recommendation to Vacate the Arbitration Ruling
was issued by a United States Magistrate Judge of the United States
District Court, District of Colorado.
Complaint filed by Goldgroup against the May 17, 2013
Shareholders’ Meeting of DynaMéxico
On
February 2
nd
, 2014, Goldgroup
Resources Inc. filed a petition with the judge, tenth district
Mazatlán, 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 to
DynaResource.
DynaResource
and DynaMéxico filed a response on January 9, 2016, and the
matter is pending. DynaMéxico will vigorously defend against
all such complaints by Goldgroup, as there exists no legal basis
for the complaint by Goldgroup against the May 17, 2013
shareholders meeting of DynaMéxico.
Litigation(s) in México – Company as
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.
The
Company believes that no material adverse change will occur as a
result of the actions taken, and the Company further believes that
there is little to no potential for the assessment of a material
monetary judgment against the Company for legal actions it has
filed in México. For purposes of confidentiality, the Company
does not provide more specific disclosure in this Form
10-K.
ITEM
4.
MINE
SAFETY DISCLOSURES
As the
Company has no mines located in the United States or any of its
territories, the disclosure required by this Item is not
applicable.
33
ITEM
5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s common stock is traded on the OTC Markets under the
symbol "DYNR". The following table sets forth, for the
periods indicated, the high and low bid quotations which reflect
inter-dealer prices, without retail mark-up or mark-down and
without commissions; and may not reflect actual transactions. All
amounts are denominated in U.S. dollars.
|
Year
ended December 31, 2017
|
Low
|
High
|
|
First
Quarter
|
1.00
|
1.60
|
|
Second
Quarter
|
1.01
|
1.35
|
|
Third
Quarter
|
0.90
|
1.35
|
|
Fourth
Quarter
|
0.90
|
1.25
|
|
|
|
|
|
Year
ended December 31, 2016
|
Low
|
High
|
|
First
Quarter
|
1.10
|
1.65
|
|
Second
Quarter
|
1.30
|
1.50
|
|
Third
Quarter
|
1.41
|
1.95
|
|
Fourth
Quarter
|
1.20
|
1.99
|
As of
April 10, 2018, there were outstanding 17,722,825 shares of our
common stock, which were held by approximately 569 shareholders of
record. This figure does not include shareholders that hold their
shares in street name or with a broker.
Dividend Policy
No cash
dividends on the Company common stock have been declared or paid
since the Company's inception. Payment of future dividends, if any,
will be at the discretion of our Board of Directors after taking
into account various factors, including the terms of any credit
arrangements, our financial condition, operating results, current
and anticipated cash needs and plans for growth. Our initial
earnings, if any, will likely be retained to finance our growth. At
the present time, we are not party to any agreement that would
limit our ability to pay dividends.
During
the fiscal year ended December 31, 2017, except as included in our
Quarterly Reports on Form 10-Q or in our Current Reports on
Form 10-K, we have not sold any equity securities not
registered under the Securities Act.
During
the fiscal years ended December 31, 2017 and 2016, no securities of
the Company were authorized for issuance under equity compensation
plans.
ITEM
6.
SELECTED
FINANCIAL DATA
Not
applicable.
34
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K 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.
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, certain
disclosures 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.
While
these terms are recognized and required by Canadian securities
legislation (under National Instrument 43-101 (“NI
43-101”), entitled
Standards
of Disclosure for Mineral Projects
), the SEC does not
recognize these terms. Investors in the United States 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 NI 43-101. 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 in the
DynaMéxico NI 43-101 Technical Report and DynaMéxico
43-101 Mineral Resource Estimate (compiled for DynaResource de
Mexico SA de CV), are economically or legally
mineable.
Under U.S. standards, as set forth in SEC Industry Guide 7,
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.
The SJG Property as described
in this Annual Report on Form 10-K is without known reserves.
Mineral resources which are not classified as mineral reserves do
not have “demonstrated economic viability.” The
quantity of resources and the quality (grade) of resources reported
as “Indicated” and “Inferred” mineral
resources in the DynaMéxico 43-101 Mineral Resource Estimate
compiled for DynaResource de Mexico SA de CV, under Canadian
National Instrument 43-101 and filed by the Company with SEDAR, are
not disclosed in this Form
10-Q
. There has been insufficient exploration to define any
mineral reserves on the SJG Property, and it is not certain if
further exploration will result in the definition of mineral
reserves.
35
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”).
We
currently conduct operations in México through our operating
subsidiaries. We currently own 80% of the outstanding shares of
DynaResource de
México, S.A. de C.V. (“DynaMéxico”).
DynaMéxico owns 100% of mining concessions, equipment, camp
and related facilities which comprise the San
Jose de Gracia
Property, in northern Sinaloa State, México. We also own 100%
of
Mineras de
DynaResource S.A. de C.V. (“DynaMineras”), the
exclusive oper
ator of the San José de Gracia Project,
under contract with DynaMéxico.
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).
In
2005, the Company formed Mineras de DynaResource S.A. de C.V.
(“DynaMineras”), a wholly owned subsidiary. DynaMineras
entered into an operating agreement with DynaMéxico on April
15, 2005. As a consequence of that agreement and subsequent
amendments to that agreement, DynaMineras is the exclusive
operating entity for the SJG Project.
Also in
2005, the Company formed another wholly owned subsidiary,
DynaResource Operaciones, S.A. de C.V.
(“DynaOperaciones”). DynaOperaciones entered into a
personnel management agreement with DynaMineras and, as a
consequence of that agreement, is the exclusive management company
for personnel and consultants involved at the SJG
Project.
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 oper
ator 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.
36
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 a
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 high-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
.
Technical Report According to Canadian National Instrument 43-101
(2012)
In
2012, DynaMéxico commissioned
Servicios y Proyectos Mineros
(“SPM”) for the production of a Technical Report
according the Canadian National Instrument 43-101 (“the
DynaMéxico NI 43-101 Technical Report”) 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 (the
“DynaMéxico NI 43-101 Mineral Resource
Estimate”).
37
Parameters Used to Estimate the DynaMéxico NI 43-101 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 DynaMéxico NI 43-101 Mineral Resource
Estimate, prepared in 2012, 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. 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.
DynaMéxico NI 43-101 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 DynaMineras.
DynaMéxico NI 43-101 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 SJG Project, so the variograms for gold were used in
estimation of the four other metals.
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.
DynaMéxico NI 43-101 Mineral Resource Estimate and
DynaMéxico
NI 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.
The
Company received from DynaMéxico on February 14, 2012, a
Mineral Resource Estimate according to Canadian National Instrument
43-101 for San Jose de Gracia (the
“
DynaMéxico NI 43-101 Mineral
Resource Estimate’). The DynaMéxico NI 43-101 Mineral
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 DynaMéxico NI 43-101 Mineral
Resource Estimate concentrates on four separate main vein systems
at SJG: Tres Amigos, San Pablo, La Union, and La
Purisima.
The
DynaMéxico NI 43-101 Mineral Resource Estimate prepared by Mr.
Robert Sandefur for the DynaMéxico NI 43-101 Technical Report
included Indicated Resources at Tres Amigos and San Pablo. The
“DynaMéxico NI 43-101 Mineral Resource Estimate also
included an Inferred Resource for the four vein systems. Table
summaries of Indicated and Inferred Resources are contained in the
DynaMéxico NI 43-101 Mineral Resource Estimate. The
DynaMéxico NI 43-101 Mineral Resource Estimate has been filed,
along with the DynaMéxico NI 43-101 Technical Report, on
SEDAR; but is
not
disclosed in this Form 10-Q.
38
Updated Technical Report According to Canadian National Instrument
43-101 (2012)
The
Company received from DynaMéxico, an updated Technical Report
according to Canadian National Instrument 43-101, which included
the DynaMéxico NI 43-101 Mineral Resource Estimate (the
“Updated DynaMéxico NI 43-101 Technical Report”).
The Updated DynaMéxico NI 43-101 Technical Report was approved
by DynaMéxico, and filed by the Company on SEDAR; but is
not disclosed in this Form
10-Q
.
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 unpaid advances made by DynaMineras to DynaMéxico as of
December 31, 2017 is $2,539,639
.
And, in addition, the total
balance owed by DynaMéxico to the Company as of December 31,
2017 is $4,000,000. 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. $74,000 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.
Test Underground Mining and Pilot Mill Operations
(2015)
In July
2015, the Company commenced a capital investment program designed
to increase tonnage and output from the test mining operations, and
to increase volume and output through the pilot mill facility.
Through DynaMineras, the Company was engaged in the implementation
of this capital investment program from July through December
2015.
Capital Investment (2015
)
The
capital investment program consisted of a net total of $3,565,000
USD as generally described below:
Contract Mining ($713,000);
including
$250,000 Deposit (advance for services), and $513,000 in direct
mining costs, explosives, and payments to contractor;
Mine related costs ($290,000
); including
mine plan development, permits, assays, consulting, mine supplies,
and equipment items expensed;
39
Mill and Camp ($613,000);
Improvements
to the Mill and Camp, including pre-operation
expenses;
Personnel Costs ($673,000
); including
payroll and consulting expenses;
Equipment ($636,000
); long term
equipment purchases including transportation, mine loading and
hauling, generators, compressors and pumps;
Overhead ($285,000
); including legal
expenses, consulting, and administration;
IVA ($272,000);
Value added taxes paid,
and refundable;
Land Use and Rental
($83,000)
;
Year 2017 Improvements and Expansion
During
2017 the Company initiated capital projects at SJG in the amount of
$1,273,500 USD to improve and expand test mining and pilot milling
operations:
● Medical
facility:
$107,500;
● Expanding
camp, office, and
infrastructures:
$145,500;
● Expanding
tailings pond, installing
liners:
$265,000;
● Improving,
setting new foundation, and re-installing the Denver
Mill:
$257,500;
● Installing
Mill
#3:
$258,000;
● Machinery
&
Equipment:
$200,000;
●
Transportation:
$40,000;
Total:
$1,273,500;
Summary of Test Mining and Pilot Mill Operations for 2015, 2016,
and 2017:
|
Year
|
Total Tonnes
Mined & Processed
|
Reported Mill Feed Grade
(g/t Au)
|
Reported Recovery
%
|
Gross Gold Concentrates Produced
(Au oz.)
|
Net Gold Concentrates Sold
(Au oz.)
|
|
2015
|
7,180
|
8.30
|
78.0%
|
1,495
|
1,308
|
|
2016
|
33,172
|
12.70
|
79.7 %
|
10,836
|
8,668
|
|
2017
|
35,170
|
12.95
|
85 %
|
12,636
|
10,740
|
DynaMineras
expects to continue to increase its test underground mining
activity and pilot milling operations in 2018; and projects the
increased output to 250 tons/day from the mine and mill during
2018.
Structure of Company / Operations
Activities
in México are conducted by Mineras de DynaResource S.A. de
C.V. (“DynaMineras”); with the management of personnel
being contracted by DynaMineras through to the personnel management
subsidiary, DynaResource Operaciones, S.A. de C.V.
(“DynaOperaciones”). Management of DynaResource, Inc.
and consultants continue to manage the operating companies in
México; while the Chairman/CEO of DynaUSA is the President of
each of the operating companies in México. Fees for Management
and administration are charged by DynaMineras and DynaOperaciones,
which are eliminated in consolidation.
Exploitation Amendment Agreement
In
2013, DynaMineras, in accordance with the terms of the Exploitation
Amendment Agreement, commenced the rehabilitation of the San Pablo
Mine and the refurbishment of the pilot production facility at SJG.
DynaMéxico received permits as discussed above for the
rehabilitation and operation of the pilot mill facility and the
exploitation and mining of the San Pablo area of SJG. The basis for
the mining activity and the operation of the pilot mill facility
are the NI 43-101 Mineral Resource Estimate, the Technical Report,
the block models prepared as a result of the recent drilling
activity, and the recent production history of
2003-2006.
40
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 $10,850,091 in 2017 and $9,496,105 in
2016.
Capital Requirements
The
mining industry in general requires significant capital in order to
take a property from the exploration, to development to production.
These costs remain a significant barrier to entry for the average
company but once in production, there is a ready market for the
final products, In the case of SJG, the final product would be
mainly gold, the price of which is determined by global markets, so
there is not a dependence on a customer base.
Gold
Gold Uses.
Gold generally is used
for fabrication or investment. Fabricated gold has a variety of end
uses, including jewelry, electronics, dentistry, industrial and
decorative uses, medals, medallions and official coins. Gold
investors buy gold bullion, official coins and
jewelry.
Gold Supply.
A combination of current
mine production, recycling and draw-down of existing gold stocks
held by governments, financial institutions, industrial
organizations and private individuals make up the annual gold
supply. Based on public information available for the years 2008
through 2014, on average, current mine production has accounted for
approximately 64% of the annual gold supply.
Gold Price.
The following table
presents the annual high, low and average daily afternoon fixing
prices for gold over the past ten years on the London Bullion
Market ($/ounce):
|
Year
|
High
|
Low
|
Average
|
|
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
|
$
1,303
|
$
1,057
|
$
1,175
|
|
2016
|
$
1,366
|
$
1,151
|
$
1,236
|
|
2017
|
$
1,379
|
$
1,101
|
$
1,244
|
Source:
Kitco, Reuters and the London Bullion Market
Association
On
April 10, 2018, the afternoon fixing gold price on the London
Bullion Market was $1,336 per ounce and the spot market gold price
on the New York Commodity Exchange was $1,336 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.
41
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 Years Ended December 31, 2017 and 2016
Test Underground Mining and Pilot Mill Operations
(2015)
In July
2015, The Company commenced a capital investment program designed
to increase tonnage and output from the test mining operations, and
to increase volume and output through the pilot mill facility. The
Company, through DynaMineras was engaged in the implementation of
this capital investment program from July through December 2015.
And, as a result, the Company accomplished mining and milling
volumes of 100 tons/day of mineralized material, in January
2016.
Capital Investment (2015
)
The
capital investment program consisted of a net total of $3,565,000
USD and is generally described below:
Contract Mining ($713,000);
including
$250,000 Deposit (advance for services), and $513,000 in direct
mining costs, explosives, and payments to contractor;
Mine related costs ($290,000
); including
mine plan development, permits, assays, consulting, mine supplies,
and equipment items expensed;
Mill and Camp ($613,000);
Improvements
to the Mill and Camp, including pre-operation
expenses;
Personnel Costs ($673,000
); including
payroll and consulting expenses;
Equipment ($636,000
); long term
equipment purchases including transportation, mine loading and
hauling, generators, compressors and pumps;
Overhead ($285,000
); including legal
expenses, consulting, and administration;
IVA ($272,000);
Value added taxes paid,
and refundable;
Land Use and Rental
($83,000)
;
Year 2017 Improvements and Expansion
During
2017 the Company initiated capital projects at SJG in the amount of
$1,273,500 USD to improve and expand test mining and pilot milling
operations:
●
Medical
facility:
$107,500;
●
Expanding camp,
office, and
infrastructures:
$145,500;
●
Expanding tailings
pond, installing
liners:
$265,000;
●
Improving, setting
new foundation, and re-installing the Denver
Mill:
$257,500;
●
Installing Mill
#3:
$258,000;
●
Machinery &
Equipment:
$200,000;
●
Transportation:
$40,000;
Total:
$1,273,500;
42
Summary of Test Mining and Pilot Mill Operations for 2015, 2016,
and 2017:
|
Year
|
Total Tons
Mined & Processed
|
Reported Mill Feed Grade
(g/t Au)
|
Reported Recovery
%
|
Gross Gold Concentrates Produced
(Au oz.)
|
Net Gold Concentrates Sold
(Au oz.)
|
|
2015
|
7,180
|
8.30
|
78.0%
|
1,495
|
1,308
|
|
2016
|
33,172
|
12.70
|
79.7 %
|
10,836
|
8,668
|
|
2017
|
35,170
|
12.95
|
85 %
|
12,636
|
10,740
|
DynaMineras
expects to continue to increase its test underground mining
activity and pilot milling operations in 2018; and projects the
increased output from to 250 tons/day from the mine and mill during
2018.
Test
pilot operations in 2017 yielded 35,170 Tons mined and processed
from underground test mining activity and pilot milling operations;
and the production of approximately 12,636 gross Oz Au, and net of
dry weight adjustments at the buyer’s facilities, the
production of approximately 10,740 Oz Au. The Company reports net
revenue of $10,850,091 net of buyer’s price discount and
refining and treatment costs.
Test
pilot operations in 2016 yielded 33,172 tons mined and processed
from underground mining activity and pilot mill operations; and the
production of approximately 10,863 gross Oz Au, and net of dry
weight adjustments at buyer’s facilities, the production of
approximately 8,668 Oz Au. The Company reported net revenue of
$9,496,105 net of buyer’s price discount and refining and
treatment costs.
DynaMineras
expects to continue its test underground mining activity and pilot
milling operations in 2018; and projects the output of 250 tons/day
from the mine and mill in 2018.
REVENUE.
Revenues for the years ended December 31, 2017 and 2016 were
$10,850,091 and $9,496,105, respectively. The Company continued the
test mining and pilot mill processing at San Jose de Gracia,
including the production and sale of precious metals
concentrates.
PRODUCTION
COSTS RELATED TO SALES. Production costs related to sales for the
years ended December 31, 2017 and 2016 were $1,120,011 and
$1,044,011, respectively. These are expenses directly related to
the milling, packaging and shipping of gold and other precious
metals product.
