SECURITIES AND EXCHANGE
COMMISSION





Washington, D.C. 20549





FORM 10-Q


(Mark
One)





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





For the quarterly
period ended June 30, 2019





OR





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





From the transition
period ___________ to ____________.





Commission File Number 000-30371





DYNARESOURCE,
INC.


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





Delaware

94-1589426(State or other
jurisdiction of incorporation or organization)

(IRS Employer
Identification No.)





222 W Las Colinas Blvd., Suite 1910
North Tower, Irving, Texas 75039


(Address of
principal executive offices)





(972) 868-9066


(Issuer's telephone
number)





N/A


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





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





Yes [X] No [
]





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





Large Accelerated Filer
[  ]

Accelerated Filer [
]Non-Accelerated Filer [
 ]

Smaller Reporting
Company [X]





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





Yes [ ] No
[X]





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]





As of September 30,
2019 there were 17,722,825 shares of Common Stock of the issuer
outstanding.













1











TABLE
OF CONTENTS







PART I.
FINANCIAL STATEMENTSITEM
1.
Unaudited
Financial Statements
3-6Notes to
Unaudited Financial Statements
7-27ITEM
2.
Management's Discussion and Analysis and Plan of
Operation
28ITEM
3.
Quantitative and Qualitative Disclosure About
Market Risk
45PART II.
OTHER INFORMATIONITEM
1.
Legal
Proceedings
46ITEM
2.
Unregistered Sales of Securities and Use of
Proceeds
51ITEM
3.
Default
Upon Senior Securities
51ITEM
4.
Mine
Safety Disclosures
51ITEM
5.
Other
Information
51ITEM
6.
Exhibits
52CERTIFICATIONSEXHIBIT
31.1
CHIEF EXECUTIVE OFFICER
CERTIFICATIONEXHIBIT
31.2
CHIEF FINANCIAL OFFICER
CERTIFICATIONEXHIBIT
32.1
CERTIFICATION PURSUANT
TO 18 U.S.C. SECTION 1350











2
















DYNARESOURCE, INC.CONSOLIDATED BALANCE
SHEETSJune 30,
2019
(Unaudited)
December 31,
2018ASSETSCurrent AssetsCash and Cash Equivalents
$583,520
$2,685,576Accounts Receivable
330,524
1,074,724Inventories
1,876,959
1,588,778Foreign Tax Receivable
1,094,173
845,564Other Current Assets
453,567
372,936Total Current Assets
4,338,743
6,567,578Mining Equipment and Fixtures (Net of
AccumulatedDepreciation of $108,302 and
$106,672)
10,852
12,482Mining Concessions
4,132,678
4,132,678Operating Lease Asset
844,246
—Investment in Affiliate
70,000
70,000Other Assets
97,804
96,409TOTAL ASSETS
$9,494,323
$10,879,147LIBILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT)Current Liabilities:Accounts Payable
$3,735,210
$2,283,803Accrued Expenses
932,289
1,567,840Customer Advances
1,000,000
1,750,000Due to Non-Controlling
Interest
231,500
231,500Derivative Liability
328,598
974,683Current Portion of Operating Lease
Liability
65,369
—Convertible Notes Payable
838,125
838,125Current Portion of Long Term
Debt
868,432
705,320Total Current Liabilities
7,999,523
8,351,271Operating Lease Liability, Less Current
Portion
795,183
—Long Term Debt, Less Current
Portion
872,655
1,097,915TOTAL LIABILITES
9,667,361
9,449,186Preferred Stock, Series C, $0.0001 per value,
1,733,221 shares Authorized, issued and
outstanding
4,333,053
4,333,053STOCKHOLDERS' EQUITY
(DEFICIT)Preferred Stock, Series A, $0.0001 par value,
1,000 sharesauthorized, issued and
outstanding
1
1Common Stock, $0.01 par value, 25,000,000
shares authorized,17,722,825 issued and 17,722,825
outstanding
177,228
177,228Preferred Rights
40,000
40,000Additional Paid In Capital
56,622,159
56,622,159Treasury Stock, 778,980
shares
(2,223,891)
(2,223,891)Accumulated Other Comprehensive
income
987,159
1,247,198Accumulated Deficit
(54,426,143)
(53,154,259)Total DynaResource Inc. Stockholders'
Equity
1,176,513
2,708,436Non-Controlling Interest
(5,682,604)
(5,611,528)TOTAL DEFICIT
(4,506,091)
(2,903,092)TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
$9,494,323
$10,879,147





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








3











DYNARESOURCE, INC.


CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME


FOR THE THREE AND SIX MONTHS ENDED June 30, 2019 AND 2018


(Unaudited)





Three Months
June 30, 2019
Three Months
June 30, 2018
(Restated)
Six Months
June 30, 2019
Six Months
June 30, 2018
(Restated)REVENUES
$3,412,973
$3,828,450
$5,742,536
$6,346,216COSTS AND EXPENSES OF
MININGOPERATIONSProduction Costs Applicable
to Sales
405,163
452,805
856,454
779,652Mine Production
Costs
793,705
836,345
1,849,645
1,291,206Mine Exploration
Costs
654,915
812,173
1,517,215
1,639,472Mine Expansion
Costs
380,981
670,965
598,204
1,050,165Camp, Warehouse and
Facilities
649,667
695,487
1,321,441
1,361,896Transportation
187,329
196,919
438,155
284,587Property Holding
Costs
267
785,777
106,229
938,164General and
Administrative
397,388
545,912
1,043,277
1,140,355Depreciation and
Amortization
815
1,309
1,630
2,618Total
Operating Expenses
3,470,230
4,997,692
7,732,250
8,488,115NET OPERATING (LOSS)
(57,257)
(1,169,242)
(1,989,714)
(2,141,899)OTHER INCOME (EXPENSE)Foreign Currency Gains
(Losses)
154,348
(912,746)
293,700
(106,232)Interest
Expense
(127,023)
(62,575)
(253,412)
(118,126)Derivatives Adj.
Mark-to-Market Gain
23,585
113,958
646,085
2,096,440Other Income
(Expense)
234
(316,324)
607
(315,944)Total Other
Income (Expense)
51,144
(1,177,687)
686,980
1,556,138LOSS BEFORE TAXES
(6,113)
(2,346,929)
(1,302,734)
(585,761)TAXES
—
—
—
—NET LOSS
$(6,113)
$(2,346,929)
$(1,302,734)
$(585,761)Cumulative Dividend for Series C
Preferred
$(43,330)
(43,330)
(86,660)
(86,660)ATTRIBUTABLE TO NON-CONTROLLING
INTERESTS
$3,960
$220,507
$30,850
$275,693ATTRIBUTABLE TO COMMON
SHAREHOLDERS
$(45,483)
$(2,169,752)
$(1,358,544)
$(396,728)EARNINGS PER SHARE
DATA
ATTRIBUTABLE TO THE EQUITY HOLDERS OF
DYNARESOURCE, INC:Basic Loss per Common
Share
$(.00)
$(.12)
$(.08)
$(.02)Diluted Loss per Common
Share
$(.00)
$(.12)
$(.08)
$(.02)Weighted Average Shares
Outstanding, Basic
17,722,825
17,722,825
17,722,825
17,722,825Weighted Average
Shares Outstanding, Diluted
17,722,825
17,722,825
17,722,825
17,722,825OTHER COMPREHENSIVE INCOME
(LOSS)NET LOSS PER
ABOVE
$(6,113)
$(2,346,929)
$(1,302,734)
$(585,761)Foreign Currency
Exchange Gains (Losses)
(133,638)
1,063,132
(300,265)
276,464TOTAL OTHER COMPREHENSIVE INCOME
(LOSS)
(133,638)
1,063,132
(300,265)
276,464TOTAL COMPREHENSIVE LOSS
$(139,751)
$(1,283,797)
$(1,602,999)
$(309,297)ATTRIBUTABLE TO:EQUITY HOLDERS OF
    DYNARESOURCE, INC.
$(116,044)
$(1,215,365)
$(1,531,923)
$(203,516)NON-CONTROLLING
INTERESTS
$(23,707)
$(70,922)
$(71,076)
$(108,271)TOTAL COMPREHENSIVE LOSS
$(139,751)
$(1,283,797)
$(1,602,999)
$(309,297)





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







4
















DYNARESOURCE,
INC.CONSOLIDATED
STATEMENTS OF STOCKHOLDERS'
EQUITYFOR THE PERIODS
ENDED JUNE 30 2019 AND 2019Preferred A
Preferred-C
Common
Preferred

Preferred

Paid In

Treasury

Treasury

Other Comp

Accumulated

Non ControllingShares

Amount
Shares

Amount
Shares

Amount
Rights

Amount

Capital

Shares

Amount

Income

Deficit

Interests

TotalsTHREE MONTHS ENDED JUNE 30,
2018(Restated)Balance, March 31,
2018
-
$
1
-
$
-
17,722,825
$
177,228
40,000
$
40,000
$
56,622,159

778,980
$
(2,223,891)
$
459,512
$
(50,754,808)
$
(5,460,539)
$
(1,140,328)Other
Comprehensive Income



















912,893



150,229

1,063,122Net
Income (Loss)





















(2,677,808)

330,879

(2,346,929)Balance, June 30,
2018
-
$
1
-
$
-
17,722,825
$
177,228
40,000
$
40,000
$
56,622,159

778,980
$
(2,223,891)
$
1,372,405
$
(53,432,616)
$
(4,979,421)
$
(2,424,135)THREE MONTHS ENDED JUNE 30,
2019Balance, March 31,
2019
-
$
1
-
$
-
17,722,825
$
177,228
40,000
$
40,000
$
56,622,159

778,980
$
(2,223,891)
$
1,101,050
$
(54,423,990)
$
(5,658,897)
$
(4,366,340)Other
Comprehensive Loss



















(113,891)



(19,747)

(133,638)Net
Income (Loss)





















(2,153)

(3,960)

(6,113)Balance, June 30,
2019
-
$
1
-
$
-
17,722,825
$
177,228
40,000
$
40,000
$
56,622,159

778,980
$
(2,223,891)
$
987,159
$
(54,426,143)
$
(5,682,604)
$
(4,506,091)SIX
MONTHS ENDED JUNE 30, 2018(Restated)Balance January 1,
2018
-
$
1
-
$
-
17,722,825
$
177,228
40,000
$
40,000
$
56,622,159
$
778,980
$
(2,223,891)
$
1,265,853
$
(52,571,162)
$
(5,425,026)
$
(2,114,838)Other
Comprehensive Income



















106,552



169,912

276,464Net
Income (Loss)





















(861,454)

275,693

(585,761)Balance, June 30,
2018
-
$
1
-
$
-
17,722,825
$
177,228
40,000
$
40,000
$
56,622,159

778,980
$
(2,223,891)
$
1,372,405
$
(53,432,616)
$
(4,979,421)
$
(2,424,135)SIX
MONTHS ENDED JUNE 30, 2019Balance January 1,
2019
-
$
1
-
$
-
17,722,825
$
177,228
40,000
$
40,000
$
56,622,159

778,980
$
(2,223,891)
$
1,247,198
$
(53,154,259)
$
(5,611,528)
$
(2,903,092)Other
Comprehensive Loss



















(260,039)



(40,226)

(300,265)Net
Income (Loss)





















(1,271,884)

(30,850)

(1,302,734)Balance, June 30,
2019
-
$
1
-
$
-
17,722,825
$
177,228
40,000
$
40,000
$
56,622,159

778,980
$
(2,223,891)
$
987,159
$
(54,426,143)
$
(5,682,604)
$
(4,506,091)The accompanying notes are an integral part of
these consolidated financial statements.















5











DYNARESOURCE, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


SIX MONTHS ENDED JUNE 30, 2019 AND
2018


(Unaudited)





2019
2018
(Restated)CASH FLOWS FROM OPERATING
ACTIVITIESNet Income (Loss)
$(1,302,734)
$(585,761)Adjustments to reconcile net income (loss) to
cashprovided by
(used in) Operating activitiesGain on Derivative
Liabilities
(646,085)
(2,096,440)Depreciation and
Amortization
1,630
2,618Change in Operating Assets and
Liabilities:Accounts
Receivable
744,200
(358,901)Inventory
(288,181)
(251,329)Foreign Tax
Receivable
(248,609)
262,353Leased
Assets
(844,246)
—Other
Assets
(82,026)
(359,030)Accounts
Payable
1,451,407
1,166,018Accrued
Liabilities
(372,390)
332,790Customer
Advances
(750,000)
625,000Lease
Liabilities
860,552
—CASH FLOWS  (USED IN) OPERATING
ACTIVITIES
(1,476,482)
(1,262,682)CASH FLOWS FROM FINANCING
ACTIVITIESPayment on Convertible Notes
Payable
-
(112,500)Payment on Long Term
Debt
(362,818)
(96,931)CASH FLOWS (USED IN) BY FINANCING
ACTIVITIES
(362,818)
(209,431)Effect of Foreign
Exchange
(262,756)
273,081NET DECREASE IN CASH
(2,102,056)
(1,199,032)CASH AT BEGINNING OF
PERIOD
2,685,576
3,528,735CASH AT END OF PERIOD
$583,520
$2,329,703SUPPLEMENTAL DISCLOSURESCash Paid for Interest
$254,725
$122,126Cash Paid for Income Taxes
$—
$—NON-CASH TRANSACTIONSConversion of Accounts Payable to Long Term
Debt
$263,161
$1,807,646





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


6











DYNARESOURCE, INC.


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS


June 30, 2019





NOTE 1
– NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING
POLICIES





Nature of Activities, History and
Organization





DynaResource, Inc.
(The “Company”, “DynaResource”, or
“DynaUSA”) was organized September 28, 1937, as a
California corporation under the name of West Coast Mines,
Inc.  In 1998, the Company re-domiciled to Delaware and
changed its name to DynaResource, Inc.  The Company is in
the business of acquiring, investing in, and developing precious
metal properties, and the production of precious
metals.





In 2000, the
Company formed a wholly owned subsidiary, DynaResource de
México S.A. de C.V., chartered in México
(“DynaMéxico”).  This Company was formed
to acquire, invest in and develop resource properties in
México. DynaMéxico owns a portfolio of mining
concessions that currently includes its interests in the San
José de 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





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 operations or consolidated statements of cash flows
and had no material impact on the Company’s consolidated
balance sheets.





Significant Accounting
Policies





The Company’s
management selects accounting principles generally accepted in the
United States of America and adopts methods for their
application.  The application of accounting principles
requires the estimating, matching and timing of 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.





7











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.





Restatement





The Company has
restated its consolidated financial statements for the year ended
December 31, 2018, including the six months ended June 30, 2018 to
correct the manner in which the Company recorded certain
expenditures. The expenditures which were capitalized as Mining
Equipment and Fixtures should have been expensed as mine expansion
costs under Generally Accepted Accounting Principles (GAAP) in the
United States. The Company made the appropriate adjustment to the
opening January 1, 2018 equity balance to reflect the cumulative
effect of prior periods to remove certain expenditures for mining
site improvements and equipment that were previously capitalized as
fixed assets.





The errors which
were included in the March 31, 2019 Form 10-Q Quarterly Report were
incurred throughout the three months ended March 31, 2019, 2018
fiscal year and prior periods and were subsequently identified in
the third quarter of the 2019 fiscal year.


Please refer to
Note 17 – Restatements for a complete summary of the
restatement adjustments and an “As Reported” and
“As Restated” comparison of the affected balances
within the financial statements.





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.





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
20% 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 method.





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 June 30, 2019, and December 31,
2018, 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 June 30, 2019 and December 31, 2018 are $1,094,173 and $845,564
respectively.





Inventory





Inventories are
carried at the lower of cost or net realizable value and consist of
mined tonnage, and gravity and flotation concentrates, and gravity
tailings or flotation feed material. The inventories are $1,876,959
and $1,588,778 as of June 30, 2019 and December 31, 2018,
respectively.







8











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 (b) 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 June 30,
2019, 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.





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 June 30, 2019, the mineral interests have been in the pilot
production stage and therefore, no amortization has been expensed.
Mining properties consist of 33 mining concessions covering
approximately 9,920 hectares at the San Jose de 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.









9











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 June 30, 2019 and December 31, 2018, no indications of
impairment existed.





Asset Retirement
Obligation:   As the Company is not
obligated to remediate the mining properties, no Asset Retirement
Obligation (“ARO”) has been established. Changes in
regulations or laws, any instances of non-compliance with laws or
regulations that result in fines, or any unforeseen environmental
contamination could result in a material impact to the amounts
charged to operations for reclamation and remediation. Significant
judgments and estimates are made when estimating the fair value of
AROs. Expected cash flows relating to AROs could occur over long
periods of time and the assessment of the extent of environmental
remediation work is highly subjective. Considering all of these
factors that go into the determination of an ARO, the fair value of
the AROs can materially change over time.





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.










10











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
(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 June 30, 2019 and
December 31, 2018 (Mexican Pesos per one U.S. dollar):





June 30, 2019
Dec 31, 2018Exchange Rate at Period End
Pesos
19.23
19.63





Relevant exchange
rates used in the preparation of the income statement portion of
financial statements for the subsidiaries are as follows for the
periods ended June 30, 2019 and June 30, 2018 (Mexican Pesos per
one U.S. dollar):


June 30, 2019
June 30, 2018Weighted Average Exchange Rate for the Six
Months Ended
Pesos
19.16
19.06





The Company
recorded currency transaction gains (losses) of $293,700 and
$(106,232) for the six months ended June 30, 2019 and 2018,
respectively.





Income Taxes





The Company
accounts for income taxes under ASC 740 “Income Taxes” using the
liability method, recognizing certain temporary differences between
the financial reporting basis of liabilities and assets and the
related income tax basis for such liabilities and assets. This
method generates either a net deferred income tax liability or
asset for the Company, as measured by the statutory tax rates in
effect. The Company derives the deferred income tax charge or
benefit by recording the change in either the net deferred income
tax liability or asset balance for the year. The Company records a
valuation allowance against any portion of those deferred income
tax assets when it believes, based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred income tax asset will not be realized.





Income from the
Company’s subsidiaries in México are taxed at applicable
Mexican tax law.





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.







11











Use of Estimates





In order to prepare
financial statement 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 June 30,
2019 and June 30, 2018, the Company’s components of
comprehensive income were foreign currency translation
adjustments.





Revenue Recognition





The Company adopted
ASC 606 “Revenue from
contracts with customers” on January 1, 2018. The
Company generates revenue by selling gold and silver produce from
its mining operations. The Company recognizes revenue for gold and
silver concentrate production, net of treatment and refining costs,
when it satisfies the performance obligation of transferring
control of the concentrate to the customer. This is generally when
the material is delivered to the customer facility for treatment
and processing as the customer has the ability to direct the use of
and obtain substantially all the remaining benefits from the
material and the customer has the risk of loss.