MINE
PRODUCTION COSTS. Mine production costs for the years ended
December 31, 2017 and 2016 were $1,295,543 and $734,542,
respectively. These costs are directly related to the extraction of
mine tonnage to be processed at the mill.
MINE
EXPLORATION COSTS. Mine exploration costs for the years ended
December 31, 2017 and 2016 were $3,539,523 and $2,006,824,
respectively. These are the cost of extracting waste material to
reach the materials to be extracted for processing.
MINE EXPANSION
COSTS: Mine expansion costs for the years ended December 31, 2017
and 2016 were $253,231 and $0, respectively. These were the cost
associated with preparing the San Jose de Gracia East Mine for
production. The Company expects to complete the mine expansion
project in the first quarter of 2018 and begin actively mining the
San Jose de Gracia East mine in the second quarter.
TRANSPORTATION.
Transportation costs for the years ended December 31, 2017 and 2016
were $576,315 and $262,755, respectively. These are the costs of
transporting the product to the customer for treatment and
sale.
CAMP,
WAREHOUSE AND SUPPORT FACILITIES. Camp, warehouse and support
facility cost for the years ended December 31, 2017 and 2016 were
$1,226,897 and $501,044, respectively. These are the support cost
of the mining facilities including housing, food, security and
warehouse operations.
PRE-PILOT-PRODUCTION
EXPENSES. Pre-Pilot Production Expenses for the years ended
December 31, 2017 and 2016 were $0 and $64,795, respectively. These
expenses were the expenses of the Company commencing mining and
milling operations incurred prior to commencing of test mining.
These expenses include refurbishment, facilitation of and cleaning
of the mill and mine operations
PROPERTY
HOLDING COSTS. Property holding costs for the years ended December
31, 2017 and 2016 were $702,599 and $504,495, respectively. These
costs are concessions taxes, leases on land and other direct costs
of maintaining the property.
GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the years ended December 31, 2017 and 2016 were $2,609,675 and
$2,784,856 respectively. These are the cost of operating the
Company not directly associated with the mine operations including
management, accounting and legal expenses.
43
OTHER
INCOME (EXPENSE). Other income for the years ended December 31,
2017 and 2016 was $3,155,274 and $(19,985), respectively. Included
in this category in 2016 is interest expense of $(119,532), other
expense of $(156,882), Change in Derivative Liability of $276,647,
and currency transaction gain or (loss) of $(20,218). Included in
this category in 2017 is interest expense of $(158,944), change in
derivative of $1,924,582 and currency transaction gain or (loss) of
$1,388,573.
NON-CONTROLLING
INTEREST. The non-controlling interest portion of the net loss for
the years ended December 31, 2017 and 2016 was $125,501 and
$347,179, respectively. This represents the non-controlling
interest share of DynaMéxico’s loss.
OTHER
COMPREHENSIVE INCOME (LOSS). Comprehensive income (loss) includes
the Company’s net income (loss) plus the unrealized currency
translation gain (loss) for the period. The Company’s other
comprehensive loss for the years ended December 31, 2017 and 2016
consisted of unrealized currency losses of $(1,781,733) and
$(147,757) respectively.
Liquidity and Capital Resources
As of
December 31, 2017, the Company had working capital of $(1,824,854),
comprised of current assets of $5,530,670 and current liabilities
of $7,355,524, of which $3,181,508 is a derivative liability. This
represents an increase of $2,468,075 from the working capital
maintained by the Company of $(4,142,929) (as restated – see
note 17) with a derivative liability of $5,106,090 as of December
31, 2016. The primary reason for this deficit is recognition of
financial statement derivatives incurred in the issuance of
Preferred C shares in 2015. The Company continued to ramp up the
operations to the refurbishment of the pilot mill facility and the
rehabilitation of the San Pablo mine at San Jose de
Gracia.
Net
cash provided (used) in operations for the year ended December 31,
2017 was $2,058,586 compared to $535,136 in the year ended December
31, 2016. This was primarily due to the large accrual for back
concession taxes.
Net
cash (used) in investing activities for the years ended December
31, 2017 and 2016 was $(1,273,189) and $(145,030), respectively.
The increase was due to the mining expansion project consisting
primarily or the refurbishing of one of the Company’s Mill
and the construction of a new third meal, expansion of the camp
facilities to accommodate double the manpower and mining capacity,
the buildings of a tailing ponds, and the purchase of numerous
machinery and equipment for the expansion.
Cash
provided (used) provided by financing activities for the year ended
December 31, 2017 was $2,328,106 compared to ($310,000) for the
year ended December 31, 2016. The primary components for the year
ended December 31, 2017 was the exercise of 1,000,000 Warrants at
$2.50/share and the repayment of promissory note and payment of
long term debt compared to the year ended December 31, 2016
consisting of the repayment of a note for $150,000 and dividends
paid of $160,000. Proceeds from financing were utilized to
refurbish the pilot mill facility and to rehabilitate the San Pablo
mine, and to prepare to process bulk mined samples through the mill
facility.
Non-controlling Interest
Under
the terms of the Earn In Agreement (September 1, 2006 to March 15,
2011), Goldgroup Mining Inc. and 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. In the years
ended December 31, 2017 and 2016 the portion of the net loss
attributable to Goldgroup was $(125,501) and $(347,179),
respectively.
Off-Balance
Sheet Arrangements
As of
December 31, 2017, 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 test mining and
pilot milling operations at SJG. 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 cash flow generated from its current
operations, is adequate to fund its ongoing general and
administrative expenses through 2018. The Company may seek
additional debt funding during the next 24 months depending on
results of its pilot operations, market conditions, and other
factors.
44
Capital Expenditures
The
Company’s primary activities relate to the exploitation of
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.
Sampling Process-Core Drill Holes
The
geological data reported from core drill holes contained in this
report was verified by an appropriate quality control person using
industry standard quality controls and quality assurance protocols
utilized in exploration activities. Standard reference samples and
various duplicates are inserted in each batch of assays. Drill core
samples are cut by saw on site and samples splits are prepared for
shipment, sealed and then shipped for assaying. Samples were sent
to a certified assayer (Inspectorate Exploration & Mining
Services Ltd., Vancouver, BC.) and analyzed for gold by fire assay
and for silver and 34 other trace and major elements in accordance
with standard industry practices.
Drilling Programs
In the
period September 2006 through December 31, 2011, funding from
Goldgroup provided for DynaMéxico’s completing
approximately 68,741 meters drilling at San Jose de Gracia,
resulting in a defined NI 43-101 Mineral Resource Estimate as
described in the 2012 DynaMéxico-CAM SJG Mineral Resource
Estimate. The Company expects DynaMineras to plan continued and
subsequent drilling programs at San Pablo, Tres Amigos, La
Ceceña, Palos Chinos, La Union, La Purisima, and La Prieta /
Rosario / Rudolpho. The Company expects further drilling programs
to confirm extensions to mineralization in all directions and down
dip from the main target areas.
Mineralization at San José de Gracia
The
Company was informed by DynaMéxico that it had outlined
significant mineralization from drilling activity at San Pablo,
Tres Amigos, La Union, and La Purisima areas of SJG as described in
the recent NI 43-101 2012 DynaMéxico-CAM SJG Mineral Resource
Estimate. Further drilling is expected to outline additional
mineralization at these 4 major target areas at SJG, while
additional mineralization is also expected to be defined at La
Prieta and the area Northeast of Tres Amigos. Other areas at SJG
indicate clear potential to develop additional
mineralization.
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 December 31, 2014 is $4,025,000. 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).
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 and as the President of DynaMineras. 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.
45
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. The SJG pilot mill
facility (a gravimetric-flotation circuit) is now processing bulk
samples mined from selected target areas of SJG. Operations at SJG
are managed by DynaMineras and are similar to those conducted by
DynaMéxico during 2003-2006.
Capital Advances to Subsidiaries
DynaResource de México
(“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, as of May 17,
2013, the Company owns 80% of the outstanding equity of
DynaMéxico.
At
December 31, 2014, the Company issued 1,333,333 shares of its
common stock to DynaMineras in exchange for $4,000,000 receivable
it held from DynaMéxico.
As of
December 31, 2017, and December 31, 2016 DynaMineras owed the
Company $6,346,500 and $6,525,000, respectively.
As of
December 31, 2017, and December 31, 2016 DynaMéxico owed the
Company $4,000,000 and $4,000,000, respectively.
As of
December 31, 2017, and December 31, 2016 DynaOperaciones owed the
Company $225,000 and $225,000, respectively.
As of
December 31, 2017, and December 31, 2016 DynaMéxico owed
DynaMineras $2,539,639 and $2,125,000, respectively.
As of
December 31, 2017, and December 31, 2016 DynaOperaciones owed
DynaMineras $6,077,325 and $3,580,249, respectively.
Beginning
on 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.
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
Dyna
México
In
2014, Goldgroup advanced $111,500 to DynaMéxico and in 2013
Goldgroup advanced $120,000 USD to DynaMéxico. This total
$231,500 is being carried by DynaMéxico as a Due to
Non-Controlling Interest.
Note Receivable and Investments in 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 had a receivable
from DynaResource Nevada, Inc. of $0 and $0 at December 31, 2017
and 2016 respectively. The Company has investment balance in
DynaResource Nevada, Inc. of $70,000 and $70,000 as of December 31,
2017 and 2016, respectively.
Minority Interest Holder in DynaMéxico Attempts to Interfere
with Activities at San Jose de Gracia (2016)
Goldgroup
Mining Inc., Vancouver, BC. (“GGA.TO” –
“Goldgroup Mining”), a Minority Interest Holder in
DynaMéxico through a Mexican subsidiary Goldgroup Resources
Inc., issued a press release on June 27, 2016 claiming to announce
a closing of mining operations at the SJG Project, which was
misleading, deceptive, and proved to be false. Goldgroup Mining
issued the June 27 press release without independently confirming
the facts – and admitted its failure to confirm the facts in
the release. DynaMéxico corrected the misleading press release
issued by Goldgroup Mining as described below:
46
1.
DynaMéxico herein states the facts:
(a)
Following an unscheduled inspection of the mining operations at the
SJG Project on June 26, 2016 by a Sinaloa State governmental
agency, an order of temporary work stoppage was quickly overturned
by Sinaloa State court order.
(b) The
Sinaloa State Court ruled that the unscheduled inspection and the
temporary suspension of mining operations at the SJG Project, were
improper. The Sinaloa State Court further ordered the immediate
removal of the temporary suspension.
(c)
Following the Sinaloa State Court Order, all mining operations at
SJG promptly resumed normal activities.
2.
DynaMéxico herein states further facts:
(a)
Following a second unscheduled inspection of the mining and milling
operations at the SJG Project on August 18, 2016 by a Sinaloa State
governmental agency, an order of temporary work stoppage was
quickly overturned by a second Sinaloa State court
order.
(b) The
Sinaloa State Court ruled that the unscheduled inspection and the
temporary suspension of mining and milling operations at the SJG
Project, were again improper. Once again, the Sinaloa State Court
further ordered the immediate removal of the temporary
suspension.
(c)
Following the second Order issued by the Sinaloa State Court, all
mining and milling operations at SJG once again promptly resumed
normal activities.
3. The
award of damages in excess of $48 million USD against Goldgroup
Resources Inc. (“Goldgroup Resources”, a wholly owned
subsidiary of Goldgroup Mining Inc.), by virtue of a sentence
issued on October 5, 2015 by the Thirty Sixth Civil Court of the
Superior Court of Justice of the Federal District of México,
remains as ordered by the court.
4. On
October 5, 2016, the Thirty-Sixth Civil Court of the Superior Court
of Justice of the Federal District of Mexico (Tribunal Superior de
Justicia del Distrito Federal) approved a Lien (referred to by the
court as an “Embargo”), in favor of DynaMéxico,
upon Stock Certificates in the name of Goldgroup Resources Inc.
(“Goldgroup”). The Stock Certificates subject to the
Lien (“Embargo”) constitute Shares of DynaMéxico
(“the Goldgroup DynaMéxico Shares”).
(a)
Goldgroup Mining Inc., the parent company (“Goldgroup
Mining”), has not disclosed the $48 million award of damages,
Nor the Lien against the Shares, nor has Goldgroup Mining disclosed
the unsuccessful efforts of its subsidiary to challenge the $ 48
million damages award, in its Annual Information Form -- the
equivalent of its annual report to shareholders.
(b) An
unrelated lawsuit, in which the amount in controversy was only $3
million, was disclosed by Goldgroup Mining Inc.
(c)
Goldgroup Resources currently holds a minority interest in the
outstanding share capital of DynaMéxico. Goldgroup Resources
has challenged this level of ownership through the legal system,
but this challenge has also been unsuccessful. The ownership of
Goldgroup Resources in the capital of DynaMéxico remains at
20%.
(d)
Goldgroup Mining, the parent company, has not disclosed the
unsuccessful efforts of Goldgroup Resources to challenge this
ownership level in DynaMéxico, in its Annual Information
Form.
(e)
Since 2005, the exclusive operator of the SJG Project, under
contract with (and an affiliate of) DynaMéxico, is Mineras de
DynaResource S.A. de C.V. (“DynaMineras”). This
operating control of the SJG Project has continued uninterrupted
since 2005, before Goldgroup Resource contributed any capital
investment to DynaMéxico.
(f)
Goldgroup Mining, the parent company, has not disclosed that
DynaMineras has operating control of the SJG Project, in its Annual
Information Form.
(g)
Since 2000, the President of DynaMéxico holds broad powers of
attorney granted by the shareholders of DynaMéxico. The powers
of attorney give the President broad authority to act for
DynaMéxico. The powers of attorney existed before Goldgroup
Resources contributed any capital investment to
DynaMéxico.
(h)
Goldgroup Mining, the parent company, has not disclosed the
existence of the powers of attorney held by the President of
DynaMéxico, in its Annual Information Form.
DynaMéxico’s further clarifying statements regarding the
SJG Project:
(a) In
recent years, Goldgroup Mining and Goldgroup Resources
(“Goldgroup”) have continuously misrepresented
ownership interest and shareholder position related to
DynaMéxico and the SJG Project;
(b)
DynaMéxico, since May 2000, owns 100% of the mining
concessions and related interest comprising the SJG
Project;
(c) 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;
47
(d)
DynaResource, Inc., Irving, Texas (OTCQB: DYNR -
“DynaUSA”) currently owns 80% of the outstanding share
Capital of DynaMéxico; Goldgroup currently owns 20% of the
outstanding share capital of DynaMéxico;
(e) 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;
(f)
There is no joint
venture agreement with Goldgroup involving the SJG
Project;
(g)
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;
(h)
Consistently and
continuously since March 2011, Goldgroup has sought to, and
threatened to stop, delay, or otherwise impair and negatively
impact the financing, maintenance, advance and further development
of the SJG Project;
The
Company believes that no material adverse change will occur as a
result of the actions taken, and the Company further believes that
there is little to no potential for the assessment of a material
monetary judgment against the Company for legal actions it has
filed in México. For purposes of confidentiality, the Company
does not provide more specific disclosure in this Form
10-K.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not
applicable.
48
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated
into and forming an integral part of this Form 10-K are the audited
financial statements for the Company for the years ended December
31, 2017 and 2016. The financial statements as of December 31, 2017
of the Company included in this Form 10-K have been audited by
Whitley Penn LLP, an independent registered public accounting firm,
as set forth in their report. The financial statements as of
December 31, 2016 of the Company included in this Form 10-K have
been audited by MaloneBailey, LLP, an independent registered public
accounting firm, as set forth in their report. The financial
statements have been included in reliance upon the authority of
them as experts in accounting and auditing.
Financial Statements included in the Form 10-K:
Reports of Independent Registered Public Accounting
Firms
Consolidated Balance Sheets as of December 31, 2017 and
2016
Consolidated Statements of Operations for the Years Ended December
31, 2017 and 2016
Consolidated Statement of Changes in Stockholders’ Equity
(Deficit) for the Years Ended December 31, 2017 and
2016
Consolidated Statements of Cash Flows for the Years Ended December
31, 2017 and 2016
Notes to the Consolidated Financial Statements for the Years Ended
December 31, 2017 and 2016
49
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors, Management, and Stockholders of
DynaResource,
Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheet of
DynaResource, Inc. and subsidiaries (the “Company”) as
of December 31, 2017, and the related consolidated statements of
income and comprehensive income, changes in stockholders’
equity (deficit), and cash flows for the year then ended, and the
related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2017, and the results of their
operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting, but not for the purpose
of expressing an opinion on the effectiveness of the entity’s
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audit included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis
for our opinion.
We have served as the Company's auditor since 2018.
/s/ Whitley Penn LLP
Dallas,
Texas
April
16, 2018
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Management of
DynaResource,
Inc.
Irving,
Texas
We have
audited the accompanying consolidated balance sheet of
DynaResource, Inc. (a Delaware Corporation) and its subsidiaries
(collectively, the “Company”) as of December 31, 2016,
and the related consolidated statements of operations and
comprehensive loss, shareholders’ equity, and cash flows for
the year then ended. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DynaResource,
Inc. and its subsidiaries as of December 31, 2016, and the results
of their operations and their cash flows for the year then ended,
in conformity with accounting principles generally accepted in the
United States of America.
/s/
MaloneBailey, LLP
www.malonebailey.com
Houston,
Texas
April
26, 2017
51
|
DYNARESOURCE, INC.
|
|
|
|
DECEMBER 31, 2017 AND 2016
|
|
|
2017
|
2016
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash and Cash Equivalents
|
$
3,528,735
|
$
2,197,005
|
|
Accounts Receivable
|
323,315
|
454,140
|
|
Inventories
|
907,982
|
561,238
|
|
Foreign Tax Receivable
|
732,241
|
1,083,364
|
|
Other Current Assets
|
38,397
|
73,871
|
|
Total Current Assets
|
5,530,670
|
4,369,618
|
|
|
|
|
|
Mining Equipment and Fixtures (Net of Accumulated
|
|
|
|
Depreciation of $974,154 and $821,132)
|
1,698,070
|
578,743
|
|
Mining Concessions
|
4,132,678
|
4,132,678
|
|
Investment in Affiliate
|
70,000
|
70,000
|
|
Other Assets
|
61,894
|
15,450
|
|
|
|
|
|
TOTAL ASSETS
|
$
11,493,312
|
$
9,166,489
|
|
|
|
|
|
LIBILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
Current Liabilities:
|
|
|
|
Accounts Payable
|
$
803,291
|
$
851,197
|
|
Accrued Expenses
|
2,059,199
|
1,367,510
|
|
Due to Non-Controlling Interest
|
231,500
|
231,500
|
|
Derivative Liabilities
|
3,181,508
|
5,106,090
|
|
Convertible Notes Payable
|
950,625
|
956,250
|
|
Current Portion of Long Term Debt
|
129,401
|
-
|
|
Total Current Liabilities
|
7,355,524
|
8,512,547
|
|
|
|
|
|
Long Term Debt, Less Current Portion
|
237,910
|
-
|
|
|
|
|
|
TOTAL LIABILITES
|
7,593,434
|
8,512,547
|
|
|
|
|
|
Preferred Stock, Series C, $0.0001 per value, 1,733,221 shares
Authorized, issued and outstanding
|
4,333,053
|
4,333,053
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
Preferred Stock, Series A, $0.0001 par value, 1,000
shares
|
|
|
|
authorized, issued and
outstanding
|
1
|
1
|
|
Common Stock, $0.01 par value, 25,000,000 shares
authorized
|
|
|
|
17,722,825 and 16,722,825 issued and outstanding
|
177,228
|
167,228
|
|
Preferred Rights
|
40,000
|
40,000
|
|
Additional Paid In Capital
|
56,622,159
|
55,083,783
|
|
Treasury Stock, 778,980 and 1,112,313 shares
|
(2,223,891
)
|
(3,175,515
)
|
|
Accumulated Other Comprehensive income
|
1,265,853
|
3,771,532
|
|
Accumulated Deficit
|
(50,898,357
)
|
(53,551,567
)
|
|
Total DynaResource Inc. Stockholders' Equity
|
4,982,993
|
2,335,462
|
|
Non-Controlling Interest
|
(5,416,168
)
|
(6,014,573
)
|
|
TOTAL EQUITY (DEFICIT)
|
(433,175
)
|
(3,679,111
)
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
11,493,312
|
$
9,166,489
|
The accompanying notes are an integral part of these consolidated
financial statements.
52
DYNARESOURCE, INC.
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
2017
|
2016
|
|
REVENUE
|
$
10,850,091
|
$
9,496,105
|
|
|
|
|
|
COSTS AND EXPENSES OF MINING OPERATIONS
|
|
|
|
Production Cost Applicable to
Sales
|
1,120,011
|
1,044,011
|
|
Mine Production Costs
|
1,295,543
|
734,542
|
|
Mine Exploration Costs
|
3,539,523
|
2,006,824
|
|
Mine Expansion Costs
|
253,231
|
-
|
|
Camp, Warehouse and Facilities
|
1,226,897
|
501,044
|
|
Transportation
|
576,315
|
262,755
|
|
Pre-Pilot Production Costs
|
-
|
64,795
|
|
Property Holding Costs
|
702,599
|
504,495
|
|
General and Administrative
|
2,609,675
|
2,784,856
|
|
Depreciation and Amortization
|
153,862
|
77,638
|
|
Total Operating Expenses
|
11,477,656
|
7,980,960
|
|
NET OPERATING INCOME (LOSS)
|
(627,565
)
|
1,515,145
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
Foreign Currency Gains
(Losses)
|
1,388,573
|
(20,218
)
|
|
Interest Expense
|
(158,944
)
|
(119,532
)
|
|
Derivatives Mark-to-Market
Gain
|
1,924,582
|
276,647
|
|
Other Income (Expense)
|
1,063
|
(156,882
)
|
|
Total Other Income (Expense)
|
3,155,274
|
(19,985
)
|
|
|
|
|
|
NET INCOME BEFORE TAXES
|
2,527,709
|
1,495,160
|
|
PROVISION FOR INCOME TAXES
|
-
|
-
|
|
|
|
|
|
NET INCOME
|
$
2,527,709
|
$
1,495,160
|
|
|
|
|
|
DEEMED DIVIDEND FOR SERIES C PREFERRED
|
(173,320
)
|
(173,797
)
|
|
LOSS ATTRIBUTABLE TO NON-CONTROLLING INTEREST
|
125,501
|
347,179
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$
2,479,890
|
$
1,668,542
|
|
|
|
|
|
EARNINGS PER SHARE ATTRIBUTABLE TO THE
|
|
|
|
EQUITY HOLDERS OF DYNARESOURCE,
INC.
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share
|
$
0.15
|
$
0.10
|
|
Weighted Average Shares Outstanding -
Basic
|
17,076,250
|
16,722,825
|
|
|
|
|
|
Diluted Earnings Per Common Share
|
$
0.14
|
$
0.10
|
|
Weighted Average Shares Outstanding -
Diluted
|
18,943,790
|
18,560,464
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
Foreign Currency Translation
Loss
|
(1,781,773
)
|
(147,757
)
|
|
TOTAL OTHER COMPREHENSIVE LOSS
|
(1,781,773
)
|
(147,757
)
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME
|
$
745,936
|
$
1,347,403
|
|
|
|
|
|
ATTRIBUTABLE TO:
|
|
|
|
EQUITY HOLDERS OF DYNARESOURCE,
INC.
|
$
147,531
|
$
791,777
|
|
NON-CONTROLLING INTEREST
|
$
598,405
|
$
555,626
|
The accompanying notes are an integral part of these consolidated
financial statements.
53
DYNARESOURCE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
|
|
Preferred
Series
A
Shares
|
Series
A
Amount
|
Common
Shares
|
Common
Amount
|
Preferred
Rights
|
Paid
In
Capital
|
Treasury
Shares
|
Treasury
Amount
|
Accumulated
Comprehensive
Income
|
Accumulated
Deficit
|
Non-
Controlling
Interest
|
Total
|
|
Balance,
December 31, 2015
|
1,000
|
$
1
|
16,722,825
|
$
167,228
|
$
40,000
|
$
55,083,783
|
1,112,313
|
$
(3,175,515
)
|
$
4,822,094
|
$
(55,233,906
)
|
$
(6,570,199
)
|
$
(4,866,514
)
|
|
Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
(1,050,562
)
|
|
902,805
|
(147,757
)
|
|
Paid Dividend
on Pref Shares
|
|
|
|
|
|
|
|
|
|
(160,000
)
|
|
(160,000
)
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
1,842,339
|
(347,179
)
|
1,495,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
1,000
|
1
|
16,722,825
|
167,228
|
40,000
|
55,083,783
|
1,112,313
|
(3,175,515
)
|
3,771,532
|
(53,551,567
)
|
(6,014,573
)
|
(3,679,111
)
|
|
Sale of Common
Stock for Cash
|
|
|
1,000,000
|
10,000
|
|
2,490,000
|
|
|
|
|
|
2,500,000
|
|
Issuance of
Treasury Shares
|
|
|
|
|
|
(951,624
)
|
(333,333
)
|
951,624
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
(2,505,679
)
|
|
723,906
|
(1,781,773
)
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
2,653,210
|
(125,501
)
|
2,527,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2017
|
1,000
|
$
1
|
17,722,825
|
$
177,228
|
$
40,000
|
$
56,622,159
|
778,980
|
$
(2,223,891
)
|
$
1,265,853
|
$
(50,898,357
)
|
$
(5,416,168
)
|
$
(433,175
)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
54
DYNARESOURCE, INC.
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
|
|
2017
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITES:
|
|
|
|
Net Income
|
$
2,527,709
|
$
1,495,160
|
|
Adjustments to reconcile net income to cash provided by operating
activities
|
|
|
|
Change in Derivatives
|
(1,924,582
)
|
(276,647
)
|
|
Depreciation and Amortization
|
153,862
|
77,638
|
|
Write off of Receivable from
Affiliate
|
-
|
157,679
|
|
Change in Operating Assets and Liabilities
|
|
|
|
Accounts Receivable
|
130,825
|
(366,861
)
|
|
Inventories
|
(346,744
)
|
(529,405
)
|
|
Foreign Tax Receivable
|
351,123
|
(643,604
)
|
|
Other Assets
|
(10,970
)
|
(79,698
)
|
|
Accounts Payable
|
(47,906
)
|
63,587
|
|
Accrued Expenses
|
1,225,269
|
637,287
|
|
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
|
2,058,586
|
535,136
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Purchase of Equipment
|
(1,273,189
)
|
(145,030
)
|
|
CASH FLOWS USED IN INVESTING ACTIVITIES
|
(1,273,189
)
|
(145,030
)
|
|
|
|
|
|
CASH FLOW FROM FINANCING ACTIVITIES:
|
|
|
|
Proceeds from Sale of Common
Stock
|
2,500,000
|
-
|
|
Payment of Dividends
|
-
|
(160,000
)
|
|
Payments of Promissory Notes - Related
Parties
|
(5,625
)
|
(150,000
)
|
|
Payments of Long Term Debt
|
(166,269
)
|
-
|
|
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
2,328,106
|
(310,000
)
|
|
|
|
|
|
Effects of Foreign Exchange
|
(1,781,773
)
|
194,300
|
|
|
|
|
|
NET INCREASE IN CASH
|
1,331,730
|
274,406
|
|
CASH AT BEGINNING OF PERIOD
|
2,197,005
|
1,922,599
|
|
CASH AT END OF PERIOD
|
$
3,528,735
|
$
2,197,005
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES
|
|
|
|
Cash Paid for Interest
|
$
158,686
|
$
119,532
|
|
Cash Paid for Income Taxes
|
$
-
|
$
-
|
|
NON-CASH TRANSACTION
|
|
|
|
Issuance of Treasury Shares
|
$
951,624
|
$
-
|
|
Conversion of Accounts Payable to Long-Term
Debt
|
$
533,580
|
$
-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
55
DYNARESOURCE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
Nature of Activities, History and Organization
DynaResource,
Inc. (The “Company”, “DynaResource”, or
“DynaUSA”) was organized September 28, 1937, as a
California corporation under the name of West Coast Mines,
Inc. In 1998, the Company re-domiciled to Delaware and
changed its name to DynaResource, Inc. The Company is in
the business of acquiring, investing in, and developing precious
metal properties, and the production of precious
metals.
In
2000, the Company formed a wholly owned subsidiary, DynaResource de
México S.A. de C.V., chartered in México
(“DynaMéxico”). This Company was formed
to acquire, invest in and develop resource properties in
México. DynaMéxico owns a portfolio of mining
concessions that currently includes its interests in the San
José de Gracia Project (“SJG”) in northern Sinaloa
State, México. The SJG District covers 69,121 hectares
(170,802 acres) on the west side of the Sierra Madre mountain
range. The Company currently owns 80% of the outstanding capital of
DynaMéxico.
In
2005, the Company formed DynaResource Operaciones de San Jose De
Gracia S.A. de C.V. (“DynaOperaciones”), and acquired
effective control of Mineras de DynaResource, S.A. de C.V.
(formerly Minera Finesterre S.A. de C.V.,
“DynaMineras”). The Company owned 25% of DynaMineras
and acquired effective control of DynaMineras by acquiring the
option to purchase the remaining 75% of the Shares of DynaMineras.
The Company finalized the option and acquisition of DynaMineras in
January 2010, and now owns 100% of DynaMineras. The
results of these subsidiaries are consolidated with those of the
Company.
From
January 2008 through March 2011, DynaMéxico issued 100
Variable Capital Series “B” shares to Goldgroup
Resources, Inc., a wholly owned subsidiary of Goldgroup Mining Inc.
Vancouver BC (“Goldgroup”), in exchange for
Goldgroup’s contribution of $18,000,000 to DynaMéxico.
At March 14, 2011, Goldgroup owned 50% of the outstanding capital
shares of DynaMéxico.
On June
21, 2013, DynaResource acquired a Certificate for 300 Series
“B” Variable Capital Shares of DynaMéxico, in
exchange for the settlement of accounts receivable from
DynaMéxico in the amount of $31,090,710 Mexican Pesos
(approximately $2.4 million USD). After the issuance and receipt of
the 300 Series B Shares, DynaUSA holds 80% of the total outstanding
Capital of DynaMéxico.
The
Company elected to become a voluntary reporting issuer in Canada in
order to avail itself of Canadian regulations regarding reporting
for mining properties and, more specifically, National Instrument
43-101 (“NI 43-101”). This regulation sets forth
standards for reporting resources in a mineral property and is a
standard recognized in the mining industry.
Reclassifications and Adjustments
Certain
financial statement reclassifications have been made to prior
period balances to reflect the current period’s presentation
format; such reclassifications had no impact on the Company’s
consolidated statements of income or consolidated statements of
cash flows and had no material impact on the Company’s
consolidated balance sheets. Certain prior year balances have been
adjusted to reflect a correction for unrecorded liabilities. See
Note 17.
Significant Accounting Policies
The
Company’s management selects accounting principles generally
accepted in the United States of America and adopts methods for
their application. The application of accounting
principles requires the estimating, matching and timing of revenue
and expense. The accounting policies used conform to generally
accepted accounting principles which have been consistently applied
in the preparation of these financial statements.
The
financial statements and notes are representations of the
Company’s management which is responsible for their integrity
and objectivity. Management further acknowledges that it is solely
responsible for adopting sound accounting practices, establishing
and maintaining a system of internal accounting control and
preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other
items that: 1) recorded transactions are
valid; 2) valid transactions are
recorded; and 3) transactions are recorded in
the proper period in a timely manner to produce
financial statements which present fairly the
financial condition, results of operations and
cash flows of the Company for
the respective periods presented.
Basis of Presentation
The
Company prepares its financial statements on the accrual basis of
accounting in conformity with accounting principles generally
accepted in the United States.
Principles of Consolidation
The
financial statements include the accounts of DynaResource, Inc., as
well as DynaResource de México, S.A. de C.V. (80% ownership),
DynaResource Operaciones S.A. de C.V. (100% ownership) and Mineras
de DynaResource S.A. de C.V. (100% ownership). All
significant inter-company transactions have been
eliminated. All amounts are presented in U.S. Dollars
unless otherwise stated.
56
Non-Controlling Interest
The
Company’s subsidiary, DynaResource de México S.A. de
C.V, is 20% owned by Goldgroup Mining, Inc. On May 17, 2013, the
ownership changed from 50% to 20%. The Company accounts for this
outside interest as “non-controlling
interest”.
Investments in Affiliates
The
Company owns a 19.95% interest in DynaResource Nevada, Inc., a
Nevada Corporation (“DynaNevada”), with one operating
subsidiary in México, DynaNevada de México, S.A. de C.V.
(“DynaNevada de México”), together
“DynaNevada”. The Company accounts for this investment
using the cost basis. The Company has significant influence over
DynaNevada, but not control, due to the lack of a majority voting
interest in the entity. DynaNevada has been dormant for several
years. DynaUSA has no plan or intention of future funding with
DynaNevada nor are any other transactions with DynaNevada
contemplated at this time. The Company therefore accounts for this
investment using the cost basis. The investment was $70,000 and
$70,000 at December 31, 2017 and 2016, respectively.
Cash and Cash Equivalents
The
Company considers all highly liquid debt instruments with an
original maturity of three months or less to be cash
equivalents. At times, cash balances may be in excess of
the Federal Deposit Insurance Corporation (“FDIC”)
insurance limits.
Accounts Receivable and Allowances for Doubtful
Accounts
The
allowance for accounts receivable is recorded when receivables are
considered to be doubtful of collection. As of December 31, 2017,
and 2016, respectively, no allowance has been made.
Foreign Tax Receivable
Foreign
Tax Receivable is comprised of recoverable value-added taxes
(“IVA”) charged by the Mexican government on goods and
services rendered. Under certain circumstances, these
taxes are recoverable by filing a tax return. Amounts
paid for IVA are tracked and held as receivables until the funds
are remitted. The total amounts of the IVA receivable as
of December 31, 2017 and December 31, 2016 are $732,241 and
$1,083,364, respectively.
Inventory
Inventories
are carried at the lower of cost or net realizable value and
consist of mined tonnage, and gravity and flotation concentrates,
and gravity tailings or flotation feed material. The inventories
are $907,982 and $561,238 as of December 31, 2017 and December 31,
2016, respectively.