The amount of
revenue recognized is initially recorded on a provisional basis
based on the contract price and the estimated metal quantities
based on assay data. The revenue is adjusted upon final settlement
of the sale. The chief risk associated with the recognition of
sales on a provisional basis is the fluctuations between the
estimated quantities of precious metals base on the initial assay
and the actual recovery from treatment and processing.





Prior to the
adoption of this standard the Company recognized revenue in
accordance with ASC 605-10, "Revenue Recognition in Financial
Statements".   Revenue was 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” was calculated an adjustment was recorded when
any remaining balance was paid.


The change in
accounting principle from ASC 605 to ASC 606 did not impact the
amount of revenue recognized in the Company’s financial
statements.





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.







12













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
June 30, 2019, of which 357,162 are exercisable at $2.50 and
2,166,527 are exercisable at $2.41,
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 June 30, 2019 which, upon conversion at a
valuation of $2.50 per share, would result in the issuance of
335,250 shares of stock.







Three Month
Ended
June 30, 2019
Three Month
Ended
June 30, 2018
(Restated)
Six Month
Ended
June 30, 2019
Six Month
Ended
June 30, 2018
(Restated)Net
loss attributable to common shareholders
$(45,483)
$(2,169,752)
$(1,358,544)
$(396,728)Weighted average number of
common shares outstanding, Basic
17,722,825
17,722,825
17,722,825
17,722,825Diluted weighted average
number of common shares outstanding,
17,722,825
17,722,825
17,722,825
17,722,825Basic
earnings (loss) per share
$0.00
$(0.12)
$(0.08)
$(0.02)Diluted earnings (loss) per
share
$0.00
$(0.12)
$(0.08)
$(0.02)





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





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. As such, The Company is required to adopt these
provisions as of the fiscal year beginning on January 1, 2019. The
Company elected the available practical expedients and adopted ASC
842 effective January 1, 2019, prospectively. The adoption of this
standard resulted in the recognition of right-to-use assets and
lease liabilities of $861,668 and $873,188 with no material impact
on the results of operations and cash flows. See Note 10 for
additional information regarding our leases.







13











NOTE 2
– INVENTORIES





The Company commenced underground test mining and
pilot milling activities (“pilot production”) in the
2nd 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 net realizable value and
consist of mined tonnage, gravity-flotation concentrates, and
gravity tailings (or, flotation feed material). Inventory balances
of June 30, 2019 and December 31, 2018, respectively, were as
follows:





2019
2018Mined Tonnage
Stockpiled
$1,753,007
$1,512,410Mill Tonnage
Stockpiled
65,835
76,368Finished Material
58,117
—Total
Inventories
$1,876,959
$1,588,778





NOTE 3
– PROPERTY





Property consists
of the following at June 30, 2019 and December 31,
2018:





2019
2018 (Restated)Leasehold
improvements
$9,340
$9,340Office equipment
31,012
31,012Office furniture and
fixtures
78,802
78,802Sub-total
119,154
119,154Less: Accumulated
depreciation
(108,302)
(106,672)Total
Property
$10,852
$12,482





The Company
purchased equipment of $0 and $0 in the six months ended June 30,
2019 and 2018, respectively.





Depreciation has
been provided over each asset’s estimated useful
life.  Depreciation expense was $1,630 and $2,618 for the
six months ended June 30, 2019 and 2018, respectively.





NOTE 4
– MINING CONCESSIONS





Mining properties consist of the following at
June 30, 2019 and December 31, 2018:
2019
2018San Jose de Gracia
(“SJG”):Total Mining
Concessions
$4,132,678
$4,132,678





Depletion expense
was $0 and $0 for the six months ended June 30, 2019 and 2018
respectively.





NOTE 5
– INVESTMENT IN AFFILIATE/RECEIVABLES FROM AFFILIATE/OTHER
ASSETS





Through December
31, 2016, 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”). As of June 30, 2019 and December
31, 2018 the loan was $70,000.







14













NOTE 6
– CONVERTIBLE PROMISSORY NOTES





Notes Payable – Series
I





In April and May
2013, the Company entered into note agreements with shareholders in
the principal amount of $1,495,000, of which $340,000 was then
converted to preferred shares within the same year, netting to
proceeds of $1,155,000 (the “Series I Notes”). The
Series I Notes bear simple interest at twelve and a half percent
(12.5%), accrued for twelve months, and with the accrued
interest to be added to the principal, and then interest will
be paid by the Company, quarterly in arrears. The holders of
the Series I Notes (in aggregate) are also entitled to receive
ten percent (10%) of the net profits received by the Company, on
the first fifty thousand tons processed through the mill facilities
at San Jose de 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 Company paid $5,625 to one Series I debt holder
during 2017. The remaining eight of the Series I notes
totaling $759,375 have been subsequently extended to December 30,
2019.





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, 2020.





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 2018 the Company paid
off one note for $112,500. The remaining two Series II Notes
totaling $78,750 have been extended to December 30,
2019.





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,
2020.





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 $842,904) 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.





15













At June 30, 2019
and December 31, 2018, 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
$78,750, for a total Note balance of $838,125. The accrued interest
for these notes was $28,828 and $25,150 as of June 30, 2019 and
December 31, 2018, respectively.





NOTE 7
– INCOME TAXES





The Company has
adopted ASC 740-10, “Income
Taxes”, which requires the use of the liability method
in the computation of income tax expense and the current and
deferred income taxes payable (deferred tax liability) or benefit
(deferred tax asset). Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to
be realized. The cumulative tax effect at the expected tax rate of
21% (blended for U.S. and México) of significant items
comprising the Company’s net deferred tax amounts as of June
30, 2019 and December 31, 2018 are as follows:





Deferred Tax Asset
Related to:





2019
2018Prior Year
$13,343,134
$12,549,746Tax Benefit for Current
Year
487,204
793,338Total Deferred Tax
Asset
13,830,338
13,343,134Less:
Valuation Allowance
(13,830,338)
(13,343,134)Net Deferred Tax
Asset
$—
$—





The income tax
provision for the Company for six ended months of June 30, 2019 and
2018 differs from those computed using the blended statutory tax
rate of 21% due to the following differences:





2019
2018Tax Expense (Benefit) at
Statutory Rates
$(325,683)
$(146,440)Other Permanent
Differences
(161,521)
(524,110)Change in Valuation
Allowance
487,204
670,550Provision for (Benefit
from) Income Taxes, Net
$—
$—





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 $54,900,000 at June 30, 2019 and will expire in the
years 2027 through 2033.





The realization of
deferred tax benefits is contingent upon future earnings and is
fully reserved at June 30, 2019.





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 periods ended June 30, 2019 and 2018,
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:







16











United
States:
2015 to
2018México
2014 to
2018





The Company does
not have any other material items of temporary or permanent
differences, which give rise to deferred tax assets or
liabilities.





NOTE 8
– STOCKHOLDERS’ EQUITY





Authorized
Capital. The total number of shares of all classes of
capital stock which the corporation shall have the authority to
issue is 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 $.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 June 30, 2019 and
December 31, 2018 there were 1,000 shares 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. The
Dividend is calculated at 4.0% of $4,333,053 payable annually on
June 30. The Company paid no dividends in 2018 or
2019.


Financing Agreement with Golden Post Rail, LLC,
a Texas Limited Liability Company





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.





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.







17











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 $2,419,359 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. The Derivative Liability is
recalculated and adjusted quarterly. At December 31, 2018 the total
Derivative Liability was $974,683 which included $402,909 for the
Series C Preferred Shares, and $571,774 in connection with the
Golden Post Warrants. At June 30, 2019 the total Derivative
Liability was $328,598 which included $136,845 for the Series C
Preferred Shares, and $191,753 in connection with the Golden Post
Warrants. The Deemed Dividend for the six months ending June 30,
2019 and June 30, 2018 was $86,660, and $86,660
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
CCarrying Value, December 31,
2018
4,333,053Issuances at Fair Value, net of issuance
costs
—Bifurcation of Derivative
Liability
—Relative Fair Value of Warrants –
Preferred Stock Discount
—Accretion of Preferred Stock to Redemption
Value
—Carrying Value, June 30,
2019
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 June 30,
2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, there
were 17,722,825 shares outstanding, respectively. No dividends
were paid for the periods ended June 30, 2019 and December 31,
2018.





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 June
30, 2019 and December 31, 2018, respectively.





Stock Issuances





2018 Activity
– None





2019 Activity
– None.







18











Treasury Stock


At June 30, 2019
and December 31, 2018, there were 778,980 treasury shares
outstanding.





Warrants


The Company had
2,523,689 warrants outstanding at June 30, 2019 and December 31,
2018. There were no warrants issued or exercised in the periods
ending June 30, 2019 and December 31, 2018.





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
ValueBalance at
December 31, 2017
2,523,689
$2.45
2.51
$—Granted
—
$—

$—Exercised
—
$—

$—Forfeited
—
$—

$—Balance at
December 31, 2018
2,523,689
$2.45
1.51
$—Granted
—
$—

$—Exercised
—
$—

$—Forfeited
—
$—

$—Balance at June 30,
2019
2,523,689
$2.45
1.01
$—Exercisable at
June 30, 2019
2,523,689
$2.45
1.01
$—





NOTE 9
– RELATED PARTY TRANSACTIONS





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.





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.









19











Dynacap Group Ltd.





The Company paid
$68,875 and $46,250 to Dynacap Group, Ltd. (“Dynacap”,
an entity controlled by the CEO of the Company) for consulting and
other fees during the six months ended June 30, 2019 and 2018,
respectively.