Proven and Probable Reserves (No Known Reserves)
The
definition of proven and probable reserves is set forth in SEC
Industry Guide 7 (“Industry Guide 7”). Proven reserves
for which (1) quantity is computed from dimensions revealed in
outcrops, trenches, workings or drill holes, grade and/or quality
are computed from the results of detailed sampling and (2) the
sites for inspection, sampling and measurement are spaced so
closely and the geological character is so well defined that size,
shape, depth and mineral content of the reserves are
well-established. Probable reserves are reserves for which quantity
and grade and/or quality are computed from information similar to
that used for proven (measured) reserves, but the sites for
inspection, sampling, and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although
lower than that for proven (measured) reserves, is high enough to
assume continuity between points of observations.
As of
December 31, 2017, none of the Company's properties contain
resources that satisfy the definition of proven and probable
reserves. The Company classifies the development of its properties,
including the San Jose de Gracia Property, as exploration stage
projects since no proven or probable reserves have been established
under Industry Guide 7.
Property
Substantially
all costs, including design, engineering, construction, and
installation of equipment are expensed as incurred as the Company
has not established proven and probable reserves on any of its
properties. Only certain types of equipment which has alternative
uses or significant salvage value, may be capitalized without
proven and probable reserves. Depreciation is computed using the
straight-line method with the exception of mining equipment. Mining
equipment is depreciated using the units-of-production method based
on tonnes processed over the estimated total mine life. Office
furniture, equipment and light vehicles are being depreciated on a
straight-line method over estimated economic lives ranging from 3
to 5 years. Leasehold improvements, which relate to the
Company's corporate office, are being amortized over the term of
the lease of 10 years. Trailers, heavy vehicles and other site
equipment are being depreciated on a straight-line method over
estimated economic lives from 5 to 15 years. Buildings are
being depreciated on straight line method over an estimated
economic life of 20 years.
Design, Construction, and Development
Costs:
Mine development costs include
engineering and metallurgical studies, drilling and other related
costs to delineate an ore body, the removal of overburden to
initially expose an ore body at open pit surface mines and the
building of access ways, shafts, lateral access, drifts, ramps and
other infrastructure at underground mines.
57
When
proven and probable reserves as defined by Industry Guide 7 exist,
development costs are capitalized, and the property is a
commercially minable property. Mine development costs incurred
either to develop new ore deposits, expand the capacity of
operating mines, or to develop mine areas substantially in advance
of current production would be capitalized. Costs of start-up
activities and costs incurred to maintain current production or to
maintain assets on a standby basis are charged to operations as
incurred. Costs of abandoned projects are charged to operations
upon abandonment. All capitalized costs would be amortized using
the units of production method over the estimated life of the ore
body based on recoverable ounces to be mined from proven and
probable reserves.
Certain
costs to design and construct mining and processing facilities may
be incurred prior to establishing proven and probable reserves. As
no proven and probable reserves have been established on any of the
Company's properties, design, construction and development costs
are not capitalized at any of the Company's properties, and
accordingly, substantially all costs are expensed as incurred,
resulting in the Company reporting larger losses than if such
expenditures had been capitalized. Additionally, the Company does
not have a corresponding depreciation or amortization of these
costs going forward since these expenditures were expensed as
incurred as opposed to being capitalized. As a result of these and
other differences, the Company's financial statements may not be
comparable to the financial statements of mining companies that
have established reserves.
Mineral Properties Interests
Mineral
property interests include acquired interests in development and
exploration stage properties, which are considered tangible assets.
The amount capitalized relating to a mineral property interest
represents its fair value at the time of acquisition. When a
property does not contain mineralized material that satisfies the
definition of proven and probable reserves, such as with the San
Jose de Gracia Property, capitalized costs and mineral property
interests are amortized using the straight-line method once
production begins. As of December 31, 2017, the mining interests
have been in the pilot production stage and therefore, no
amortization has been expensed.
Mining properties consist of 33
mining concessions covering approximately 69,121 hectares at the
San Jose de Gracia property (“SJG”), the basis of which
are amortized on the unit of production method based on estimated
recoverable resources. If it is determined that the deferred
costs related to a property are not recoverable over its productive
life, those costs will be written down to fair value as a charge to
operations in the period in which the determination is
made. The amounts at which mineral properties and the
related costs are recorded do not necessarily reflect present or
future values.
Impairment of Assets:
The Company
reviews and evaluates its long-lived assets for impairment when
events or changes in circumstances indicate that the related
carrying amounts may not be recoverable. Mineral properties are
monitored for impairment based on factors such as mineral prices,
government regulation and taxation, the Company's continued right
to explore the area, exploration reports, assays, technical
reports, drill results and its continued plans to fund exploration
programs on the property.
For
operating mines, recoverability is measured by comparing the
undiscounted future net cash flows to the net book value. When the
net book value exceeds future net undiscounted cash flows, an
impairment loss is measured and recorded based on the excess of the
net book value over fair value. Fair value for operating mines is
determined using a combined approach, which uses a discounted cash
flow model for the existing operations and a market approach for
the fair value assessment of exploration land claims. Future cash
flows are estimated based on quantities of recoverable mineralized
material, expected gold and silver prices (considering current and
historical prices, trends and related factors), production levels,
operating costs, capital requirements and reclamation costs, all
based on life-of-mine plans. The term "recoverable mineralized
material" refers to the estimated amount of gold or other
commodities that will be obtained after taking into account losses
during processing and treatment of mineralized material. In
estimating future cash flows, assets are grouped at the lowest
level for which there are identifiable cash flows that are largely
independent of future cash flows from other asset groups. The
Company's estimates of future cash flows are based on numerous
assumptions and it is possible that actual future cash flows will
be significantly different than the estimates, as actual future
quantities of recoverable minerals, gold, silver and other
commodity prices, production levels and costs and capital are each
subject to significant risks and uncertainties.
The
recoverability of the book value of each property will be assessed
annually for indicators of impairment such as adverse changes to
any of the following:
●
estimated
recoverable ounces of gold, silver or other precious
minerals;
●
estimated future
commodity prices;
●
estimated expected
future operating costs, capital expenditures and reclamation
expenditures.
A
write-down to fair value will be recorded when the expected future
cash flow is less than the net book value of the property or when
events or changes in the property indicate that carrying amounts
are not recoverable. This analysis will be completed as
needed, and at least annually. As of the date of this filing, no
events have occurred that would require write-down of any
assets. As of December 31, 2017, and 2016, no
indications of impairment existed.
58
Asset Retirement Obligation:
As the
Company is not obligated to remediate the mining properties, no
Asset Retirement Obligation (“ARO”) has been
established. Changes in regulations or laws, any instances of
non-compliance with laws or regulations that result in fines, or
any unforeseen environmental contamination could result in a
material impact to the amounts charged to operations for
reclamation and remediation. Significant judgments and estimates
are made when estimating the fair value of AROs. Expected cash
flows relating to AROs could occur over long periods of time and
the assessment of the extent of environmental remediation work is
highly subjective. Considering all of these factors that go into
the determination of an ARO, the fair value of the AROs can
materially change over time.
Pre-Pilot Production Costs
During
2016, the Company has conducted rehabilitation activity at the San
Pablo mine and has refurbished the Pilot Mill Facility at San Jose
de Gracia and, in general prepared for test mining and pilot
milling (“Pilot Production”) Operations. The costs
associated with the rehabilitation, preparation, clean up and
facilitation of this process are expensed as pre-pilot production
costs.
Property Holding Costs
Holding
costs to maintain a property on a care and maintenance basis are
expensed in the period they are incurred. These costs include
security and maintenance expenses, lease and claim fees and
payments, and environmental monitoring and reporting
costs.
Exploration Costs
Exploration
costs are charged to operations and expenses as incurred.
Exploration, development, direct field costs and administrative
costs are expensed in the period incurred.
Foreign Currency Translation
The
functional currency for the subsidiaries of the Company is the
Mexican Peso. As a result, the financial statements of
the subsidiaries have been re-measured from Mexican Pesos into U.S.
dollars using (i) current exchange rates for monetary asset and
liability accounts, (ii) historical exchange rates for nonmonetary
asset and liability accounts, (iii) historical exchange rates for
revenues and expenses associated with nonmonetary assets and
liabilities and (iv) the weighted average exchange rate of the
reporting period for all other revenues and expenses. In
addition, foreign currency translation gains and losses are
reported as a separate component of stockholders’ equity and
comprehensive income (loss).
The
financial statements of the subsidiaries should not be construed as
representations that Mexican Pesos have been, could have been or
may in the future be converted into U.S. dollars at such rates or
any other rates.
Relevant
exchange rates used in the preparation of the financial statements
for the subsidiaries are as follows for the periods ended December
31, 2017 and December 31, 2016 (Mexican Pesos per one U.S.
dollar):
|
|
|
Dec 31, 2017
|
Dec 31, 2016
|
|
|
|
|
|
|
Current
exchange rate
|
Pesos
|
19.73
|
20.65
|
|
|
|
|
|
|
Weighted
average exchange rate for the period ended
|
Pesos
|
18.12
|
18.69
|
The
Company recorded currency transaction gains (losses) of $1,388,573
for the year ended December 31, 2017 and $(20,218) in
2016.
Income Taxes
The
Company accounts for income taxes under ASC 740
“Income Taxes”
using the
liability method, recognizing certain temporary differences between
the financial reporting basis of liabilities and assets and the
related income tax basis for such liabilities and assets. This
method generates either a net deferred income tax liability or
asset for the Company, as measured by the statutory tax rates in
effect. The Company derives the deferred income tax charge or
benefit by recording the change in either the net deferred income
tax liability or asset balance for the year. The Company records a
valuation allowance against any portion of those deferred income
tax assets when it believes, based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred income tax asset will not be realized.
Income
from the Company’s subsidiaries in México are taxed at
applicable Mexican tax law.
On
December 22, 2017, the 2017 Tax Cuts and Jobs Act (the
“Act”) was signed into law. Among other provisions, the
Act reduced the highest corporate tax rate from 35% to 21%. With
the passage of the Act, the Company‘s deferred tax assets and
liabilities were restated as of the effective date of the law to
reflect the new applicable rate. The reduction to the net deferred
tax asset was charged to tax expense in the period of the change
and offset by a valuation allowance stemming from historical net
operating loss carryforwards.
59
Use of Estimates
In
order to prepare financial statements in conformity with accounting
principles generally accepted in the United States, management must
make estimates, judgments and assumptions that affect the amounts
reported in the financial statements and determines whether
contingent assets and liabilities, if any, are disclosed in the
financial statements. The ultimate resolution of issues requiring
these estimates and assumptions could differ significantly from
resolution currently anticipated by management and on which the
financial statements are based.
Comprehensive Income (Loss)
ASC 220
“Comprehensive
Income”
establishes standards for reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements. The
Company’s comprehensive income consists of net income and
other comprehensive income (loss), consisting of unrealized net
gains and losses on the translation of the assets and liabilities
of its foreign operations. For the periods ended December 31,
2017 and December 31, 2016, the Company’s components of
comprehensive income were foreign currency translation
adjustments.
Revenue Recognition
The
Company recognizes revenue in accordance with ASC 605-10,
"
Revenue Recognition in Financial
Statements
". Revenue is recognized when
persuasive evidence of an arrangement exists, delivery or service
has occurred, the sale price is fixed or determinable and receipt
of payment is probable. Revenues earned from the sale of precious
metal concentrates are recognized when both the buyer and seller
agree on the % of gold as determined by sample assays and when it
is delivered to the Buyer. Subsequently, a “final
settlement” is calculated and any remaining balance is
paid.
Stock-Based Compensation
The
Company accounts for stock options at fair value as prescribed in
ASC 718. The Company estimates the fair value of each stock
option at the grant date by using the Black-Scholes option-pricing
model and provides for expense recognition over the service period,
if any, of the stock option.
The
Company accounts for stock options issued and vesting to
non-employees in accordance with ASC Topic 505-50
“
Equity -Based Payment to
Non-Employees”
and accordingly the value of the stock
compensation to non-employees is based upon the measurement date as
determined at either (a) the date at which a performance
commitment is reached, or (b) at the date at which the
necessary performance to earn the equity instruments is complete.
Accordingly, the fair value of these options is being “marked
to market” quarterly until the measurement date is
determined.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash, receivables,
payables and long-term debt. The carrying amount of cash,
receivable and payables approximates fair value because of the
short-term nature of these items. The carrying amount of long-term
debt approximates fair value due to the relationship between the
interest rate on long-term debt and the Company’s incremental
risk adjusted borrowing rate.
Per Share Amounts
Earnings
per share are calculated in accordance with ASC 260
“
Earnings per
Share
”. The weighted average number of common
shares outstanding during each period is used to compute basic
earnings (loss) per share. Diluted earnings per share
are computed using the weighted average number of shares and
potentially dilutive common shares
outstanding. Potentially dilutive common shares
are additional common shares assumed to be
exercised. Potentially dilutive common shares consist of
stock options and convertible preferred shares and convertible
notes and are excluded from the diluted earnings per share
computation in periods where the Company has incurred a net loss,
as their effect would be considered anti-dilutive.
The
Company had 2,523,689 warrants outstanding at December 31, 2017
exercisable at $2.50 per share, which upon exercise, would result
in the issuance of 2,523,689 shares of common stock. The Company
also had convertible debt instruments as of December 31, 2017
which, upon conversion at a valuation of $2.50 per share, would
result in the issuance of 380,250 shares of stock.
60
The
Company had 3,593,689 warrants outstanding at December 31, 2016
exercisable at $2.50 per share, which upon exercise, would result
in the issuance of 3,593,689 shares of common stock. The Company
also had convertible debt instruments as of December 31, 2016
which, upon conversion at a valuation of $2.50 per share, would
result in the issuance of 382,500 shares of stock.
|
|
Years ended December 31
|
|
|
|
2017
|
2016
|
|
Net
income
|
$
2,479,890
|
$
1,668,542
|
|
Shares:
|
|
|
|
Weighted
average number of common shares outstanding, Basic
|
17,076,250
|
16,722,855
|
|
|
|
|
|
Diluted
weighted average number of common shares outstanding,
Diluted
|
18,943,790
|
18,560,464
|
|
|
|
|
|
Basic
earnings per share
|
$
0.15
|
$
0.10
|
|
|
|
|
|
Diluted
earnings per share
|
$
0.14
|
$
0.10
|
Related Party Transactions
FASB
ASC 850, "Related Party Disclosures" requires companies to include
in their financial statements disclosures of material related party
transactions. The Company discloses all material related party
transactions. A party is considered to be related to the Company if
the party directly or indirectly or through one or more
intermediaries, controls, is controlled by, or is under common
control with the Company. Related parties also include principal
owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and
other parties with which the Company may deal if one party controls
or can significantly influence the management or operating policies
of the other to an extent that one of the transacting parties might
be prevented from fully pursuing its own separate interests. A
party which can significantly influence the management or operating
policies of the transacting parties or if it has an ownership
interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the
transacting parties might be prevented from fully pursuing its own
separate interests is also a related party.”
Recently Issued Accounting Pronouncements
Stock compensation
In
March 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2016-09 amending several aspects of share-based
payment accounting. This guidance requires all excess tax benefits
and tax deficiencies to be recorded in the income statement when
the awards vest or are settled, with prospective application
required. The guidance also changes the classification of such tax
benefits or tax deficiencies on the statement of cash flows from a
financing activity to an operating activity, with retrospective or
prospective application allowed. Additionally, the guidance
requires the classification of employee taxes paid when an employer
withholds shares for tax-withholding purposes as a financing
activity on the statement of cash flows, with retrospective
application required. This ASU is effective for annual periods, and
interim periods within those annual periods, beginning after
December 15, 2016. As such, The Company adopted these provisions as
of the fiscal year beginning January 1, 2017. There was no material
effect of the new provisions on our consolidated financial
statements and related disclosures.
In May
2017, the FASB issued ASU 2017-09, Compensation – Stock
Compensation (Topic 718): Scope of Modification Accounting
(“ASU 2017-09). ASU 2017-09 provides clarity and reduce both
(1) diversity in practice and (2) cost and complexity when applying
the guidance in Topic 718, Compensation—Stock Compensation,
to a change to the terms or conditions of a share-based payment
award. The amendments in this update provide guidance about which
changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting in Topic 718.
The amendments in this update are effective for all entities for
annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. Early adoption is permitted. As
such, The Company is required to adopt these provisions as of the
fiscal year beginning on January 1, 2018. The amendments in this
update should be applied prospectively to an award modified on or
after the adoption date. We are currently assessing the potential
impact of ASU 2017-09 on our consolidated financial statements and
results of operations.
61
Leases
In
February 2016, FASB issued ASU 2016-02— Leases (Topic 842).
The update is intended to increase transparency and comparability
among organizations by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information
about leasing arrangements. The amendments in this update are
effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Early
application of the amendments in this update is permitted. As such,
The Company is required to adopt these provisions as of the fiscal
year beginning on January 1, 2019. The Company is currently
evaluating the impact of FASB ASU 2016-02 and expects the adoption
thereof will have a material effect on The Company’s
presentation of balance sheet assets and liabilities based on the
present value of future lease payments, but does not expect a
material effect on the presentation of expenses and cash
flows.
Revenue:
Revenue
from Contracts with Customers: In May 2014, ASC 606 was issued
related to revenue from contracts with customers. Under this
guidance, revenue is recognized when promised goods or services are
transferred to customers in an amount that reflects the
consideration that is expected to be received for those goods or
services. The updated standard will replace most existing revenue
recognition guidance under GAAP when it becomes effective and
permits the use of either the retrospective or cumulative effect
transition method. Early adoption is not permitted. The standard
will be effective for the Company's fiscal year beginning January
1, 2018, including interim reporting periods within that year. The
new guidance is not expected to have an impact on the Company's
consolidated financial statements. The Company has analysis the
standard and will implement any relevant provisions for the interim
periods beginning January 1,2018.
Inventory
In July
2015, FASB issued ASU 2015-11— Inventory (Topic 330):
“Simplifying the Measurement of Inventory”. The update
is effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. As such, the
Company adopted these provisions beginning on January 1, 2017. The
amendments in this Update should be applied prospectively with
earlier application permitted as of the beginning of an interim or
annual reporting period. The update is part of FASB’s
Simplification Initiative, the objective of which is to identify,
evaluate, and improve areas of generally accepted accounting
principles (GAAP) for which cost and complexity can be reduced.
Pursuant to the update, an entity should measure inventory at the
lower of cost and net realizable value. The amendments in the
update more closely align the measurement of inventory in GAAP with
the measurement of inventory in International Financial Reporting
Standards (IFRS). Adoption of the new guidance did not have an
impact on the Company's consolidated financial
statements.
The
Company commenced underground test mining and pilot milling
activities (“pilot production”) in the 2
nd
quarter of 2014.
Rehabilitation of the San Pablo Mine and refurbishing of the Pilot
Mill Facility and construction of the adjacent tailings pond
continued through 2016. Inventories are carried at the lower of
cost or fair value and consist of mined tonnage, gravity-flotation
concentrates, and gravity tailings (or, flotation feed material).
Inventory balances of December 31, 2017 and December 31, 2016,
respectively, were as follows:
|
|
2017
|
2016
|
|
|
|
|
|
Mined
Tonnage, Gold-Silver Concentrates, and/or Gravity Tailings
(Flotation Feed Material)
|
$
907,982
|
$
561,238
|
|
Total Inventories
|
$
907,982
|
$
561,238
|
Property
consists of the following at December 31, 2017 and December 31,
2016:
|
|
2017
|
2016
|
|
|
|
|
|
Camp buildings and improvements
|
$
418,639
|
$
-
|
|
Machinery and equipment
|
1,368,736
|
955,555
|
|
Transportation equipment
|
289,165
|
249,848
|
|
Office furniture and fixtures
|
78,802
|
75,829
|
|
Office equipment
|
152,805
|
118,646
|
|
Construction in progress
|
364,917
|
-
|
|
Sub-total
|
2,673,064
|
1,399,875
|
|
Less: Accumulated depreciation
|
(974,994
)
|
(821,132
)
|
|
Total Property
|
$
1,698,070
|
$
578,743
|
62
The
Company purchased equipment of $1,273,189 and $145,030 in the years
ended December 31, 2017 and 2016, respectively.
Depreciation
has been provided over each asset’s estimated useful
life. Depreciation expense was $153,862 and $77,638 for
the years ended December 31, 2017 and 2016,
respectively.
Mining
properties consist of the following at December 31, 2017 and
December 31, 2016:
|
|
2017
|
2016
|
|
San Jose de Gracia (“SJG”):
|
|
|
|
|
|
|
|
Total Mining
Concessions
|
$
4,132,678
|
$
4,132,678
|
Depletion
expense was $0 and $0 for the years ended December 31, 2017 and
2016, respectively.
Through
December 31, 2017, the Company loaned a total of $805,760 to
DynaResource Nevada, Inc. (“DynaNevada”), a Nevada
Corporation, which owns 100% of one operating subsidiary in
México, DynaNevada de México, S.A. de
C.V. (“DynaNevada de México”). 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 $.25
/ Share. DynaNevada is a related entity (affiliate),
and through its subsidiary, DynaNevada de México has entered
into an Option agreement with Grupo México (IMMSA) in
México, for the exploration and development of approximately
3,000 hectares in the State of San Luis Potosi (“The Santa
Gertrudis Property”). DynaNevada de México exercised the
Option with IMMSA in March 2010, so that DynaNevada de México
now owns 100% of the Santa Gertrudis Property. In June 2010,
DynaNevada de México acquired an additional 6,000 hectares in
the State of Sinaloa (the “San Juan
Property”).
On
December 31, 2010, the Company exercised its option to convert the
note receivable and other receivable from DynaNevada into shares of
common stock at a rate of $.25 / Share. The Company received
3,223,040 shares, which represents approximately 19.95% of the
outstanding shares of DynaNevada. At the time of the exchange,
DynaNevada’s net book value was approximately $695,000,
consisting of $30,000 cash and the remainder unproven mining
properties. Based upon the above, Management estimated the value of
the Company’s DynaNevada shares as of December 31, 2017 and
December 31, 2016 to be $70,000 and $70,000, respectively. The loss
was taken to “other income (loss) on the income statement in
previous years.
In 2016
the Company deemed $159,143 of receivable for funds, previously
advanced to DynaNevada in order for DynaNevada to meets its basis
filing and reporting obligations with the Mexican authorities
relating to tax returns and paying taxes on its mining concessions,
to be uncollectable and wrote them off. As of December 31, 2017,
and December 31, 2016 the Company had no remaining receivable from
DynaNevada.
Notes Payable – Series I
In April and May 2013, the Company entered into note agreements
with shareholders in the principal amount of $1,495,000, of which
$340,000 was then converted to preferred shares within the same
year, netting to proceeds of $1,155,000 (the “Series I
Notes”). The Series I Notes bear simple interest at twelve
and a half percent (12.5%), accrued for twelve months, and
with the accrued interest to be added to the principal,
and then interest will be paid by the Company, quarterly in
arrears. The holders of the Series I Notes (in aggregate) are also
entitled to receive ten percent (10%) of the net profits
received by the Company, on the first fifty thousand tons processed
through the mill facilities at San Jose de Gracia. Such net profits
(if any) are to be calculated after deducting
“all expenses related to the production”
, and after a prior deduction
of thirty-three percent (33%) from the net profits, to be
deposited into a sinking fund cash reserve. To date, the Company
has not produced any net profits as calculated in accordance with
the Series I Notes.
The Notes originally matured on December 31, 2015.
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 extended the maturity date of the Series I Notes
to December 31, 2016.
The
remaining Series I Notes were further extended to December 31,
2017.
The Company paid $5,625 to one Series I debt holder
during 2017. In December 2017 the Company reached agreement
with seven of the Series I noteholders to extend the notes totaling
$759,375 to December 31, 2018. The remaining note was paid off on
January 5, 2018. (See note 14)
The Company has the right to prepay the Series I Notes with a ten
percent (10%) penalty.
The Series I Note holder retains the option, at any time prior to
maturity or prepayment, to convert any unpaid principal and accrued
interest into Common Stock at $5.00 per share. If the Series I Note
is converted into Common Stock, at the time of conversion, the
holder would also receive warrants, in the same number as the
number of common shares received upon conversion, to purchase
additional common shares of the Company for $7.50 per share, with
such warrants expiring on December 31, 2018.
63
Notes Payable – Series II
In 2013 and 2014, the Company entered into additional note
agreements of $199,808 and $250,000, respectively (the
“Series II Notes”) with similar terms as the Series I
Notes. The Series II Notes bear simple interest at twelve and a
half percent (12.5%), accrued for twelve months, and with the
accrued interest to be added to the principal, and then
interest will be paid by the Company, quarterly in arrears.
The holders of the Series II Notes (in aggregate) are also entitled
to receive ten percent (10%) of the net profits received by
the Company, on the second fifty thousand tons processed through
the mill facilities at San Jose de Gracia. Such net profits (if
any) are to be calculated after deducting
“all
expenses related to the production”
l, and after a prior deduction
of thirty-three percent (33%) from the net profits, to be
deposited into a sinking fund cash reserve. To date, the Company
has not produced any net profits as calculated in accordance with
the Series II Notes.
The Notes originally matured on December 31, 2015.
In April
2015, the Company received allonges (note extensions) from all
noteholders to ensure that all notes were in good standing and
confirmed the maturity of the Series II notes to be December 31,
2016.
At December 31, 2016, the
remaining Series II Notes were further extended to December 31,
2017. In December 2017 the remaining three Series II notes were
extended to December 31, 2018.
The Company has the right to prepay the Series II Notes with a ten
percent (10%) penalty.
The Note holder may, at any time prior to maturity or prepayment,
convert any unpaid principal and accrued interest into common stock
of the Company at $5.00 per share. At the time of conversion, the
holder would receive a warrant to purchase additional common shares
of the Company for $7.50 per share, such warrant expiring on
December 31, 2018.
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 $33,120 of accrued interest (total of $842,903) was contracted
to convert into 337,162 common shares. In addition, 337,162
warrants were issued which provide the option to purchase common
shares at $2.50, with all warrants expiring December 31, 2017. The
Company recorded $826,347 inducement expense related to these
conversion transactions. On August 17, 2015, these common shares
and warrants were issued.
At December 31, 2017, the principal and capitalized interest
balance on the remaining Series I Notes was $759,375, and the
principal and capitalized interest on the Series II Notes was
$191,250, for a total Note balance of $950,625. At December 31,
2016, the principal and capitalized interest balance on the
remaining Series I Notes was $765,000, and the principal and
capitalized interest on the Series II Notes was $191,250, for a
total Note balance of $956,250. The accrued interest for these
notes was $30,141 and $29,883 as of December 31, 2017 and 2016,
respectively.
The Company has adopted ASC 740-10,
“
Income
Taxes”
, which requires
the use of the liability method in the computation of income tax
expense and the current and deferred income taxes payable (deferred
tax liability) or benefit (deferred tax asset). Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
The
cumulative tax effect at the expected tax rate of 21% and 34%,
respectively (blended for U.S. and México) of significant
items comprising the Company’s net deferred tax amounts as of
December 31, 2017 and December 31, 2016 are as
follows:
Deferred
Tax Asset Related to:
|
|
2017
|
2016
|
|
Prior Year
|
$
17,244,045
|
$
17,719,823
|
|
Tax Benefit for Current Year
|
(114,148
)
|
(475,778
)
|
|
Permanent Difference Due to Rate Change
|
(4,564,600
)
|
-
|
|
Total Deferred Tax Asset
|
12,565,297
|
17,244,045
|
|
Less: Valuation
Allowance
|
(12,565,297
)
|
(17,244,045
)
|
|
Net Deferred Tax Asset
|
$
-
|
$
-
|
The
income tax provision for the Company as of December 31, 2017 and
2016 differs from those computed using the statutory federal tax
rate of 34% due to the following differences:
|
|
2017
|
2016
|
|
Book Income
|
$
2,527,709
|
$
1,495,160
|
|
Tax Expense at Statutory Rates
|
859,421
|
508,354
|
|
Permanent Difference Due to Rate Change
|
4,860,392
|
-
|
|
Other Permanent Differences
|
(653,180
)
|
(32,576
)
|
|
Change in Valuation Allowance
|
(5,072,597
)
|
(489,536
)
|
|
Other
|
5,964
|
13,758
|
|
Provision for (Benefit from) Income Taxes, Net
|
$
-
|
$
-
|
64
The net
deferred tax asset and benefit for the current year is generated
primarily from the cumulative net operating loss carry-forward
which is approximately $48,800,000 at December 31, 2017 and will
expire in the years 2026 through 2032.
The
realization of deferred tax benefits is contingent upon future
earnings and is fully reserved at December 31, 2017.
On
December 11, 2013, the Mexican government enacted a tax reform
that increased the effective tax rate applicable to the Company's
Mexican operations. The law, effective January 1, 2014,
increased the future corporate income tax rate to 30%, created a
10% withholding tax on dividends paid to non-resident shareholders
and created a new Extraordinary Mining duty which is equal to 0.5%
of gross revenues from the sale of gold, silver and platinum.
Furthermore, the reform introduced a Special Mining Duty of 7.5%.
The Special Mining Duty is deductible for income tax purposes. The
Special Mining Duty is generally applicable to earnings before
income tax, depreciation, depletion, amortization and interest.
There will be no deductions related to development type costs but
exploration and prospecting costs are deductible when incurred.
Certain non-deducted exploration expenditures incurred prior to
January 1, 2014 are also deductible in the calculation of the
Special Mining Duty. For the years ended December 31, 2017 and
2016, the Company had no taxes payable under the 7.5% Special
Mining Duty.
The
Company or its subsidiaries file income tax returns in the United
States and México. These tax returns are subject to
examination by local taxation authorities provided the tax years
remain open to audit under the relevant statute of limitations. The
following summarizes the open tax years by major
jurisdiction:
United
States: 2014 to 2017
México:
2013 to 2017
The
Company does not have any other material items of temporary or
permanent differences, which give rise to deferred tax assets or
liabilities.
Authorized Capital
. The total
number of shares of all classes of capital stock which the
corporation shall have the authority to issue is 45,001,000 shares,
consisting of (i) twenty million and one thousand (20,001,000)
shares of Preferred Stock, par value $0.0001 per share
(“Preferred Stock”), of which one thousand (1,000)
shares shall be designated as Series A Preferred Stock and (ii)
twenty-five million (25,000,000) shares of Common Stock, par value
$0.01 per share (“Common Stock”).
Series A Preferred Stock
The Company has designated 1,000 shares of its Preferred Stock as
Series A, having a par value of $0.0001 per share. Holders of the
Series A Preferred Stock have the right to elect a majority of the
Board of Directors of the Company. In October 2007, the
Company issued 1,000 shares of Series A Preferred Stock to its CEO.
At December 31, 2017 and December 31, 2016, there were 1,000 and
1,000 shares of Series A Preferred Stock outstanding,
respectively.
Series C Senior Convertible Preferred Shares
On June
30, 2015, the Company issued 1,600,000 Series C Senior Convertible
Preferred Shares (the “Series C Preferred Shares”) at
$2.50 per share for gross proceeds of $ 4,000,000, as well as
issuing 133,221 additional Series C Preferred Shares due to
anti-dilution provisions (with no cash remuneration). Legal fees of
$45,000 were deducted from the proceeds of this transaction at
closing. These Series C Preferred Shares are convertible to common
shares at $2.50 per share, through 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. During 2016, the company paid Dividends of $160,000 to the
holder of Series C Convertible Preferred Stock. The Dividend is
calculated at 4.0% of $433,053 payable annually on June 30. At
December 31, 2017 the dividend was $173,320 in
arrears.
Financing Agreement with Golden Post Rail, LLC, a Texas Limited
Liability Company
1.
On May 6, 2015, the
Company, Golden Post Rail, LLC, a Texas limited liability company
(“Golden Post”), and Mr. Koy W. (“K.D.”)
Diepholz, Chairman-CEO of the Company entered into a Securities
Purchase Agreement (the “SPA”). Pursuant to the SPA,
Golden Post acquired the following securities:
a)
1,600,000 shares of
Series C Senior Convertible Preferred Stock (the “Series C
Preferred”) at a purchase price of $2.50 per share ($4M USD),
plus an additional 133,221 shares of Series C Preferred pursuant to
anti-dilution provisions. The Series C Preferred is entitled to
receive dividends at the per share rate of four percent (4%) per
annum, ranks senior (in priority) to the Common Stock, the Series A
Preferred Stock, and each other class or series of equity security
of the Company. The Series C Preferred is convertible into Common
Stock of the Company at the price of $2.41 per share and is
entitled to anti-dilution protection for (i) subsequent equity
issuances by the Company and (ii) changes in the Company’s
ownership of DynaResource de México SA de CV
(“DynaMéxico”). The Series C Preferred is also
entitled to preemptive rights, and the holder has the right to
designate one person to the Company’s Board of Directors as a
Class III director.
b)
A Common Stock
Purchase Warrant (the “Golden Post Warrant”) for the
purchase of 2,166,527 shares of the Company’s Common Stock,
at an exercise price of $2.50 per share, and expiring June 30,
2020. The anti-dilution protections contained in the terms of the
Series C Preferred are essentially replicated in the Golden Post
Warrant.
65
2.
Pursuant to the
SPA, the Company executed a Registration Rights Agreement pursuant
to which Golden Post may require the Company to register the shares
of Common Stock which may be issued upon the conversion of the
Series C Preferred and the shares of Common Stock issuable upon the
exercise of the Warrant, including any additional shares of Common
Stock issuable pursuant to anti-dilution provisions.
In
2015, due to underlying anti-dilutive provisions contained in the
Series C Preferred Shares and the Golden Post Warrant, the Company
incurred derivative liabilities of $1,531,789 in connection with
the Series C Preferred Shares, and $2,963,378 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 $4,637,179, which is reflected
“below” the net income (loss) amount. Also in 2015, the
Company reported $87,374 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. At December 31, 2017 the total
Derivative Liability was $3,181,508 which included $2,513,638 for
the Series C Preferred Shares, and $1,649,719 in connection with
the Golden Post Warrant. The Deemed Dividend for 2017 and 2016 was
$173,320, and $173,797 respectively.