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
10 – COMMITMENTS AND CONTINGENCIES







Concession Taxes





The Company is
required to pay taxes in México in order to maintain mining
concessions owned by DynaMéxico.  Additionally, the
Company is required to incur a minimum amount of expenditures each
year for all concessions held.  The minimum expenditures
are calculated based upon the land area, as well as the age of the
concessions.  Amounts spent in excess of the minimum may
be carried forward indefinitely over the life of the concessions,
and are adjusted annually for inflation.  Based on
management's recent business plans and Company activities at San
Jose de Gracia, and considering the Company’s current and
forward plans, and considering expenditures on mining concessions
since 2002-2016, the Company does not anticipate that
DynaMéxico will have any difficulties meeting the minimum
annual expenditures for the concessions ($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 2016 minimum, adjusted for annual inflation of
4%).





Leases





In addition to the
surface rights held by DynaMéxico pursuant to the Mining Act of México and its
Regulations (Ley Minera y su
Reglamento), DynaMineras maintains access and surface rights
to the SJG Project pursuant to the 20-year Land Lease Agreement.
The 20 Year Land Lease
Agreement with the Santa Maria Ejido Community surrounding San Jose
de 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 on
January 1st each year by
DynaMineras of $1,359,443 Pesos (approx. $72,000 USD), commencing
in 2014. The Land Lease Agreement provides DynaMineras with
surface access to the core resource areas of SJG (4,399 hectares),
and allows for all permitted mining and exploration activities from
the owners of the surface rights (Santa Maria Ejido
community).





The Company leases
office space for its corporate headquarters in Irving, Texas. In
September 2017, the Company entered into a sixty-six month
extension of the lease through 2023. As part of the agreement the
Company received six months free rent as a finish out allowance.
The Company capitalized the leasehold improvement costs and
amortized them over the rent abatement period as rent expense. The
Company makes tiered lease payments on the 1st of each
month.





Effective January
1, 2019, the Company adopted ASC 842, which requires recognition of
a right-of-use asset and lease liability for all leases at the
commencement date based on the present value of lease payments over
the lease term. Additional qualitative and quantitative disclosures
regarding the Company's leasing arrangements are also required. The
Company adopted ASC 842 prospectively and elected the package of
transition practical expedients that does not require reassessment
of (1) whether any existing or expired contracts are or contain
leases, (2) lease classification and (3) initial direct costs. In
addition, the Company has elected other available practical
expedients to not separate lease and non-lease components, which
consist principally of common area maintenance charges, for all
classes of underlying assets and to exclude leases with an initial
term of 12 months or less.







20











The Company
determines if a contract is or contains a lease at inception. As of
June 30, 2019 the Company has two operating leases - a six and one
half year lease for office space with a remaining term of
forty-three months and a twenty year ground lease in association
with it Mexico mining operations with a remaining term of fourteen
years. Variable lease costs consist primarily of variable common
area maintenance, storage parking and utilities. The
Company’s leases do not have any residual value guarantees or
restrictive covenants.





As the implicit
rate is not readily determinable for most of the Company’s
lease agreements, the Company uses an estimated incremental
borrowing rate to determine the initial present value of lease
payments. These discount rates for leases are calculated using the
Company's interest rate of promissory notes.





The Company’s
components of lease cost are as follows:







Six Months Ended
June 30, 2019Operating Lease – Office
Lease
$40,936Operating Lease – Ground
Lease
41,792Short Term Lease Costs
2,960Variable Lease Costs
—TOTAL
$85,688





Weighted average
remaining lease term and weighted average discount rate are as
follows:





Weighted Average
Remaining Lease Term (Years) – Operating Leases
11.00Weighted Average
Discount Rate – Operating Leases
12.50%





Future minimum
lease obligations are as follow for the twelve months ending June
30:





YEAR2020
$166,6602021
170,9732022
175,3622023
164,9792024
94,074Thereafter
984,381TOTAL
$1,756,429







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.







21











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 Part
II, Item 1. Legal Proceedings).





NOTE
11 – DERIVATIVE LIABILITIES





Preferred Series C
Stock





As discussed in
Note 8, the Company analyzed the embedded conversion features of
the Series C Preferred Stock and determined that the stock
qualified as a derivative liability and is required to be
bifurcated and accounted for as such since the host and the
embedded instrument are not clearly and closely related. The
Company performed a valuation of the conversion feature. In
performing the valuation, the Company applied the guidance in ASC
820, “Fair Value
Measurements”, to nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a nonrecurring
basis. ASC 820 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). To measure fair value, the Company incorporates
assumptions that market participants would use in pricing the asset
or liability, and utilizes market data to the maximum extent
possible.





In instances where
the determination of the fair value measurement is based on inputs
from different levels of the fair value hierarchy, the level in the
fair value hierarchy within which the entire fair value measurement
falls is based on the lowest level input that is significant to the
fair value measurement in its entirety. The Company’s
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and considers
factors specific to the asset or liability.





The Company
considered the inputs in this valuation to be level 3 in the fair
value hierarchy under ASC 820 and used an equity simulation model
to determine the value of conversion feature of the Series C
Preferred Stock based on the assumptions below for the six months
ended June 30, 2019 and year ended December 31, 2018:





June 30, 2019
December 31,
2018Annual volatility
rate
85%
86%Risk free
rate
1.78%
2.48%Holding
Period
5 years
5 yearsFair Value of common
stock
$0.95
$1.13





The below table
represents the change in the fair value of the derivative liability
(Preferred Series C Stock) during the six months ending June 30,
2019 and the year ending December 31, 2018:





Period Ended
June 30,
2019
December 31,
2018Fair value of derivative (Preferred Series C
Stock), beginning of year
$402,909
$1,531,789Change in fair value of derivative (Preferred
Series C Stock)
(266,064)
(1,128,880)Fair value of derivative (Preferred Series C
Stock), end of period
$136,845
$402,909





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.







22











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 for the periods ended June 30, 2019 and
December 31, 2018:





June 30, 2019
December 31, 2018Annual volatility
rate
85%
86%Risk free
rate
1.78%
2.48%Holding
Period
5 years
5 yearsFair Value of common
stock
$0.95
$1.20





The below table
represents the change in the fair value of the derivative liability
(Preferred Series C Warrants) for the quarterly period ending June
30, 2019 and the year ending December 31, 2018.





Period Ended
June 30, 2019
December 31, 2018Fair value of
derivative liability (Warrants), beginning of year
$571,774
$1,649,719Change in fair value
of derivative liability (Warrants)
(380,021)
(1,077,945)Fair value of
derivative liability (Warrants), end of period
$191,753
571,774


Total
(Gain) Loss on Derivative Liability (Preferred Series C Stock and
Warrant)





The below table
represents the total (gain) or loss, of the derivative liability
(Preferred Series C Stock and Warrants) for the quarterly period
ending June 30, 2019 and the year ending December 31,
2018.





Period Ended
June 30, 2019
December 31, 2018Fair value of
derivative liability (Preferred C Stock and Warrants), beginning of
year
$974,683
$3,181,508Change in fair value
of derivative liability (Stock and Warrants)
(646,085)
(2,206,825)Fair value of
derivative liability (Stock and Warrants), end of
period
$328,598
974,683





NOTE
12 – NON-CONTROLLING INTEREST





The Company’s
Non-Controlling Interest recorded in the consolidated financial
statements relates to an interest in DynaResource de México,
S.A. de C.V. of 50% through May 13, 2013, and 20% thereafter.
Changes in Non-Controlling Interest for the periods ended June 30,
2019 and December 31, 2018, respectively were as
follows:





Six Months Ended
June 30, 2019
Year Ended
December 31, 2018Beginning balance
$(5,611,528)
$(5,425,026)Operating
loss
(30,850)
(383,630)Share
of Other Comprehensive Loss
(40,226)
197,128Ending balance
$(5,682,604)
$(5,611,528)





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





23











NOTE
13 – FAIR VALUE OF FINANCIAL
INSTRUMENTS





The ASC guidance
for fair value measurements and disclosure establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements).  The three
levels of the fair value hierarchy are described
below:





Level 1 Inputs – Quoted prices
for identical instruments in active markets.


Level 2 Inputs – Quoted prices
for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active;
and model-derived valuations whose inputs are observable or whose
significant value drivers are observable.


Level 3 Inputs – Instruments with
primarily unobservable value drivers.





As of June 30, 2019
and December 31, 2018, 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 June 30
2019 Using:

Quoted
Prices in
Active Markets
For Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)Assets:None
$—
$—
$—
$—Totals
$—
$—
$—
$—Liabilities:Derivative
Liabilities
$328,598
$—
$—
$328,598Totals
$328,598
$—
$—
$328,598Fair
Value Measurement at December 31, 2018 Using:Assets:None
$—
$—
$—
$—Totals
$—
$—
$—
$—Liabilities:Derivative
Liabilities
$974,683
$—
$—
$974,683Totals
$974,683
$—
$—
$974,683





NOTE
14 – REVENUE CONCENTRATION





For the six months
ended June 30, 2019 one customer accounted for 100% of revenue and
for the six months ended June 30, 2018, one customer accounted for
100% of revenue.





At June 30, 2019,
one customer accounted for 100% of accounts
receivable.  At December 31, 2018, one customer accounted
for 100% of accounts receivable.





NOTE
15 – NOTES PAYABLE





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.







24











In February 2018
the Company entered into a financing agreement for unpaid mining
concessions taxes for the year ended December 31, 2016 in the
amount of $552,990. The Company paid an initial payment of $110,598
and financed the balance over 36 months at 18%.