Due to
the nature of this transaction as mandatorily redeemable, the
preferred shares are classified as “temporary equity”
on the balance sheet.
|
|
Preferred Series
C
|
|
|
|
|
Carrying Value, December 31, 2015
|
$
4,333,053
|
|
Issuances at Fair Value, Net of Issuance Costs
|
0
|
|
Bifurcation of Derivative Liability
|
0
|
|
Relative Fair Value of Warrants – Preferred Stock
Discount
|
0
|
|
Accretion of Preferred Stock to Redemption Value
|
0
|
|
Carrying Value, December 31, 2016
|
4,333,053
|
|
|
|
|
Issuances at Fair Value, Net of Issuance Costs
|
0
|
|
Bifurcation of Derivative Liability
|
0
|
|
Relative Fair Value of Warrants – Preferred Stock
Discount
|
0
|
|
Accretion of Preferred Stock to Redemption Value
|
0
|
|
Carrying Value, December 31, 2017
|
4,333,053
|
Preferred Stock (Undesignated)
In
addition to the 1,000 shares designated as Series A Preferred Stock
and the 1,733,221 shares designated as Series C Preferred Shares,
the Company is authorized to issue an additional 16,266,779 shares
of Preferred Stock, having a par value of $0.0001 per share. The
Board of Directors of the Company has authority to issue the
Preferred Stock from time to time in one or more series, and with
respect to each series of the Preferred Stock, to fix and state by
the resolution the terms attached to the Preferred Stock. At
December 31, 2017 and December 31, 2016, there were no other shares
of Preferred Stock outstanding.
Separate Series; Increase or Decrease in Authorized Shares
.
The shares of each series of Preferred Stock may vary from the
shares of any other series thereof in any or all of the foregoing
respects and in any other manner. The Board of Directors may
increase the number of shares of Preferred Stock designated for any
existing series by a resolution adding to such series authorized
and unissued shares of Preferred Stock not designated for any other
series. Unless otherwise provided in the Preferred Stock
Designation, the Board of Directors may decrease the number of
shares of Preferred Stock designated for any existing series by a
resolution subtracting from such series authorized and unissued
shares of Preferred Stock designated for such existing series, and
the shares so subtracted shall become authorized, unissued and
undesignated shares of Preferred Stock.
Common Stock
The Company is authorized to issue 25,000,000 common shares at a
par value of $0.01 per share. These shares have full voting rights.
At December 31, 2017 and December 31, 2016, there were 17,722,825
and 16,722,825 shares outstanding, respectively. No dividends
were paid for the years ended December 31, 2017 and 2016,
respectively.
Preferred Rights
The
Company issued “Preferred Rights” for the rights to
percentages of revenues generated from the San Jose de Gracia Pilot
Production Plant and received $158,500 in 2003 and $626,000 in
2002. This has been reflected as “Preferred Rights” in
stockholders’ equity. As of December 31, 2004, $558,312 was
repaid and as of December 31, 2005, an additional $186,188 was
repaid, leaving a current balance of $40,000 and $40,000 as of
December 31, 2017 and December 31, 2016, respectively.
66
Stock Issuances
2017 Activity
During
the year ended December 31, 2017, the Company issued 1,000,000
common shares for the exercise of stock warrants at $2.50 a share
for total proceeds of $2,500,000. In addition, the Company issued
333,333 shares of treasury stock as additional compensation for
exercise of the warrants at above market price.
2016 Activity
None.
Treasury Stock
During
the year ended December 31, 2017 the Company issued 333,333
treasury shares as additional compensation for the exercise of
stock warrants at an above market price as discussed above. At
December 31, 2017 and 2016, 778,980 and 1,112,313 treasury shares
were outstanding.
Warrants
2017 activity
The
Company had 2,523,689 warrants outstanding at December 31, 2017.
1,000,000 warrants were exercised at $2.50 a share during the year
and 70,000 warrants expired.
2016 activity
The
Company had 3,593,689 warrants outstanding at December 31, 2016.
There were no warrants issued or exercised in 2016 and 567,500
warrants expired in 2016.
The
Company recorded no expense related to the issuance of these
warrants since these warrants were issued in common stock for cash
sales and note conversions.
|
|
Number of
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (Years)
|
Intrinsic
Value
|
|
Balance at
December 31, 2015
|
4,161,189
|
$
3.07
|
3.17
|
$
-
|
|
Granted
|
-
|
$
-
|
|
$
-
|
|
Exercised
|
-
|
$
-
|
|
$
-
|
|
Forfeited
|
(567,500
)
|
$
7.02
|
|
$
-
|
|
Balance at
December 31, 2016
|
3,593,689
|
$
2.45
|
2.51
|
$
-
|
|
Granted
|
-
|
$
-
|
|
$
-
|
|
Exercised
|
(1,000,000
)
|
$
2.50
|
|
$
-
|
|
Forfeited
|
(70,000
)
|
$
2.50
|
|
$
-
|
|
Balance at
December 31, 2017
|
2,523,689
|
$
2.45
|
1.51
|
$
-
|
|
Exercisable at
December 31, 2017
|
2,523,689
|
$
2.45
|
1.51
|
$
-
|
Related Party Transactions
The
Company follows FASB ASC subtopic 850-10, Related Party
Disclosures, for the identification of related parties and
disclosure of related party transactions. Pursuant to ASC
850-10-20, related parties include: a) affiliates of the Company;
b) entities for which investments in their equity securities would
be required, absent the election of the fair value option under the
Fair Value Option Subsection of Section 825–10–15, to
be accounted for by the equity method by the investing entity; c)
trusts for the benefit of employees, such as pension and
profit-sharing trusts that are managed by or under the trusteeship
of management; d) principal owners of the Company; e) management of
the Company; f) other parties with which the Company may deal if
one party controls or can significantly influence the management or
operating policies of the other to an extent that one of the
transacting parties might be prevented from fully pursuing its own
separate interests; and g) other parties that can significantly
influence the management or operating policies of the transacting
parties or that have an ownership interest in one of the
transacting parties and can significantly influence the other to an
extent that one or more of the transacting parties might be
prevented from fully pursuing its own separate
interests.
67
Material
related party transactions are required to be disclosed in the
consolidated financial statements, other than compensation
arrangements, expense allowances, and other similar items in the
ordinary course of business. However, disclosure of transactions
that are eliminated in the preparation of consolidated or combined
financial statements is not required in those statements. The
disclosures shall include: a) the nature of the relationship(s)
involved; b) a description of the transactions, including
transactions to which no amounts or nominal amounts were ascribed,
for each of the periods for which statements of operation are
presented, and such other information deemed necessary to an
understanding of the effects of the transactions on the financial
statements; c) the dollar amounts of transactions for each of the
periods for which statements of operations are presented and the
effects of any change in the method of establishing the terms from
that used in the preceding period; and d) amounts due from or to
related parties as of the date of each balance sheet presented and,
if not otherwise apparent, the terms and manner of
settlement.
Dynacap Group Ltd.
The
Company paid $165,250 and $116,750 to Dynacap Group, Ltd.
(“Dynacap”, an entity controlled by the CEO of the
Company) for consulting and other fees during the years ended
December 31, 2017 and 2016, respectively. Dynacap retains 2
individuals, who are family members of the CEO, as independent
contractors who provide administrative and executive support
services to the Company. Dynacap has provided these services to the
Company for recent years.
Advances from Goldgroup Mining Inc. (“Goldgroup”) to
Dyna
México
In
2014, Goldgroup advanced $111,500 to DynaMéxico and in 2013
Goldgroup advanced $120,000 USD to DynaMéxico. This total
$231,500 is being carried by DynaMéxico as a Due to
Non-Controlling Interest.
DynaResource Nevada, Inc. and DynaNevada de México S.A. de
C.V. (together “DynaNevada”)
Previous
advances to DynaNevada for maintenance of its corporate obligations
and mining concessions totaling $159,143 were written off as
uncollectable in 2016.
The
Company is required to pay taxes in México in order to
maintain mining concessions owned by
DynaMéxico. Additionally, the Company is required
to incur a minimum amount of expenditures each year for all
concessions held. The minimum expenditures are
calculated based upon the land area, as well as the age of the
concessions. Amounts spent in excess of the minimum may
be carried forward indefinitely over the life of the concessions
and are adjusted annually for inflation. Based on
Management’s recent business activities and current and
forward plans and considering expenditures on mining concessions
since 2002-2017 and continuing expenditures in current and forward
activities, the Company does not anticipate that DynaMéxico
will have any difficulties meeting the minimum annual expenditures
for the concessions ($388 – $2,400 Mexican Pesos per
hectare). DynaMéxico retains sufficient carry-forward amounts
to cover over 10 years of the minimum expenditure (as calculated at
the 2017 minimum, adjusted for annual inflation of
4%).
In
addition to the surface rights held by DynaMéxico pursuant to
the
Mining Act
of
México and its Regulations (
Ley Minera y su Reglamento
),
DynaMineras maintains access and surface rights to the SJG Project
pursuant to the 20-year Land Lease Agreement. The
20 Year Land Lease
Agreement with the Santa Maria Ejido Community surrounding San Jose
de Gracia 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. $72,000 USD), commencing
in 2014.
The Land Lease Agreement provides DynaMineras with
surface access to the core resource areas of SJG (4,399 hectares)
and allows for all permitted mining and exploration activities from
the owners of the surface rights (Santa Maria Ejido
community).
The
Company leases office space for its corporate headquarters in
Irving, Texas. In September 2017, the Company entered into a
sixty-six month extension of the lease through 2023. As part of the
agreement the Company received six months free rent as a finish out
allowance. The Company capitalized the leasehold improvement costs
and amortized them over the rent abatement period as rent expense
The Company incurred rent expense of $71,399 and $67,746 for the
office lease in the years ended December 31, 2017 and 2016,
respectively.
Future
minimum lease obligations are as follow for the years ending
December 31:
|
YEAR
|
AMOUNT
|
|
2018
|
$
67,324
|
|
2019
|
$
82,474
|
|
2020
|
$
84,280
|
|
2021
|
$
86,086
|
|
2022
|
$
87,892
|
|
Thereafter
|
$
14,849
|
|
|
|
|
TOTAL
|
$
422,905
|
68
Other
Contingencies
The
Company's mining and exploration activities are subject to various
laws and regulations governing the protection of the environment.
These laws and regulations are continually changing and generally
becoming more restrictive. The Company conducts its operations so
as to protect public health and the environment, and believes its
operations are materially in compliance with all applicable laws
and regulations. The Company has made, and expects to make in the
future, expenditures to comply with such laws and
regulations.
Damages Awarded to DynaMéxico in México
Litigation
On
October 5, 2016, 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 in
Part II, Item 1., Legal Proceedings. As of December 31, 2017 the
decision remains under appeal.
Litigation
The
Company believes that no material adverse change will occur as a
result of the legal actions taken, and the Company further believes
that there is little to no potential for the assessment of a
material monetary judgment against the Company for legal actions it
has filed in México. Further, the Company believes there is no
legal basis for which to conduct arbitration proceedings. (See Item
3. Legal Proceedings. And, see Item 7. Management’s
Discussion and Analysis of Financial Conditions and Results of
Operations).
Preferred Series C Stock
As
discussed in Note 8, the Company analyzed the embedded conversion
features of the Series C Preferred Stock and determined that the
stock qualified as a derivative liability and is required to be
bifurcated and accounted for as such since the host and the
embedded instrument are not clearly and closely related. The
Company performed a valuation of the conversion feature. In
performing the valuation, the Company applied the guidance in ASC
820,
“Fair Value
Measurements”,
to nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring
basis. ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). To measure fair value, the Company incorporates
assumptions that market participants would use in pricing the asset
or liability and utilizes market data to the maximum extent
possible.
In
instances where the determination of the fair value measurement is
based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or
liability.
The
Company considered the inputs in this valuation to be level 3 in
the fair value hierarchy under ASC 820 and used an equity
simulation model to determine the value of conversion feature of
the Series C Preferred Stock based on the assumptions
below:
|
|
2017
|
|
2016
|
|
|
Annual
volatility rate
|
153%
|
|
123%
|
|
|
Risk
free rate
|
2.20%
|
|
1.93%
|
|
|
Holding
Period
|
5
years
|
|
5
years
|
|
|
Fair
Value of common stock
|
$1.11
|
|
$1.75
|
|
For the
year ended December 31, 2017, an active market for the
Company’s common stock did not exist. Accordingly, the fair
value of the Company’s common stock was estimated using a
valuation model with level 3 inputs.
The
below table represents the change in the fair value of the
derivative liability during the years ended December 31, 2017 and
2016:
|
Year Ended
|
2017
|
2016
|
|
Fair value of
derivative (stock), beginning of year
|
$
2,592,492
|
$
2,419,359
|
|
Change in fair
value of derivative
|
(1,060,703
)
|
173,093
|
|
Fair value of
derivative on the date of issuance
|
-
|
-
|
|
Fair value of
derivative(stock), end of year
|
$
1,531,789
|
$
2,592,452
|
69
Preferred Series C Warrants
As
discussed in Note 8, the Company analyzed the embedded conversion
features of the Series C Preferred Stock and determined that the
Warrants qualified as a derivative liability and is required to be
bifurcated and accounted for as such since the host and the
embedded instrument are not clearly and closely related. The
Company performed a valuation of the conversion feature. In
performing the valuation, the Company applied the guidance in ASC
820,
“Fair Value
Measurements”,
to nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring
basis. ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). To measure fair value, the Company incorporates
assumptions that market participants would use in pricing the asset
or liability and utilizes market data to the maximum extent
possible.
In
instances where the determination of the fair value measurement is
based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair
value measurement falls is based on the lowest level input that is
significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires
judgment and considers factors specific to the asset or
liability.
The
Company considered the inputs in this valuation to be level 3 in
the fair value hierarchy under ASC 820 and used an equity
simulation model to determine the value of conversion feature of
the Warrants based on the assumptions below:
|
|
2017
|
|
2016
|
||
|
Annual
volatility rate
|
153%
|
|
123%
|
||
|
Risk
free rate
|
2.20%
|
|
1.93%
|
||
|
Holding
Period
|
5 years
|
|
5 years
|
||
|
Fair
Value of common stock
|
$1.11
|
|
$1.75
|
||
For the
year ended December 31, 2017, an active market for the
Company’s common stock did not exist. Accordingly, the fair
value of the Company’s common stock was estimated using a
valuation model with level 3 inputs.
The
below table represents the change in the fair value of the
derivative liability during the years ended December 31, 2017 and
2016:
|
Year Ended
|
2017
|
2016
|
|
Fair value of
derivative (warrants), beginning of year
|
$
2,513,638
|
$
2,963,378
|
|
Change in fair
value of derivative
|
(863,919
)
|
(449,740
)
|
|
Fair value of
derivative on the date of issuance
|
-
|
-
|
|
Fair value of
derivative(warrants), end of year
|
$
1,649,719
|
$
2,513,638
|
The
Company’s Non-Controlling Interest recorded in the
consolidated financial statements relates to an interest in
DynaResource de México, S.A. de C.V. of 50% through May 13,
2013, and 20% thereafter. Changes in Non-Controlling Interest for
the years ended December 31, 2017 and December 31, 2016,
respectively were as follows:
|
|
Year
Ended
December
31,
2017
|
Year
Ended
December
31,
2016
|
|
|
|
|
|
Beginning balance
|
$
(6,014,573
)
|
$
(6,570,199
)
|
|
Operating income
(loss)
|
(125,501
)
|
(347,179
)
|
|
Share of Other
Comprehensive Income (loss)
|
723,906
|
902,805
|
|
Ending balance
|
$
(5,416,168
)
|
$
(6,014,573
)
|
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.
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:
70
Level 1 Inputs
– Quoted prices
for identical instruments in active markets.
Level 2 Inputs
– Quoted prices
for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active;
and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.
Level 3 Inputs
– Instruments with
primarily unobservable value drivers.
As of
December 31, 2017, and December 31, 2016, the Company’s
financial assets were measured at fair value using Level 3 inputs,
with the exception of cash, which was valued using Level 1 inputs.
A description of the valuation of the Level 3 inputs is discussed
in Note 11.
|
Fair Value
Measurement at December 31, 2017 Using:
|
|
Quoted Prices
in Active Markets For Identical Assets (Level 1)
|
Significant
Other Observable Inputs (Level 2)
|
Signific ant
Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
None
|
-
|
-
|
-
|
-
|
|
Totals
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Liabilities
|
$
3,181,508
|
-
|
-
|
3,181,508
|
|
Totals
|
$
3,181,508
|
$
-
|
$
-
|
$
3,181,508
|
|
Fair
Value Measurement at December 31, 2016 Using:
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
None
|
-
|
-
|
-
|
-
|
|
Totals
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative
Liabilities
|
$
5,106,690
|
-
|
-
|
5,106,690
|
|
Totals
|
$
5,106,690
|
$
-
|
$
-
|
$
5.106,690
|
On
January 5, 2018 the Company paid off one Series I Convertible Note
Payable including principal of $112,500 and accrued interest of
$3,516.
On
February 27, 2018 the Company entered into a financing agreement
for unpaid mining concession taxes for the year ended December 31,
2016 in the amount of $550,202. The Company paid an initial 20%
payment of $110,044 and financed the balance over 36 months at an
interest rate of 18%.
Recommendation to Vacate Arbitration Ruling issued by United States
Magistrate Judge
On
February 13, 2018 a Recommendation to Vacate the Arbitration Ruling
was issued by a United States Magistrate Judge of the United States
District Court, District of Colorado (See
“Litigation”).
The
Company had certain customers whose revenue individually
represented 10% or more of the Company’s total revenue, or
whose accounts receivable balances individually represented 10% or
more of the Company’s total accounts receivable, as
follows:
For
each of the twelve months ended December 31, 2017 and 2016, two
customers accounted for 100% of revenue.
At both December 31, 2017 and 2016,
one customer accounted for 100% of accounts
receivable.