In June 2018 the Company entered into financing
agreements for the unpaid mining concession taxes for the year
ended December 31, 2017 and the period ending June 30, 2018 in the
amount of $1,739,392. The Company paid an initial 20% payment of
$347,826 and financed the balance over 36 months at
21.84%





In February 2019
the Company entered into a financing agreement for unpaid mining
concessions taxes for the period ended December 31, 2018 in the
amount of $325,559. The Company paid an initial payment of $65,112
and financed the balance over 36 months at
21.84%.





The following is a
summary of the transaction during the periods ended December 31,
2018 and June 30, 2019:





Balance at December 31,
2017
367,311Exchange Rate Adjustment
1,861Property Holding Taxes January 1, 2016 –
June 30, 2018
2,292,122Initial payment of 20%
(458,423)2018 principal payments
(399,636)Balance at December 31,
2018
$1,803,235Exchange Rate Adjustment
37,509Property Holding Taxes July 1, 2018 –
December 31, 2018
328,951Initial payment of 20%
(65,790)2019 principal payments
(362,818)Balance at June 30, 2019
$1,741,087








2020
$868,4322021
798,6202022
74,035Total
$1,741,087





note
16 – subsequEnt events





The Company has evaluated events from June 30, 2019, through the
date whereupon the financial statements were issued, and has
determined the below described events subsequent to the end of the
period.








Legal Rulings





Rejection of Goldgroup Resources Inc. request to the Supreme Court
of México





On July 3, 2019 an Official Ruling from The Supreme Court of
México was issued to Reject the
Request of Goldgroup Resources Inc. (the “México Supreme
Court Rejection to Goldgroup”). The Justices of the First Chamber of the Supreme
Court of Justice of México issued a Rejection Notice to Goldgroup Resources
Inc., “due to the lack of legitimacy presented by
Goldgroup”; and in issuing the Rejection Notice to Goldgroup,
the Supreme court thereby reverted the Amparo Appeal back to
the México Circuit Court
where the Official and Final Ruling from the México
Circuit Court is expected to be
issued.





DynaResource Entities’ Filings in United States District
Court





On
July 12, 2019 the DynaResource Entities Filed the Motion for Leave
to Supplement the Record which included the following Ruling Issued
in México:





On July 3, 2019, The Official
Ruling from The Supreme Court of México was Issued to Reject the
Request of Goldgroup Resources Inc. (the “México Supreme
Court Rejection to Goldgroup”). The Justices of the First Chamber of the Supreme
Court of Justice of México issued a Rejection Notice to Goldgroup Resources
Inc., “due to the lack of legitimacy presented by
Goldgroup”; and in issuing the Rejection Notice to Goldgroup,
the Supreme court thereby reverted the Amparo Appeal back to
the México Circuit Court
where the Official and Final Ruling from the México
Circuit Court is expected to be
issued.





Advances from Purchaser





September 17, 2019 $ 1M USD Advance from Purchaser





The Purchaser of the Company’s precious metals products
produced from San Jose de Gracia submitted the next advance to
Mineras de DynaResource S.A. de C.V. in the amount of $ 1 M
USD.







25











Rejection of Goldgroup Resources Inc. request
to the Supreme Court of México





On July 3, 2019 an Official Ruling from The
Supreme Court of México was issued to Reject the Request of
Goldgroup Resources Inc. (the “México Supreme Court
Rejection to Goldgroup”). The Justices of the First
Chamber of the Supreme Court of Justice of México issued a
Rejection Notice to Goldgroup Resources Inc., “due to the
lack of legitimacy presented by Goldgroup”; and in issuing
the Rejection Notice to Goldgroup, the Supreme court thereby
reverted the Amparo Appeal back to the México Circuit Court
where the Official and Final Ruling from the México Circuit
Court is expected to be issued.





Advances from Purchaser





September 17, 2019 $1M USD Advance from
Purchaser





The Purchaser of
the Company’s precious metals products produced from San Jose
de Gracia submitted the next advance to Mineras de DynaResource
S.A. de C.V. in the amount of $1M USD.





NOTE 17 – RESTATEMENT





The Company has identified certain
expenditures amounting to $142,048 in 2019, $1,039,391 in 2018 and
$1,829,895 in prior periods which were improperly capitalized as
Mining Equipment. Because the Company has not established proven
and probable reserves under Generally Accepted Accounting
Principles (GAAP) in the United States all costs associated with
the exploration and development of mining properties should be
expensed including those with useful life exceeding one year. The
Company has adjusted the Consolidated Statements of income and
Comprehensive Income for the three and six months ended June 30,
2018 and the balance sheets as of December 31, 2018 and the opening
Balance Sheet as of January 1, 2018. The following presents the
adjustments in detail:





Previously

RestatedReported

BalanceJan 1, 2018
Adjustments
Jan 1, 2018EQUITY (DEFICIT)Accumulated
Deficit
$(50,898,357)
$(1,672,805)
$(52,571,162)Total DynaResource Inc. Stockholders'
Equity
4,982,993
(1,672,805)
3,310,188Non-Controlling Interest
(5,416,168)
(8,858)
(5,425,026)TOTAL EQUITY (DEFICIT)
(433,175)
(1,681,663)
(2,114,838)





Previously

RestatedReported

BalanceDec 31, 2018
Adjustments
Dec 31, 2018BALANCE SHEET:Mining Equipment and Fixtures (Net of
Accumulated  Depreciation)
$2,449,354
$(2,436,872)
$12,482Total Assets
$13,316,019
$(2,436,872)
$10,879,147Accumulated Deficit
$(50,723,786)
$(2,430,473)
$(53,154,259)Total DynaResource Inc. Stockholders'
Equity
5,138,909
(2,430,473)
2,708,436Non-Controlling Interest
(5,605,129)
(6,399)
(5,611,528)TOTAL EQUITY (DEFICIT)
(466,220)
(2,436,872)
(2,903,092)TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
$13,316,019
$(2,436,872)
$10,879,147





Previously

RestatedReported

Balance3 Mths
Ended

3 Mths
EndedJune 30, 2018
Adjustments
June 30, 2018INCOME
STATEMENT:COSTS AND EXPENSES OF MINING
OPERATIONS:Mine
Expansion Costs
$302,731
$368,234
$670,965Depreciation and
Amortization
65,109
(63,800)
1,309Total Operating
Expenses
4,693,258
304,434
4,997,692NET
OPERATING INCOME (LOSS)
(864,808)
(304,434)
(1,169,242)NET
INCOME (LOSS)  BEFORE TAXES
(2,042,495)
(304,434)
(2,346,929)NET
INCOME (LOSS)
(2,042,495)
(304,434)
(2,346,929)ATTRIBUTABLE TO
NON-CONTROLLING INTEREST
219,293
1,214
220,507NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
$(1,866,532)
$(303,040)
$(2,169,572)Basic Earnings
(Loss)  Per Common Share
$(0.11)
$(0.01)
$(0.12)Diluted Earnings (Loss) Per
Common Share
$(0.11)
$(0.01)
$(0.12)





26











Previously

RestatedReported

Balance6 Mths
Ended

6 Mths
EndedJune 30, 2018
Adjustments
June 30, 2018INCOME STATEMENT:COSTS AND EXPENSES OF MINING
OPERATIONS:Mine Expansion Costs
$462,631
$587,534
$1,050,165Depreciation and
Amortization
129,921
(127,303)
2,618Total Operating Expenses
8,027,884
460,231
8,488,115NET OPERATING INCOME
(LOSS)
(1,681,668)
(460,231)
(2,141,899)NET INCOME (LOSS)  BEFORE
TAXES
(125,530)
(460,231)
(585,761)NET INCOME (LOSS)
(125,530)
(460,231)
(585,761)ATTRIBUTABLE TO NON-CONTROLLING
INTEREST
276,938
(1,245)
275,693NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS
$64,748
$(461,476)
$(396,728)Basic Earnings (Loss)  Per Common
Share
$0.00
$(0.02)
$(0.02)Diluted Earnings (Loss) Per Common
Share
$0.00
$(0.02)
$(0.02)





In evaluating whether the Company’s
previously issued consolidated financial statements were materially
misstated, the Company considered the guidance in ASC Topic 250,
Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1,
Assessing Materiality, and ASC Topic 250-10-S99- 2, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements
in Current Year Financial Statements.








STATEMENT
OF CASH FLOW:Previously
Reported
June 30, 2018
Adjustments
Restated
Balance
June 30, 2018CASH
FLOWS FROM OPERATING ACTIVITES:Net (Loss)
$(125,530)
$(460,231)
$(585,761)Adjustments to reconcile net loss to cash provided by operating
activitiesChange in Derivatives
(2,096,440)

(2,096,440)Depreciation and Amortization
129,921
(127,303)
2,618Change in Operating Assets and LiabilitiesAccounts Receivable
(358,901)

(358,901)Inventories
(251,329)

(251,329)Foreign Tax Receivable
262,353

262,353Other Assets
(359,030)

(359,030)Customer Advances
625,000

625,000Accounts Payable
1,166,018

1,166,018Accrued Liabilities
332,790

332,790CASH FLOWS Provided BY OPERATING ACTIVITIES
(675,148)
(587,534)
(1,262,682)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of Equipment
(587,534)
587,534
-CASH FLOWS (USED IN) INVESTING ACTIVITIES $
$(587,534)
$587,534
-





27











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





FORWARD-LOOKING STATEMENTS





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





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





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





The Company is an
“OTC Reporting Issuer” as that term is defined in BC
Multilateral Instrument 51-105, Issuers Quoted in the U.S. Over-the-Counter
Markets, promulgated by the British Columbia Securities
Commission.





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.





28











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.





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 operator 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 operator of the San
José de Gracia Project, under contract with DynaMéxico,
and we own 100% of DynaResource Operaciones de San Jose de Gracia,
S.A. de C.V., (“DynaOperaciones”), a company which
manages the personnel registered to work at the San Jose de Gracia
Project.





San Jose de Gracia -
History





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





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





29













Drilling – Exploration Programs (1997
– 2000)





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





Structure of Company /
Operations





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





Exclusive Operating Entity at San Jose de
Gracia





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





DynaMéxico General Powers of
Attorney





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





Company Ownership and Description of
Subsidiaries





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





DynaResource de México S.A. de
C.V.:

80% Owned by
DynaResource, Inc.;100% owner of the San
Jose de Garcia 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”) withDynaMéxico (See EAA
below);Entered into a 20-year
Surface Rights Agreementwith the Santa Maria
Ejido (See Surface Rights Agreement below);DynaResource Operaciones de

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

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
tonnesProduction (Oz
Au)
18,250 OzAverage
Grade
15-20 g/tRecovery Efficiency
(Plant)
85%Recovery in
Concentrate (Sales)
90%Production Cost
(Average, 4 Years)
$175 / Oz







30











Year 2006 Suspension of Test Mining and Pilot
Milling Activities





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”).





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.







31











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.





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.







32











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 June 30, 2019
is $2,125,000. 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. $72,000 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.





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.





Activities under 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.







33











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.





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
Average2009
$1,213
$810
$9722010
$1,421
$1,058
$1,2252011
$1,895
$1,319
$1,5722012
$1,792
$1,540
$1,6692013
$1,694
$1,192
$1,4112014
$1,380
$1,140
$1,2652015
$1,303
$1,057
$1,1752016
$1,366
$1,151
$1,2512017
$1,379
$1,101
$1,2362018
$1,355
$1,178
$1,2882019 (through September
30, 2019)
$1,540
$1,269
$1,301





Source: Kitco,
Reuters and the London Bullion Market Association





On September 30,
2019, the afternoon fixing gold price on the London Bullion Market
was $1,485 per ounce and the spot market gold price on the New York
Commodity Exchange was $1,485 per ounce.





34











Condition of Physical Assets and
Insurance





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





Environmental Matters





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





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)





Capital Investment Program (2015 and
2016)





In July 2015, the
Company commenced a capital investment program designed to increase
tonnage 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. And, in 2016,
the Company was carrying out operations utilizing the improvements
and increased outputs from test mining and pilot milling
activities. 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;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 Taxes;

$272,000; Value added taxes paid, and
refundable;Land Use and Rental;

$83,000;Total:

$3,565,000





Project Improvements, Expansion and Increased
Output (2017, 2018 AND 2019)





The Company
continues its business plan of operations at San Jose de Gracia,
which is to improve, increase and expand test mining and pilot
milling operations and generally, to increase production output.
Since 2015 startup of the test mining and milling activities, the
Company has increased daily output from an initial 75 tons per day,
to a current 200 tons per day, and during fiscal year 2019 the
Company expects to achieve production output of 250 tons per day.
(Note the Summary of Test Mining and Pilot Mill Operations for
2015, 2016, 2017, and 2018 below).







35













Since January 2017,
the Company has expended over $10.2 million USD in non-operating
costs, generally classified as project improvements and expansion
costs which have been expensed in the company’s financial
statements. These funds have been provided primarily from cash
flows from operations. An itemized list of these non-operating
costs is described below:





Mill Expansion;

$1,693,000Tailings Pond Expansion

265,000Machinery and Equipment

777,000Mining Camp Expansion

146,000Medical Facility

123,000Mine Development - San
Pablo

3,036,000Mine Expansion - San Pablo
East
836,000Mine Expansion – Tres
Amigoes

503,000SJG Mining Concessions

1,359,000Surface Rights and
Permitting

238,000Debt Retirement

125,000Legal Fees

1,116,000Total

$10,217,000








The Company is
currently reporting all costs of mine operations, improvements, and
expansion as expenses in accordance with United States General
Accepted Accounting Principal (GAAP) requirements. The results of
expensing all costs is that the Company has accumulated a net loss
carry forward from Mexico operations of $28 million USD which
amount is available to offset future taxable earnings.







Summary of Test Mining and Pilot Mill
Operations for 2015, 2016, 2017 and 2018:





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
1,3082016
33,172
12.70
79.7 %
10,836
8,6682017
35,170
12.95
85.00 %
12,636
10,7402018
52,038
9.82
86.11%
14,147
13,418





DynaMineras expects
to continue to increase its test underground mining activity and
pilot milling operations in 2019; and projects the increased output
to 250 tons/day from the mine(s) and mill during 2019.





Test pilot
operations in 2018 yielded 52,038 tonnes mined and processed from
underground mining activity and pilot mill operations; and the
production of approximately 14,147 gross Oz Au (and net of dry
weights, buyer’s price discount and refining and treatment
costs, approximately 13,418 Oz. Au) contained in gold-silver
concentrates, and the receipt of $14,059,697 in revenues from the
sale of gold-silver concentrates.





Test pilot
operations in 2017 yielded 35,170 tonnes mined and processed from
underground mining activity and pilot mill operations; and the
production of approximately 12,636 gross Oz Au (and net of dry
weights, buyer’s price discount and refining and treatment
costs, approximately 10,740 Oz. Au) contained in gold-silver
concentrates, and the receipt of $10,850,091 in revenues from the
sale of gold-silver concentrates.





Summary of Test Mining and Pilot Mill
Operations for the six months ended June 30, 2019 and
2018:





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.)Six Months Ended June 30,
2019
33,137
6.36
87.0%
5,895
5,405Six Months Ended June 30,
2018
22,931
9.70
83.0%
6,159
5,821







36











Test pilot
operations in Q1 2019 yielded 17,599 tonnes mined and processed
from underground mining activity and pilot mill operations; and the
production of approximately 2,517 gross Oz Au (and net of dry
weights, buyer’s price discount and refining and treatment
costs, approximately 2,366 Oz. Au) contained in gold-silver
concentrates, and the receipt of $2,329,563 in revenues from the
sale of gold-silver concentrates.





Test pilot
operations in Q2 2019 yielded 15,538 tonnes mined and processed
from underground mining activity and pilot mill operations; and the
production of approximately 3,378 gross Oz Au (and net of dry
weights, buyer’s price discount and refining and treatment
costs, approximately 3,039 Oz. Au) contained in gold-silver
concentrates, and the receipt of $3,412,973 in revenues from the
sale of gold-silver concentrates.





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.







37













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: Na2S (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.









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.





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 $5,742,536 and
$6,346,216 for the six months ended June 30, 2019 and June 30, 2018
respectively.





38













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.





Condition of Physical Assets and
Insurance





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





Environmental Matters





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





Results for the Three and Six Months Ended June
30, 2019 and 2018





In the six months
ended June 30, 2019 and 2018, the Company, through its wholly owned
subsidiary DynaMineras, continued full test mining and pilot mill
operations at San Jose de Gracia.





DynaMineras
conducted test mining and milling operations in the first and
second quarters of 2019 and 2018. During the six months ended June
30, 2019, the test mining and pilot milling operations have yielded
the underground mining and mill processing of approx. 33,137 tonnes
of mineralized material, the production of approximately 5,405
gross oz. Au (and net of weight and value adjustment) approximately
oz. Au) contained in gold-silver concentrates. DynaMineras realized
the receipt of $5,742,536 in revenues from the delivery and sale of
gold-silver concentrates in the first six months of
2019.





REVENUE. Revenues
for the three months ended June 30, 2019 and 2018 were $3,412,973
and $3,828,450, respectively. Revenues for the six months ended
June 30, 2019 and 2018 were $5,742,536 and $6,346,216,
respectively. The decrease was due to a lower yield per ton from
the current years mining. The g/t yield dropped from 9.76 g/t to
6.36 g/t.


PRODUCTION COSTS
RELATED TO SALES. Production costs related to sales for the three
months ended June 30, 2019 and 2018 were $405,163 and $452,805
respectively. Production costs related to sales for the six months
ended June 30, 2019 and 2018 were $856,454 and $779,652,
respectively. The increase was largely due to the company’s
increase in processing capacity related to the refurbishing and
opening of the second mill.





MINE PRODUCTION
COSTS. Mine production costs for the three months ended June 30,
2019 and 2018 were $793,705 and $836,345 respectively. Mine
productions costs for the six months ended June 30, 2019 and 2018
were $1,849,645 and $1,291,206, respectively. These costs are
directly related to the extraction of mine tonnage for processing.
The increase is due to the increase tonnage mined and the drop in
the g/t yield.





MINE EXPLORATION
COSTS: Mine Explorations costs for the three months ended June 30,
2019 and 2018 were $654,915 and $812,173 respectively. Mine
exploration cost for the six months ended June 30, 2019 and 2018
were $1,517,215 and 1,639,472, 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 three months ended June 30,
2019 and 2018 were $380,981 and $670,965, respectively. Mine
expansion costs for the six months ended June 30, 2019 and 2018
were $598,204 and $1,050,165, respectively. The 2018 cost were the
cost associated with preparing the San Jose de Gracia East Mine for
production. The Company began actively mining the San Jose de
Gracia East mine in the second quarter of 2018.







39











TRANSPORTATION.
Transportation costs for the three months ended June 30, 2019 and
2018 were $187,329 and $196,919, respectively. Transportation costs
for the six months ended June 30, 2019 and 2018 were $438,155 and
$284,587, 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 three months ended June 30, 2019 and 2018 were $649,667 and
$695,487 respectively. Camp, warehouse and support facility costs
for the six months ended June 30, 2019 and 2018 were $1,321,441 and
$1,361,896, respectively. These are the support cost of the mining
facilities including housing, food, security and warehouse
operations. The increase are consistent with the increase in
production.