In June
2017, the Company entered into financing agreements for unpaid
mining concession taxes for the period July 1, 2014 to December 31,
2015 in the amount of $533,580. The Company paid an initial 20%
payment in the amount of $106,716 and financed the balance over 36
months at 18% interest.
71
The
following is a summary of the transaction during the year ended
December 31, 2017:
|
Property Holding Taxes June 1, 2014 – December 31,
2015
|
$
533,580
|
|
Initial payment of 20%
|
(106,716
)
|
|
2017 principal payments
|
(59,553
)
|
|
Balance
at December 31, 2017
|
$
367,311
|
|
At December 31, 2017 future maturities of notes payable are as
follows
Year Ending December 31:
|
|
|
2018
|
$
129,401
|
|
2019
|
154,715
|
|
2020
|
83,195
|
|
Total
|
$
367,311
|
In the
second quarter 2017, we identified certain property taxes amounting
to $541,245 from 2014 and 2015, and $319,232 from 2016, which were
not expensed as required, and an over accrual of $150,000 for legal
expenses at December 31, 2016. The Company assessed the materiality
of this misstatement in the 2016 and 2015 periods financial
statements in accordance with the SEC’s Staff Accounting
Bulletin (SAB) No. 99, codified in ASC No. 250, Presentation of
Financial Statements, and concluded that the misstatement was not
material to any prior periods. In accordance with SAB 108, the
Company has adjusted the year ended December 31, 2016 and the
balance sheet as of December 31, 2016. The following presents these
adjustments in detail:
|
BALANCE
SHEET
|
Previously
Reported
Dec
31,2016
|
Adjustments
|
Adjusted
Balance
Dec 31,
2016
|
|
Accounts
Payable
|
$
309,952
|
$
541,245
|
$
851,197
|
|
Accrued
Expenses
|
1,198,278
|
169,232
|
1,357,510
|
|
Total
Liabilities
|
7,802,070
|
710,477
|
8,512,547
|
|
|
|
|
|
|
Accumulated
Deficit
|
(53,013,185
)
|
(538,382
)
|
(53,551,567
)
|
|
Non-Controlling
Interest
|
(5,842,478
)
|
(172,095
)
|
(6,014,573
)
|
|
Total
Equity (Deficit)
|
(2,968,634
)
|
(710,477
)
|
(3,679,111
)
|
|
Total
Liabilities and Equity
|
$
9,166,489
|
$
—
|
$
9,166,489
|
72
|
INCOME
STATEMENT
|
|||
|
|
Year Ended
December 31, 2016
|
||
|
|
Previously
Reported
|
Adjustments
|
Adjusted
|
|
COSTS
AND EXPENSES OF MINING OPERATIONS
|
|
|
|
|
Property
Holding Costs
|
$
185,263
|
$
319,232
|
$
504,495
|
|
General
and Administrative
|
2,598,916
|
(150,000
)
|
2,448,916
|
|
Total
Operating Expenses
|
7,811,728
|
169,232
|
7,980,960
|
|
|
|
|
|
|
NET
OPERATING INCOME (LOSS)
|
1,684,377
|
(169,232
)
|
1,515,145
|
|
|
|
|
|
|
NET
INCOME (LOSS) BEFORE TAXES
|
1,664,392
|
(169,232
)
|
1,495,160
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
1,664,392
|
(169,232
)
|
1,495,160
|
|
|
|
|
|
|
ATTRIBUTABLE
TO NON-CONTROLLING INTERESST
|
283,333
|
63,846
|
347,179
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
$
1,773,928
|
$
(105,386
)
|
$
1,668,542
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Loss Per Common Share
|
$
0.11
|
$
(0.01
)
|
$
0.10
|
|
|
|
|
|
|
Diluted
Loss Per Common Share
|
$
0.09
|
$
0.01
|
$
0.10
|
73
None.
Evaluation
of Disclosure on Controls and Procedures.
We
carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31,
2017. This evaluation was accomplished under the supervision and
with the participation of our chief executive officer / principal
executive officer and our financial consultant who concluded that
our disclosure controls and procedures are not effective to ensure
that all material information required to be filed in the annual
report on Form 10-K has been made known to them. The evaluation did
not include a 404A assessment. 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 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.
Management’s Annual Report on Internal Control Over Financial
Reporting
Our
management is responsible for
establishing and maintaining adequate internal control over
financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our
internal control system was designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes, in
accordance with generally accepted accounting principles in the
United States of America. Our internal control over financial
reporting includes those policies and procedures that (i) pertain
to the maintenance records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets
of the Company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the
financial statements.
Because
of inherent limitations, a system of internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate due to
change in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our
management conducted an evaluation of the effectiveness of our
internal control over financial reporting using the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control—Integrated
Framework (2013 Internal Control—Integrated Framework) at
December 31, 2017. Based on its evaluation, our management
concluded that, as of December 31, 2017, our internal control over
financial reporting was not effective. We have identified two areas
which contain material weaknesses. First; the size of the Company
and limitations inherent in companies with limited accounting staff
prevent the desired multiple checks and balances prior to
processing daily operations. We need more compensating controls.
Though adequate processes are in place and functioning, subsequent
reviews are deemed necessary to identify unauthorized transactions.
Secondly; the same inherent current limitation on company staffing
requires specialized outside accounting assistance to implement
additional procedures that are effective, and another review to the
process, to ensure that all material information required to be
filed in the annual report on Form 10-K has been made known to
them. The material weaknesses identified will be addressed with the
implementation of revised internal control procedures to be
developed and approved by the Board of Directors and the Companies
external auditors. A material weakness is a deficiency, or a
combination of control deficiencies, in internal control over
financial reporting such that there is a reasonable possibility
that a material misstatement of the Company’s annual or
interim financial statements will not be prevented or detected on a
timely basis.
74
This
annual report does not include an attestation report of the
Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to the attestation by the Company’s
registered public accounting firm pursuant to rules of the SEC that
permit the Company to provide only management’s report in
this annual report.
Changes in Internal Controls over Financial Reporting
We have
not made any changes in our internal controls over financial
reporting that occurred during the period covered by this
report on Form 10-K that has materially affected, or is reasonably
likely to materially affect, our internal control over
financial reporting.
This
annual report does not include an attestation report of the
Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to the attestation by the Company’s
registered public accounting firm pursuant to rules of the SEC that
permit the Company to provide only management’s report in
this annual report.
None.
75
The
Company has a code of business conduct and ethics that applies to
all employees, officers and directors. The code of business conduct
and ethics is available on our website at
www.dynaresource.com
and we will post any amendments to, or waivers from, the code of
ethics on that website.
The
following table lists the names and ages of the executive officers,
directors and key consultants of the Company. The directors will
continue to serve until the next annual shareholders meeting, or
until their successors are elected and qualified. All Directors
have been elected to serve through 2018. All officers serve at the
discretion of the President, Chairman of the Board of Directors,
and members of the Board of Directors.
|
Name
|
|
Age
|
|
Position
|
|
Held Since
|
|
K. W. (“K.D.”) Diepholz
|
|
60
|
|
Chairman of The Board
|
|
May 1995
|
|
1303 Regency Court
|
|
|
|
CEO/President
|
|
May 1997
|
|
Southlake, Texas 76092
|
|
|
|
Treasurer
|
|
May 1997
|
|
|
|
|
|
|
|
|
|
Dr. Jose Vargas Lugo
|
|
57
|
|
Director of Operations - México, President - México
Operations;
|
|
August 2011
|
|
Enrique Dunant Y5 de Mayo #963 L-3
|
|
|
|
Director;
|
|
May 2013
|
|
Fracc, Los Parques
|
|
|
|
|
|
August 2013
|
|
Guamuchil, Sin CP 81460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eduardo Luna
|
|
73
|
|
Senior Advisor to President of Mineras de
DynaResource;
|
|
February 2017
|
|
Sierra Grande #134
|
|
|
|
Director
|
|
February
2017
|
|
Fraccionamiento Lomas de Mazatlán
|
|
|
|
|
|
|
|
Mazatlán, Sinaloa México 82110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pedro Ignacio Teran Cruz
|
|
58
|
|
Executive Vice President, Director of Exploration and Resource
Development;
|
|
2008-2013;
|
|
Sierra Grande #134
|
|
|
|
Board Member
|
|
March 2016
|
|
Fraccionamiento Lomas de Mazatlán
|
|
|
|
|
|
|
|
Mazatlán, Sinaloa México 82110
|
|
|
|
|
|
December, 2014
|
|
|
|
|
|
|
|
|
|
John C. Wasserman
|
|
78
|
|
Independent Director
|
|
December 2015
|
|
222 W. Las Colinas Blvd.
|
|
|
|
|
|
|
|
Suite 744 East Tower
|
|
|
|
|
|
|
|
Irving, TX. 75039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dale G. Petrini
|
|
63
|
|
Independent Director
|
|
December 2016
|
|
222 W. Las Colinas Blvd.
|
|
|
|
|
|
|
|
Suite 744 East Tower
|
|
|
|
|
|
|
|
Irving, TX. 75039
|
|
|
|
|
|
|
|
Philip K. Rose
|
|
29
|
|
Independent Director
|
|
July 2015
|
|
222 W. Las Colinas Blvd.
|
|
|
|
|
|
|
|
Suite 744 East Tower
|
|
|
|
|
|
|
|
Irving, TX. 75039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradford J. Saulter
|
|
58
|
|
Vice President – Investor Relations
|
|
May 1998
|
|
7618 Straits Lane
|
|
|
|
|
|
|
|
Rowlett, Texas 75088
|
|
|
|
|
|
|
|
Nicolas Miguel
|
|
|
|
Controller for Mexico Operations;
|
|
May 2017
|
|
Sierra Grande #134
|
|
|
|
|
|
|
|
Fraccionamiento Lomas de Mazatlán
|
|
|
|
|
|
|
|
Mazatlán, Sinaloa México 82110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raul Garcia Reimbert
|
|
56
|
|
Special Advisor to President of Mineras de
DynaResource;
|
|
November 2016
|
|
Sierra Grande #134
|
|
|
|
|
|
|
|
Fraccionamiento Lomas de Mazatlán
|
|
|
|
|
|
|
|
Mazatlán, Sinaloa México 82110
|
|
|
|
|
|
|
76
K.W. (“K.D.”) Diepholz.
Mr. Diepholz has been
involved in the resource sectors, primarily as an
investor/entrepreneur, since 1980. He founded KWD Properties Corp.
an Oil and Gas exploration and production company in 1983 and
served as an executive manager to this Oil and Gas concern, and as
a General partner to several limited partnerships. Mr. Diepholz has
served in a variety of capacities with DynaResource, Inc. from 1994
to the present, and has served as Chairman of the Board, President,
CEO and Treasurer since 1995. Mr. Diepholz has special skills in
the areas of negotiation, business development, project planning
and management, corporate financing, acquisition analysis,
investment program interpretation and structuring, and executive
management. Mr. Diepholz has been instrumental to the Company in
the negotiations of the following: the acquisition of 24.9% Net
Profits Interest in the San José de Gracia in 1995; the
acquisition of an additional 25% interest in San José de
Gracia in 1998; the acquisition and consolidation of 100% of the
rights to the San José de Gracia from prior owners,
culminating in March 2000; the acquisition and consolidation of
several outstanding Concessions at the San José de Gracia from
previous Mexican owners during 2000-2003; the direction and
management of the test mining and pilot mill operations at San
José de Gracia during 2003-2006; the negotiation of the Stock
Purchase/Earn In Agreement in 2006; the negotiation of the surface
rights agreement with the Santa Maria Ejido in 2013; the
negotiation of the financing agreement with Golden Post Rail, LLC,
and the general financing of, and the general management of the
Company since inception. In addition to his roles with the Company,
Mr. Diepholz serves as Chairman and CEO of DynaResource Nevada,
Inc., an affiliated company, and as President of DynaNevada de
Mexico, a wholly owned subsidiary of DynaResource Nevada Inc. Mr.
Diepholz is also the current President of the following
subsidiaries of the Company in Mexico: DynaResource de Mexico,
Mineras de DynaResource, and DynaResource Operaciones.
Dr. Jose Vargas Lugo
. Dr.
Vargas is a licensed physician with graduate from the Universidad
Nacional Autonoma de México (UNAM) and is a 4
th
year law student at
Universidad Autonoma de Sinaloa (UAS). Dr. Vargas commenced his
involvement with the mining business with Minera Industrial
Peñoles as a Medical Assistant to the Mining Services Division
of Peñoles in Fresnillo, Zacatecas. Since 1993, Dr. Vargas has
been a supplier of industrial goods and services in and around the
municipalities of Sinaloa de Leyva and Mocorito Sinaloa. Dr. Vargas
has worked with companies such as Compañ’a Minera El
Rosarito, which was conducting operations at San Jose de Gracia
during the period 1993 – 1995. Dr. Vargas later provided
services and supplies to Mineras Finesterre at San Jose de Gracia,
and to Minera Pangea, which was owned by Queenstake Resources, then
Nevada Pacific, and now US. Gold. Dr. Vargas began working with
DynaResource de México in spring 2000; as it commenced
activities to acquire and consolidate the San Jose de Gracia
District. Over the past + 10 Years, Dr. Vargas has proven to be an
integral part of the Company’s activities at San Jose de
Gracia and in Sinaloa State; involved in all facets of the
Company’s business. Dr. Vargas has proven instrumental in the
areas of public relations, community relations, governmental
affairs, environmental matters, and overall management of the
company’s business activities in México.
Eduardo Luna.
Mr. Luna is a respected and successful senior
executive with over 40 years’ experience in the mining
industry. Mr. Luna’s experience includes serving as a Member
of the Board of Directors for major mining companies which have
achieved success at the highest level of the mining industry. Mr.
Luna currently serves as a member of the Board of Directors of
Silver Wheaton. Mr. Luna has also served as a Member of the Board
of Directors of Goldcorp Inc., Alamos Gold Inc., and Primero Mining
Corp.
In
addition to his roles on company boards, Mr. Luna served in a
variety of operational capacities. From 1991 to 2005, Mr. Luna
served as President of Luismin SA de CV in Mexico, which operated
the Tayoltita Project for Goldcorp in Mexico. Mr. Luna also served
as an Executive Vice President of Goldcorp. More recently, Mr. Luna
served as President of Mexican Operations for Primero Mining from
2010-2015, the time frame during which Primero Mining operated the
Tayoltita Project.
During
his distinguished career, Mr. Luna has received several mining
industry recognitions and appointments, which include:
●
National Mining
Award, Mexico, 1997;
●
President of the
Mexican Chamber of Mines;
●
President of the
Consulting Board for the School of Mines, Universidad de
Guanajuato;
●
Member of the
Advisory Boards of the School of Mines of National University of
Mexico and University of Zacatecas;
●
President of The
Silver Institute 2002 – 2003.
Mr.
Luna received a Bachelor’s degree in Mining Engineering from
Universidad de Guanajuato, 1971; an MBA from Tecnológico de
Monterrey, 1979; and an Advanced Management degree from Harvard
Business School.
In 1997
Mr. Luna was appointed Trustee of Fundación Pro Niños de
la Calle, a charity that works with children living on the streets
of Mexico City.
77
Pedro Ignacio Teran Cruz.
Mr. Teran is a graduate Geologist
from the Universidad de Sonora, México. He has over 28
years’ experience in mineral exploration, mine development is
a successful and respected Geological Consultant in México and
is credited with defining significant resources at several
projects. From 1986 to 1992, he was Project Geologist for Minera
Real de Angeles, SA de CV (Frisco/Placer Dome Inc, now Alamos
Gold), in which under his participation, explored and discovered
the "Mulatos Gold Deposit" Sonora, México, and later as a
Project Manager, the "San Felipe Gold Project" BC, México,
both now in production. From 1992 to 1996, Mr. Teran worked as a
Mine Geologist with Hecla Mining Co and explored and advanced into
production the open pit "La Choya Gold Mine". From 1996 to 1999,
Mr. Teran worked as Geology Superintendent for Compañ’a
Minera Lluvia de Oro (Santa Cruz Gold, Now NWM Mining Corp.) and at
the open pit "Lluvia de Oro Gold Mine", Sonora, México. From
1999 to 2001, Mr. Teran worked as a Consultant Geology performing
due diligences for Tara Gold Resources in several projects located
in la Sierra Madre Occidental. From 2001 to 2005, he worked as
Manager of Geology Department for the Compañ’a Minera
Pangea SA de CV (Queenstake Resources, Nevada Pacific and now
McEwen Mining), in the "El Magistral Gold Mine" Sinaloa,
México. Under his direction of exploration, the reserves were
increased substantially and formed part of the team to put the
project in production. During 2005 and part of 2006, Mr. Teran
worked as Data Manager for Linear Gold Corp. in the "Ixhuatan
Project" Chiapas, México. He built the computer block model
and Resources Estimation. From 2006 to 2008, he worked as Project
Manager for Pediment Exploration Ltd., now Argonaut Gold Inc. in
the "San Antonio Gold Project" located in BCS,
México.
Since
2008, Mr. Teran began working as a Consultant Geologist with
DynaResource, Inc. in the "San Jose de Gracia Gold Project" located
in Sinaloa, México, an advanced exploration project. Mr. Teran
now is working 100% of his time with the DynaResource Team and with
full focus at San Jose de Gracia.
Bradford J. Saulter.