PROPERTY HOLDING
COSTS. Property holding costs for the three months ended June 30,
2019 and 2018 were $267 and $785,777 respectively. Property holding
costs for the six months ended June 30, 2019 and 2018 were $106,229
and $938,164, respectively. These costs are concessions taxes,
leases on land and other direct costs of maintaining the property.
The decrease in a result of final settlement of prior year
concession taxes on the Francisco Arturo property and the reduction
of the total concession area.





GENERAL AND
ADMINISTRATIVE EXPENSES. General and administrative expenses for
the three months ended June 30, 2019 and 2018 were $397,388 and
$545,912 respectively. General and administrative expenses for the
six months ended June 30, 2019 and 2018 were $1,043,277 and
$1,140,355, respectively. The above expenses exclude depreciation
and amortization amounts of $815 and $1,309 for the three months
ended June 30, 2019 and 2018, respectively and $1,630 and $2,618
for the six months ended June 30, 2019 and 2018,
respectively.





OTHER INCOME
(EXPENSE). Other income (expense) for the three ended June 30, 2019
and 2018 was $51,144 and $(1,177,687), respectively. Included in
this category in 2019 is interest expense of $(127,023), other
income of $234, change in derivative liability of $23,585 and
currency transaction gain of $154,348. Included in this category in
2018 is interest expense of $(62,575), other expense of $(316,324),
change in derivative liability of $113,958 and currency transaction
gain of $(912,746).





Other income for
the six ended June 30, 2019 and 2018 was $686,980 and $1,556,138,
respectively. Included in this category in 2019 is interest expense
of $(253,412), other income of $607, change in derivative liability
of $646,085 and currency transaction gain of $293,700. Included in
this category in 2018 is interest expense of $(118,126), other
expenses of $(315,944), change in derivative liability of
$2,096,440 and currency transaction loss of
$(315,944).





NON-CONTROLLING
INTEREST. The non-controlling interest portion of the net loss for
the three months ended June 30, 2019 and 2018 were $3,960 and
$220,507, respectively. The non-controlling interest portion of the
net loss for the six months ended June 30, 2019 and 2018 were
$30,850 and $275,693, respectively.


COMPREHENSIVE
INCOME (LOSS). Comprehensive income (loss) includes the
Company’s net income (loss) plus the unrealized currency
translation gain (loss) for the period. For the three months ended
June 30, 2019 and 2018, the Company recorded a loss of $(133,638)
and $1,063,132, respectively, which were made up of unrealized
losses on currency translation. For the six months ended June 30,
2019 and 2018, the Company recorded a (gain) loss of $(300,265) and
$278,464, respectively.





Liquidity and Capital
Resources





As of June 30,
2019, the Company had a negative working capital of $(3,660,780),
comprised of current assets of $4,338,743 and current liabilities
of $7,999,523. This represents a decrease of $1,877,087 in the
working capital (deficit) maintained by the Company of $(1,783,693)
as of December 31, 2018, due primarily to decrease in cash from
funding the Company’s operating loss.





Net cash used by
operations for the six months ended June 30, 2019 was $1,476,482
compared with cash used by operations of $1,262,682 for the six
months ended June 30, 2019.





Net cash used in
investing activities for the six months ended June 30, 2019 and
2018 was $0 and $0, respectively.





Net cash used in
financing activities for the six months ended June 30, 2019 and
2018 was $362,818 and $209,431 respectively.  These amounts
were used for debt service.







40











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 $18M 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 six months ended June 30, 2019 and 2018 the loss
attributable to Goldgroup was $30,850, and $275,693.





Off-Balance Sheet
Arrangements





As of June 30,
2019, the Company 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 2019. The Company plans to seek
additional debt funding during the next 12 months depending on
results of its pilot operations, market conditions, and other
factors.





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.





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).







41











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.





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 projected to be 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 June 30,
2019, and December 31, 2018 DynaMineras owed the Company $6,310,456
and $6,392,705, respectively.





As of June 30,
2019, and December 31, 2018 DynaMéxico owed the Company
$4,000,000 and $4,000,000, respectively.





As of June 30,
2019, and December 31, 2018 DynaOperaciones owed the Company
$225,000 and $225,000, respectively.





As of June 30,
2019, and December 31, 2018 DynaMéxico owed DynaMineras
$2,373,500 and $2,373,500, respectively.





As of June 30,
2019, and December 31, 2018 DynaOperaciones owed DynaMineras
$7,134,800 and $7,134,800, 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.







42











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 $0 receivable
from DynaResource Nevada, Inc. at March 31, 2019 and December 31,
2018 respectively. The Company has investment balance in
DynaResource Nevada, Inc. of $70,000 and $70,000 as of June 30,
2019 and December 31, 2018, 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:





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.







43















(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;







44











(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;





(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-Q.





ITEM 3.
          QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





Not
applicable.





Evaluation of Disclosure Controls and
Procedures





The company carried
out an evaluation of the effectiveness of the design and operation
of its disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2019. This
evaluation was accomplished under the supervision and with the
participation of our chief executive officer / principal executive
officer, and chief financial officer / principal financial officer
who concluded that the company’s disclosure controls and
procedures are not effective to ensure that all material
information required to be filed in the quarterly report on Form
10-Q has been made known to them.





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





Based upon an
evaluation conducted for the period ended June 30, 2019, our Chief
Executive Officer and Chief Financial Officer as of the date of
this Report, have concluded that as of the end of the period
covered by this report, our internal control over financial
reporting was not effective. We have identified three areas which
contain material weaknesses. First, the size of the Company and
inherent limitations 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 quarterly report on Form 10-Q has been made known to
them. Thirdly as a result of the two previously mention weaknesses
the Company failed to properly apply United States General Accepted
Accounting Principles (GAAP) in accounting for certain expenditures
as mining equipment and fixtures and depreciated them over their
useful lives. Because the Company does not have proven and probable
reserves under U.S. Gaap as defined in SEC Industry Guide 7 all
costs of mine development including items with a useful life
greater than one year should be expensed in the period incurred. As
a result, we have restated our previously issued financial
statement as detail in Note 17 to the financial statements. 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. 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.







45











Changes in Internal Controls over
Financial Reporting





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








PART II


ITEM 1. Legal Proceedings





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.










46











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 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:





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 Ear In/Option
Agreement must be brought and resolved under Mexican Law and by
competent Mexican Courts with proper jurisdiction, in recognition
of the waiver and exclusion of the arbitration clause (contained in
the Earn In/Option Agreement) by both parties.EIGHT:
This
Court declares that the American Arbitration Association must
abstain from hearing arbitration procedure number 50 501 T 00226
14, or any other ongoing and/or future arbitration proceeding
already filed or that may be filed by the co-defendant Goldgroup
against DynaResource.





47

















NINTH:
This
Court declares that the American Arbitration Association does not
have jurisdiction to hear any conflict and/or interpretation
arising from the Earn In/Option Agreement, dated September 1,
2006.TENTH:
This
Court declares, that the American Arbitration Association does not
have jurisdiction to hear disputes arising between shareholders of
DynaMéxico, which disputes do not arise directly and
immediately from the Earn In/Option Agreement, dated September 1,
2006.ELEVENTH:
This
Court declares, that the American Arbitration Association does not
have jurisdiction to hear any matters where Koy Wilber Diepholz,
who is the President of the Board of Directors of DynaMéxico,
and has been personally sued in relation to the arbitration clause
established under clause 8.16 of the Earn In/Option Agreement,
dated September 1, 2006, since he signed the mentioned instrument
in representation of the Company and not in his personal
capacity.TWELFTH:
The
expenses and costs associated with these proceedings are hereby
waived.THIRTEENTH:
LET
IT SO BE PUBLISHED. A Copy of this order and Sentence shall be
found in the corresponding records.








ORDERED, adjudged and decreed by the Thirty Sixth Civil Judge of
the Superior Court of the Federal District, Mr. JULIO GABRIEL
IGLESIAS GOMEZ.








The October 5, 2015 Resolution constitutes a public record which
may be reviewed through the Courts in México
City.





México City Court Approves Lien on Shares of DynaMéxico
owned by Minority Interest Holder





On October 5, 2016, the Thirty-Sixth Civil Court of the Superior
Court of Justice of the Federal District of México (Tribunal
Superior de Justicia del Distrito Federal) approved a Lien
(referred to by the court as an “Embargo”), in favor of
DynaMéxico, upon Stock Certificates in the name of Goldgroup
Resources Inc. (“Goldgroup”). The Stock Certificates
subject to the Lien (“Embargo”) constitute Shares of
DynaMéxico (“the Goldgroup DynaMéxico
Shares”).





The Goldgroup DynaMéxico Shares were seized as a partial
recovery of assets by DynaMéxico after DynaMéxico was
awarded more than $48M USD (Forty-Eight Million Dollars) in damages
against Goldgroup (the “Damages against Goldgroup”) on
October 05, 2015, as described in a Sentencia Definitiva (the
“Definitive Sentence”) issued by the same court, the
Thirty Sixth Civil Court of the Superior Court of Justice of the
Federal District of México, File number 1120/2014. Excerpts
from the Definitive Sentence appear below. In addition to the
Damages against Goldgroup, the Definitive Sentence also included
additional Resolutions ordered in favor of DynaMéxico (the
Damages against Goldgroup and the additional Resolutions are
together referred to as the “Oct. 5, 2015
Resolution”).





48











Rejection of Goldgroup Resources Inc. request to the Supreme Court
of México





On July 3, 2019 an Official Ruling from The Supreme Court of
México was issued to Reject the Request of Goldgroup Resources
Inc. (the “México Supreme Court Rejection to
Goldgroup”). The Justices of the First Chamber of the Supreme
Court of Justice of México issued a Rejection Notice to
Goldgroup Resources Inc., “due to the lack of legitimacy
presented by Goldgroup”; and in issuing the Rejection Notice
to Goldgroup, the Supreme court thereby reverted the Amparo Appeal
back to the México Circuit Court where the Official and Final
Ruling from the México Circuit Court is expected to be
issued.





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
most arbitration proceedings in the U.S., the Arbitration Ruling is
not final. Since the Arbitration Ruling is subject to international
rules, the ruling may be vacated by U.S. courts, or simply not
recognized by U.S. courts, on several grounds. Accordingly, both
DynaMéxico and DynaResource have timely requested relief from
the United States Federal District Court in Colorado, via the
filing of a Petition for Nonrecognition of Foreign Arbitral Award
and/or Motion to Vacate Arbitration Award (the “Petition for
Nonrecognition”), and a supporting brief. The Petition for
Nonrecognition relies heavily upon the Mexican court’s
Definitive Sentence, key excerpts of which appear immediately
below.





The Mexican court has already ruled that “any controversy
arising from the Earn In/Option Agreement must be brought and
resolved under Mexican Law and by competent Mexican Courts with
proper jurisdiction.” Consequently, the monetary awards
against DynaResource – which are based upon a finding that
the Earn In/Option Agreement is still in force – will not be
enforceable if the Mexican court rules that the Earn In/Option
Agreement is terminated. The Company believes that the potential
for the assessment of a material monetary judgment against
DynaResource is remote.





SIXTH:
Pursuant
to Article 1424 of the Commercial Code of México, the
arbitration provision established under clause 8.16 of the Earn
In/Option Agreement, dated as of September 1, 2006, is ineffective
and impossible to execute.SEVENTH:
This
Court declares that any controversy arising from the Earn In/Option
Agreement must be brought and resolved under Mexican Law and by
competent Mexican Courts with proper jurisdiction, in recognition
of the waiver and exclusion of the arbitration clause (contained in
the Earn In/Option Agreement) by both parties.EIGHT:
This
Court declares that the American Arbitration Association must
abstain from hearing arbitration procedure number 50 501 T 00226
14, or any other ongoing and/or future ongoing arbitration already
filed or to be filed by the defendant Goldgroup, based on the Earn
In/Option Agreement dated September 1, 2006.NINTH:
This
Court declares that the American Arbitration Association does not
have jurisdiction to hear any conflict and/or interpretation
arising from the Earn In/Option Agreement, dated September 1,
2006.TENTH:
This
Court declares, that the American Arbitration Association does not
have jurisdiction to hear disputes arising between shareholders of
DynaMéxico, which disputes do not arise directly and
immediately from the Earn In/Option Agreement, dated September 1,
2006.ELEVENTH:
This
Court declares, that the American Arbitration Association does not
have jurisdiction to hear any matters where Koy Wilber Diepholz,
who is the President of the Board of Directors of DynaMéxico,
and has been personally sued in relation to the arbitration clause
established under clause 8.16 of the Earn In/Option Agreement,
dated September 1, 2006, since he signed the mentioned instrument
in representation of the Company and not in representation of the
Company and not in his personal capacity.









49

























(a)
 The
Arbitration Ruling contains an acknowledgement by the AAA that the
AAA was named as a defendant in the legal demand filed by
DynaMéxico in the Thirty Sixth Civil Court of the Superior
Court of Justice of the Federal District of México (the
“DynaMéxico Legal Demand”). The Arbitration Ruling
also contains a statement that the AAA was not properly served
notice of the DynaMéxico Legal Demand;
 (b)
 DynaMéxico
obeyed the October 5, 2015 Court Order and did not attend the
Arbitration hearing;
 (c)
 DynaMéxico
will pursue all legal remedies in order to obtain a full dismissal
of the Arbitration Ruling;
 (d)
 The
October 5, 2015 Court Order and the $48 million USD award of
damages against Goldgroup Resources Inc. 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.





Arbitration Award against DynaResource, Inc. and DynaResource de
México, S.A. de C.V.





On May
9, 2019, the United States district court for the district of
Colorado confirmed the August 2016 Arbitration award against
DynaResource, Inc. and DynaResource de México, S.A. de
C.V.  The district court’s decision overruled the
recommendation previously issued by the magistrate judge to sustain
the DynaResource entities’ motion to vacate the arbitration
award. Each of DynaResource, Inc. and DynaResource de México,
S.A. de C.V. intends to exercise all its rights, as appropriate,
including an appeal.





DynaResource, Inc. and DynaResource de México, S.A. de C.V
Filings in United States District Court





On
June 6, 2019, DynaResource, Inc. and DynaResource de México,
S.A. de C.V filed a Motion to Alter or Amend Judgment which
included the following notice of Intent for Final Ruling Issued by
the México Circuit Court of Appeals:





México
Circuit Court of Appeals – Notice of Intent for Final Ruling
in Favor of DynaResource de México





On May 27, 2019, The Eleventh Collegiate Court
in Civil Matters of the First Circuit (“México Circuit
Court”, and the Court of Final Appeal for Goldgroup Resources
Inc.) issued a written notice confirming it was ruling against the
Amparo Appeal filed by Goldgroup Resources Inc. and in Favor of
DynaResource de México, S.A. de C.V. In an effort to
stay the issuance of the Ruling by the México Circuit Court,
Goldgroup Resources Inc. filed a request to The Supreme Court of
México to review the Amparo Appeal decision.





On July 12, 2019, DynaResource,
Inc. and DynaResource de México, S.A. de C.V Filed A Motion
for Leave to Supplement the Record which included the following
Ruling Issued by the México Supreme Court:





Rejection
of Goldgroup Resources Inc. request to the Supreme Court of
México





On
July 3, 2019 an Official Ruling from The Supreme Court of
México was issued to Reject the Request of Goldgroup Resources
Inc. (the “México Supreme Court Rejection to
Goldgroup”). The Justices of the First Chamber of the Supreme
Court of Justice of México issued a Rejection Notice to
Goldgroup Resources Inc., “due to the lack of legitimacy
presented by Goldgroup”; and in issuing the Rejection Notice
to Goldgroup, the Supreme court thereby reverted the Amparo Appeal
back to the México Circuit Court where the Official and Final
Ruling from the México Circuit Court is expected to be
issued.





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





On
February 2nd, 2014, Goldgroup Resources Inc. filed a petition with
the Judge of the Tenth District Mazatlán, according to record
08/2014, in the ordinary commercial action, against DynaResource
Inc., and DynaResource de México, S.A. de CV.
(“DynaMéxico”). In the Petition, Goldgroup
complains against the results of the shareholders meeting of
DynaMéxico of May 17, 2013, and petitions for the
nullification of the meeting itself and for the nullification of
the additional shares of the outstanding capital of DynaMéxico
issued to DynaResource, Inc. in satisfaction of debts owed to
DynaResource.





DynaResource
and DynaMéxico filed a response on January 9, 2016, and the
matter was. DynaMéxico will vigorously defend against all such
complaints by Goldgroup, as there exists no legal basis for the
complaint by Goldgroup against the May 17, 2013 shareholders
meeting of DynaMéxico.


On
October 31, 2018, the Judge of the Tenth District declared the
Expiration of the Trial, due to inactivity of Goldgroup in the
process, and the Judge decreed the Trial as a concluded and filed
trial. As a result, the shareholders' meeting of May 17, 2013
remains valid.





On
November 16, 2018, Goldgroup appealed the declaration of Expiration
of the Trial.







50















On February 12, 2019, the Court of Appeals (Segundo Tribunal
Unitario de Circuito in Mazatlán) confirmed the resolution
issued October 31, 2018 by the Judge of Tenth District and declared
and confirmed the Expiration of the Trial, due to the inactivity of
Goldgroup to the process, and therefore the Court of Appeals
decreed the matter as a concluded and filed trial. As a result, the
shareholders' meeting of May 17, 2013 remains valid.





Goldgroup
has filed a writ of amparo against the resolution of the Court of
Appeals that confirmed the declaration of expiration of the trial.
This Amparo Trial is pending resolution.





Litigation(s) in México – Company as
Plaintiff





The
Company, and DynaMéxico have filed several legal actions in
México against Goldgroup Mining Inc. and Goldgroup Resources
Inc., and certain individuals
retained as agents of Goldgroup Mining Inc., or Goldgroup
Resources. The Company and DynaMéxico are plaintiffs in the
actions filed in México and the outcomes are
pending.


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







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





None.





ITEM 3.
         Default Upon
Senior Securities





None.





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.





ITEM 5.
         Other Information





None.





51











ITEM 6.
         Exhibits





Exhibit Number; Name of
Exhibit





31.1
Certification of
Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange
Act, as enacted by Section 302 of the Sarbanes-Oxley Act of
2002.





31.2
Certification of
Chief Financial Officer, pursuant to Rule 13a-14(a) of the Exchange
Act, as enacted by Section 302 of the Sarbanes-Oxley Act of
2002.





32.1
Certification of
Chief Executive Officer and Chief Financial Officer, pursuant to 18
United States Code Section 1350, as enacted by Section 906 of the
Sarbanes-Oxley Act of 2002.





SIGNATURES





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





DynaResource,
Inc.


By /s/ K.W.
(“K.D.”) Diepholz





K.W.
(“KD”) Diepholz, Chairman / CEO


Date: October 15,
2019
















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