Attended University of Texas, Austin,
Texas; Marketing Department of Metagram, Inc., a Dallas National
Marketing Company; Regional Manager for Lugar, Lynch, &
Associates, A Dallas Financial Services Company, Involved in Sales
& Marketing of Various Investment Products; Independent
Marketing Consultant; Series 22 & 63 Securities License; Vice
President / Marketing - Dynacap Group Ltd. (1992 - Present);
Director: Farm Partners, Inc. (1992 - Present), Vice President
– Investor Relations - DynaResource, Inc., Dallas, Texas
(1995 to present).
John C. Wasserman
. Mr. Wasserman is a Partner with
Wasserman, Bryan, Landry & Honold, LLP Law firm, Perrysburg
Ohio. He is a stockholder of the Company and brings the following
credentials to the Board of Directors:
University
of Detroit (PHB); Ohio State University, Law School (JD) –
Graduate work in business administration; University of Toledo
– Undergraduate and Graduate work in business administration;
Admitted to practice before Ohio Supreme Court, U.S. Supreme Court,
U.S. District Court for Northern District of Ohio, Sixth Circuit
U.S. Court of Appeals; Member, Ohio State, Lucas County, Ohio (past
President) and Toledo, Ohio Bar Associations; Board Member,
Corporate and Board Secretary, Blue Water Satellite, Inc.; Board
Member, TechTol of Toledo, Inc.; Member and current chair of the
City of Waterville, Ohio Planning Commission; Member of the ten
year Plan Committee of Waterville, Ohio; Member, Past Board Member,
Secretary Treasurer and President of Toledo, Ohio Rotary; Past
Assistant District Governor, Area 4 of District 6600 of Rotary
International; Member of Timberlake Investments, LLC, an investment
LLC; Board Member, Victory Center of Toledo, Ohio; Member,
Succession Committee, DynaResource, Inc.; Member/Managing
Partner/Member, numerous LLCs/Partnerships for real estate
developments and investments.
Mr.
Wasserman has been employed with the Ohio Attorney General office,
as Special Counsel; and with Ohio Bureau of Unemployment, as
Hearing Officer; and as a Former Acting Judge, Maumee, Ohio,
Municipal Court; Past Toledo, Ohio Exchange Club Member
(President). Mr. Wasserman was selected one of Jaycees Top Ten
Young men of Toledo, Ohio; was Co Author – Management
Considerations of a Business Entity in the Environment of Chapter
XI Reorganization Proceedings Under the New Federal Bankruptcy Code
Effective October 1, 1979 published in Midwest Business
Administration Association; was an Expert witness in real estate
mandamus case: Lucas County Common Pleas Court, State ex rel Ad Hoc
Committee of Waterville Citizens for Initiative and Referendum
Petitions, Etc., Realtor vs. City of Waterville and Dale Knepper,
Clerk of Council, City of Waterville, Respondents, Case No.
CI-2013-1137.
Dale G. Petrini.
Mr. Petrini
brings over 40 years of extensive international project and
manufacturing experience to the Board of DynaResource, Inc. During
his 40+ years with The Dow Chemical Company, Houston, Texas, Mr.
Petrini was the engineering sponsor, advisor and led the project
development for several international mega projects totally over
$50 billion USD. In his latest role for Dow, he was responsible for
the project development of mega project growth opportunities in
Latin America.
Previously,
Mr. Petrini was responsible for Global Construction Management and
Global Capital Procurement for Dow with offices and personnel
located throughout the world. In addition, he was the Plant Manager
for several production units and led the respective business
management teams.
78
Mr.
Petrini earned his civil engineering degree from The University of
Michigan and is a registered licensed professional engineer. He
holds dual citizenship in the US and EU.
Philip K. Rose.
Mr. Rose is the appointee to the Board of
Directors by Golden Post, LLC., the holder of the Series C
convertible preferred shares. Mr. Rose is a 2011 graduate of Texas
Christian University in Fort Worth, Texas.
Consultants
Nicolas Miguel Padilla (Comptroller in Mexico):
Mr.
Padilla received his Degree in Public Accounting from the
Universidad Michoacana de San Nicolás de Hidalgo, School
Generation 1978-1982. Mr. Padilla is Certificated by CENEVAL
Año 2010 Professional Patent No. 7330509.
Most
recently, Mr. Padilla was employed by
Primero Servicios Mineros, S.A. de C.V.,
Primero Mining Corp., at the Unidad Tayoltita; where he was
Comptroller-Manager from February 2014 Until September 2016. Prior
to serving as Comptroller for Primero, Mr. Padilla served as
Superintendent of Administration from July 2010 to July 2011, and
Mr. Padilla served as Manager of Administration and
Services-Comptroller from August 2011 to January 2014.
Previous
to serving Primero, Mr. Padilla served as Chief Accountant for Los
Filos S.A. de C.V., a subsidiary of Goldcorp, Inc. during the
period April 2004 to June 2010. And before serving Los Filos S.A.
de C.V. as Chief Accountant, Mr. Padilla served as Superintendent
of Administration-Comptroller for Luismin, S.A. de C.V., a
subsidiary of Goldcorp, Inc., during the period November 1990 to
March 2004.
Mr.
Padilla joined Mineras de DynaResource S.A. de C.V., a subsidiary
of DynaResource, Inc., as Comptroller-Mexico, in June
2017.
Raul Garcia Reimbert. (Security and Risk Advisor)
Mr.
Garcia Reimbert is a graduated engineer in Mining and Metallurgist
and Lawyer from the Universidad Nacional Autonoma de Mexico, he
also has a Master as a Mine Expert Engineer from the Ecole des
Mines, Nancy, France and several specializations in Holistic Risk
Management, Crisis Management and Business Administration that
provides over 35 years of experience in the mining industry and
risk management activities. Mr. Garcia Reimbert is the fifth
generation of miners in his family.
Mr.
Garcia Reimbert served as Plan Engineer at SICARTSA (1981 -1983)
and as Corporate Risk Manager at Grupo Peñoles / Fresnillo
(1983 - 2011). From 2011 up to date, Mr. Garcia Reimbert is the CEO
of Cabinet Reimbert, a company specialized in Risk Management,
Security, Environmental, Community and Legal Solutions for the
Mining industry and others. His portfolio includes global and local
mining companies, global manufacturing companies, as well as
governmental agencies.
Mr.
Garcia Reimbert was also a professor for 15 years at the
Universidad Nacional Autonoma de Mexico, and from 2015 at Federal
Governmental agencies. Mr. Garcia Reimbert also serves as the
National Treasurer of The Mexican Mines, Metallurgists, and
Geologist Engineers Society. Mr. Gracia Reimbert has received
recognitions as The Best Mexican Risk Manager in 1999 and One of
the Most Influential Security Specialists in Mexico for
2016.
Mr.
Garcia Reimbert, was retained as Special Advisor to DynaResource in
November 2016.
To the
knowledge of the Company, no present or former director, executive
officer, or person nominated to become a director or executive of
the Company, or consultants to the Company, has ever:
1.
Filed a bankruptcy
petition by or against any business of which such person was a
general partner or executive officer whether at the time of the
bankruptcy or with two years prior to that time;
2.
Had any conviction
in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor
offenses);
3.
Been subject to any
order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking
activities; and,
4.
Been found by a
court of competent jurisdiction (in a civil action), the Commission
or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment
has not been reversed suspended or vacated.
79
The
following officers received the following compensation for the
years ended December 31, 2016 and 2015. These officers(*) do not
have employment contracts with the Company.
|
Name and
principal position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock
Awards
|
|
Option
Awards
|
|
Non-equity
incentive
plan compensation
|
|
Nonqualified
deferred compensation
|
|
All
other
compensation
*
|
|
K.W.
(“K.D.”) Diepholz,
|
|
2017
|
|
$251,039
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
$45,000
|
|
CEO/President
|
|
2016
|
|
$225,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
$14,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr.
Jose Vargas Lugo; EVP., s
|
|
2017
|
|
$90,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
President of
México Operation
|
|
2016
|
|
$90,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eduardo
Luna
|
|
2017
|
|
$166,670
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Sr. Advisor
to
|
|
2016
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
President of
Mineras de DynaResource
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Rene
L.F. Mladosich;
|
|
2017
|
|
$54,250
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
former GM of San
Jose de Gracia Project
|
|
2016
|
|
$137,500
|
|
$10,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Robert
(“Chip”)
|
|
2017
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Allender, Jr.,
Former EVP.
Dir of
Operations
|
|
2016
|
|
$54,405
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*David
S. Hall,
|
|
2017
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Former
CFO
|
|
2016
|
|
$33,732
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pedro
Ignacio Teran Cruz,
|
|
2016
|
|
$120,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Dir. of Exp. and
Resource Dev.
|
|
2016
|
|
$120,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradford
J. Saulter,
|
|
2017
|
|
$90,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
$20,000
|
|
VP,
Investor
Relations
|
|
2016
|
|
$72,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
80
*
As disclosed in the financial statements, the Company paid
consulting fees to Dynacap Group, Ltd.
|
|
|
|
Option Awards
|
|
Stock Awards
|
|||||||
|
Name and principal position
|
|
Number of Securities Underlying Unexercised options (#)
exercisable
|
|
Number of Securities Underlying Unexercised options (#)
un-exercisable
|
|
Equity incentive plan awards
|
|
Option exercise price
|
|
Option expiration date
|
|
Number of share awards that have not
vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K.W. (“K.D.”) Diepholz
|
|
None
|
|
None
|
|
None
|
|
N/A
|
|
N/A
|
|
None
|
|
CEO/President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Jose Vargas Lugo
|
|
None
|
|
None
|
|
None
|
|
N/A
|
|
N/A
|
|
None
|
|
President
of México Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rene L.F. Mladosich
|
|
None
|
|
None
|
|
None
|
|
N/A
|
|
N/A
|
|
None
|
|
GM of San Jose de Gracia Project (2016)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert (“Chip”) Allender, Jr.
|
|
None
|
|
None
|
|
None
|
|
N/A
|
|
N/A
|
|
None
|
|
Director of Mining Operations (2016)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pedro Ignacio Teran Cruz; Dir. of Expl.
|
|
None
|
|
None
|
|
None
|
|
N/A
|
|
N/A
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Hall
|
|
None
|
|
None
|
|
None
|
|
N/A
|
|
N/A
|
|
|
|
●
CFO, 2015 to May 2016
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bradford J. Saulter
|
|
None
|
|
None
|
|
None
|
|
N/A
|
|
N/A
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John C. Wasserman
|
|
None
|
|
None
|
|
None
|
|
N/A
|
|
N/A
|
|
None
|
81
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth the amount and nature of beneficial
ownership of each of the executive officers and directors of the
Company and each person known to be a beneficial owner of more than
five percent of the issued and outstanding shares of common stock
of the Company as of December 31, 2017. The following table
sets forth the information based on 17,722,825(1) common shares
issued and outstanding (1) as of December 31, 2017.
|
COMMON STOCK
|
|
Beneficial
Owner
|
|
Address
|
|
Common
Shares
|
|
Percent
Ownership
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
K.W.
(“K.D.”) Diepholz
Chairman
/ CEO
|
|
222 W.
Las Colinas Blvd.
Suite
1910 North Tower
Irving,
Texas 75039
|
|
1,865,100
|
|
10.50%
|
|
Common
Stock
|
|
Mineras
de DynaResource
SA de
CV.
|
|
CP
82110, Mazatlán, Sinaloa, Mexico
|
|
504,300
|
|
2.8%
|
|
Common
Stock
|
|
Gareth
Nichol
|
|
Denver,
Colorado
|
|
2,333,333
|
|
13.16%
|
|
Common
Stock
|
|
Dr.
Jose Vargas Lugo
EVP,
Director
|
|
Plutarco
Elias Calles 47
Guamuchil
Sin. Mex. 81450
|
|
274,508
|
|
1.5%
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Pedro
I. Teran Cruz
EVP;
Director
|
|
Hermosillo,
Sonora Mexico
|
|
37,500
|
|
.21%
|
|
Common
Stock
|
|
Bradford
J. Saulter
VP.,
Investor Relations
|
|
222 W.
Las Colinas Blvd.
Suite
1910 North Tower
Irving,
Texas 75039
|
|
124,439
|
|
.70%
|
|
Common
Stock
|
|
John C.
Wasserman
Director;
|
|
Waterville,
Ohio 43566
|
|
134,389
|
|
.758%
|
|
Common
Stock
|
|
Dale G.
Petrini
Director
|
|
Houston,
Texas 77027
|
|
156,330
|
|
.935%
|
|
Common
Stoc
|
|
Eduardo
Luna;
Director
|
|
Mexico
City; Mexico
|
|
|
|
|
|
**
|
|
Philip
A. Rose (2)
Director
|
|
Westlake,
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Officers, Directors and Beneficial owners as a Group (10
holders)
|
|
|
|
5,429,899
|
|
30.64
%
|
82
(1)
Does Not Include (i) 1,733,221 shares of common stock issuable upon
the conversion of 1,733,221 shares of Series C Convertible
Preferred Stock, which are currently convertible, and (ii)
2,166,527 shares of common stock issuable upon the exercise of a
warrant, which is exercisable, and subsequent conversion into
common shares.
(2)
Mr. Rose is a Director of the Company, elected by the holder of the
Series C Preferred Shares.
No
officer or director holds options which are either (a) vested or
(b) will vest within 60 days.
OPTIONS/WARRANTS
The
officers and directors and those 5% beneficial owners held the
following options/warrants as of December 31, 2017:
None
PREFERRED SHARES (SERIES A)
|
Preferred
Series
|
|
Beneficial
Owner
|
|
Address
|
|
Preferred
Shares
|
|
Percent
Ownership
|
|
Series
“A”
|
|
K.W.
(“K.D.”)
Diepholz,
CEO
|
|
1303
Regency Court
Southlake,
Texas76092
|
|
1,000
|
|
100.0%
|
PREFERRED SHARES (SERIES C)
|
Preferred
Series
|
|
Beneficial
Owner
|
|
Address
|
|
Preferred
Shares
|
|
Percent
Ownership
|
|
Series
“C”
|
|
Golden
Post LLC.
|
|
1110
Post Oak Place
Westlake,
Texas76262
|
|
1,733,221
|
|
100.0%
|
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Dynacap Group Ltd.
The
Company paid $165,250 and $116,750 to Dynacap Group, Ltd.
(“Dynacap”, an entity controlled by the CEO of the
Company) for consulting and other fees during the years ended
December 31, 2017 and 2016, respectively. Dynacap retains 2
subcontractors who provide accounting, administrative and executive
support services to the Company during recent years.
Cash Advances by Management
In
2015, 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. These shares were issued in August 2015. The
Company repaid the $150,000 advance to the former CFO in
2016.
Stock Issued to Management
None
The
Company is not aware of any other material relationships or related
transactions between the Company and any officers, directors or
holders of more than five percent of any class of outstanding
securities of the issuer.
83
ITEM
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES
(1)
Audit Fees
The
aggregate fees billed for professional services rendered by our
auditors, for the audit of the registrant's annual financial
statements and review of the financial statements included in the
registrant's Form 10-K and Form 10-Q(s) or services that are
normally provided by the accountant in connection with statutory
and regulatory filings or engagements, for fiscal years 2017 and
2016 was $100,000 and $108,155, respectively.
(2)
Audit Related Fees
None
(3)
Tax Fees
None
(4) All
Other Fees
None
(5)
Audit Committee Policies and Procedures
The
Company does not have an audit committee.
(6) If
greater than 50 percent, disclose the percentage of hours expended
on the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees.
Not
applicable.
84
The
exhibits listed in the accompanying exhibit index are filed (except
where otherwise indicated) as part of this report.
|
No.
|
Description
|
|
31.1
*
|
Certification of
the Company’s Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
31.2
*
|
Certification of
the Company’s Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
|
32.1
*
|
Certification of
the Company’s Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
* Filed
herewith.
|
|
85
Exhibit Number; Name of Exhibit
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.
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.
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.
86
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the
Company caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
DYNARESOURCE,
INC.
|
|
|
|
|
|
|
|
| Dated: April 16, 2018 |
By:
|
/s/ K.W.
(“K.D.”) DIEPHOLZ
|
|
|
|
|
K.W. (K.D.) Diepholz, Chairman of the Board of Directors andChief Executive Officer |
|
|
|
|
|
|
In
accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
K.W.
(“K.D.”) DIEPHOLZ
|
|
Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) |
|
April 16, 2018 |
| K.W. (K.D.) Diepholz |
|
|
|
|
|
|
|
|
|
|
|
/s/
K.W.
(“K.D.”) DIEPHOLZ
|
|
Acting Chief Financial Officer (Principal Financial and Accounting Officer) |
|
April 16, 2018 |
| K.W. (K.D.) Diepholz |
|
|
|
|
87
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Nature Of Activities and Significant Accounting PoliciesNote 2 InventoriesNote 3 PropertyNote 4 Mining ConcessionsNote 5 Investment in Affiliate/receivables From Affiliate/other AssetsNote 6 Convertible Promissory NotesNote 7 Income TaxesNote 8 Stockholders EquityNote 9 Related Party TransactionsNote 10 Commitments and ContingenciesNote 11 Derivative LiabilitiesNote 12 Non-controlling InterestNote 13 Fair Value Of Financial InstrumentsNote 14 Subsequent EventsNote 15 Revenue ConcentrationNote 16 Notes PayableNote 17 Adjustment Of Prior PeriodsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules