UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X . QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
or
. TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________to___________________________
Commission File Number: 333-169701
DESERT HAWK GOLD CORP.
(Exact name of registrant as specified in its charter)
Nevada | 82-0230997 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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7723 N. Morton St., Spokane, WA | 99208 |
(Address of principal executive offices) | (Zip Code) |
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(509) 434-8161 | |
(Registrants telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X . No .
Indicate by check mark 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 | . (Do not check if a smaller reporting company) | Smaller reporting company | X . |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes . No X .
Indicate the number of shares outstanding of the issuers common stock, as of November 6, 2012: 8,560,973.
DESERT HAWK GOLD CORP.
Form 10-Q
September 30, 2012
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION | 3 |
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Item 1. Financial Statements | 4 |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations | 16 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 20 |
Item 4. Controls and Procedures | 20 |
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PART II OTHER INFORMATION | 21 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 21 |
Item 6. Exhibits | 21 |
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SIGNATURES | 21 |
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
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| Page |
Consolidated Balance Sheets |
| 4 |
Consolidated Statements of Operations (Unaudited) |
| 5 |
Consolidated Statements of Cash Flows (Unaudited) |
| 6 |
Notes to Unaudited Financial Statements |
| 8 |
3
DESERT HAWK GOLD CORP | |||||||
(An Exploration Stage Company) | |||||||
CONSOLIDATED BALANCE SHEETS | |||||||
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| September 30, |
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| December 31, |
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| 2012 |
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| 2011 |
ASSETS |
| (unaudited) |
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CURRENT ASSETS |
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| Cash | $ | 10,745 |
| $ | 415,090 | |
| Accounts receivable |
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| 1,475 |
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| 66,883 |
| Prepaid expenses and other current assets |
| 63,852 |
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| 92,195 | |
| Total Current Assets |
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| 76,072 |
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| 574,168 |
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PROPERTY AND EQUIPMENT, net of accumulated depreciation of $140,993 and $88,976 |
| 325,740 |
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| 377,757 | ||
MINERAL PROPERTIES AND INTERESTS (Note 4) |
| 885,556 |
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| 835,237 | ||
RECLAMATION BONDS (Note 4) |
| 150,581 |
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| 149,981 | ||
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TOTAL ASSETS | $ | 1,437,949 |
| $ | 1,937,143 | ||
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LIABILITIES AND STOCKHOLDERS' DEFICIT |
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CURRENT LIABILITIES |
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| Accounts payable | $ | 111,928 |
| $ | 6,771 | |
| Accrued expenses |
| 75,273 |
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| 22,886 | |
| Derivative liability-put option (Notes 7 and 9) |
| - |
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| 25,193 | |
| Derivative liability-conversion option (Notes 7 and 8) |
| 188,560 |
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| 230,714 | |
| Interest payable (Note 8) |
| 885,521 |
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| 419,559 | |
| Notes payable-net of discount (Note 8) |
| 4,935,896 |
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| 4,710,286 | |
| Convertible debt-net of discount (Note 6) |
| 587,264 |
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| 534,764 | |
| Total Current Liabilities |
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| 6,784,442 |
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| 5,950,173 |
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LONG-TERM LIABILITIES |
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| Asset retirement obligation (Note 4) |
| 62,141 |
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| 57,502 | |
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TOTAL LIABILITIES |
| 6,846,583 |
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| 6,007,675 | ||
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COMMITMENTS (Note 9) |
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STOCKHOLDERS' DEFICIT (Note 3) |
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| Preferred stock, $0.001 par value, 10,000,000 shares authorized |
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| Series A: 958,033 shares issued and outstanding |
| 958 |
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| 958 | |
| Series A-1: No shares issued and outstanding |
| - |
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| - | |
| Series A-2: 180,000 and 100,000 shares issued and outstanding, respectively |
| 180 |
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| 100 | |
| Common stock, $0.001 par value, 100,000,000 shares authorized; 8,460,973 and 8,314,883 shares issued and outstanding, respectively |
| 8,463 |
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| 8,316 | |
| Additional paid-in capital |
| 6,088,487 |
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| 5,058,563 | |
| Accumulated deficit prior to exploration stage |
| (1,016,591) |
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| (1,016,591) | |
| Accumulated deficit during exploration stage |
| (10,490,131) |
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| (8,121,878) | |
| Total Stockholders' Deficit |
| (5,408,634) |
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| (4,070,532) | |
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 1,437,949 |
| $ | 1,937,143 | ||
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The accompanying notes are an integral part of these unaudited financial statements |
4
5
DESERT HAWK GOLD CORP | ||||||||
(An Exploration Stage Company) | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | ||||||||
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| Period from |
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| May 1, 2009 | ||
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| (Inception of |
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| Nine Months Ended |
| Exploration Stage) | ||
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| September 30, |
| September 30, |
| to September 30, |
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| 2012 |
| 2011 |
| 2012 | |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss | $ | (2,368,253) | $ | (4,231,117) | $ | (10,490,131) | ||
Adjustments to reconcile net loss to net cash used by operating activities: |
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| Depreciation |
| 52,017 |
| 49,982 |
| 142,360 | |
| Common stock issued for services |
| - |
| 136,842 |
| 530,009 | |
| Common stock issued for interest expense |
| 67,500 |
| 37,500 |
| 105,000 | |
| Preferred stock issued for financing agreement |
| 920,000 |
| - |
| 920,000 | |
| Accretion of debt-related discounts |
| 278,110 |
| 612,454 |
| 1,442,959 | |
| Accretion of asset retirement obligation |
| 4,320 |
| - |
| 4,320 | |
| Change in fair value of derivatives |
| (67,347) |
| 103,850 |
| 53,885 | |
| Loss on extinguishment of debt |
| - |
| 2,149,404 |
| 2,149,404 | |
| (Gain) on sale of marketable securities |
| - |
| - |
| (2,540) | |
Changes in operating assets and liabilities: |
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| (Increase) decrease in inventory |
| - |
| (49,738) |
| - | |
| (Increase) decrease in accounts receivable |
| 65,408 |
| - |
| (1,475) | |
| (Increase) decrease in prepaid expenses and other current assets |
| 28,343 |
| 3,564 |
| (4,421) | |
| Increase (decrease) in accounts payable |
| 105,158 |
| (26,651) |
| 108,754 | |
| Increase (decrease) in accrued expenses |
| 52,387 |
| (11,135) |
| 34,582 | |
| Increase (decrease) in interest payable |
| 488,462 |
| 264,706 |
| 908,022 | |
Net cash used by operating activities |
| (373,895) |
| (960,339) |
| (4,099,272) | ||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Purchase of property and equipment |
| - |
| (39,327) |
| (452,104) | |
| Payments on mineral leases |
| (50,000) |
| (49,845) |
| (359,681) | |
| Acquisition of reclamation bonds |
| (600) |
| (63,001) |
| (107,780) | |
| Notes receivable |
| - |
| - |
| 27,500 | |
| Proceeds from marketable securities |
| - |
| - |
| 48,920 | |
Net cash used by investing activities |
| (50,600) |
| (152,173) |
| (843,145) |
6
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| Period from |
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| May 1, 2009 |
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| (Inception of |
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| Nine Months Ended |
| Exploration Stage) | ||
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| September 30, |
| September 30, |
| to September 30, |
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| 2012 |
| 2011 |
| 2012 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Proceeds from convertible notes payable |
| - |
| - |
| 600,000 | |
| Proceeds from notes payable |
| - |
| 1,000,000 |
| 3,500,000 | |
| Payment of note payable - equipment |
| - |
| (15,995) |
| (15,995) | |
| Proceeds from issuance of common stock |
| 20,150 |
| 316,125 |
| 1,363,833 | |
| Proceeds from issuance of preferred stock |
| - |
| - |
| 958 | |
| Financing fees paid |
| - |
| (55,000) |
| (521,281) | |
Net cash provided by financing activities |
| 20,150 |
| 1,245,130 |
| 4,927,515 | ||
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NET INCREASE (DECREASE) IN CASH |
| (404,345) |
| 132,618 |
| (14,902) | ||
CASH, BEGINNING OF PERIOD |
| 415,090 |
| 566,549 |
| 25,647 | ||
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CASH, END OF PERIOD | $ | 10,745 | $ | 699,167 | $ | 10,745 | ||
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NON-CASH FINANCING AND INVESTING ACTIVITIES: |
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Common stock issued for mineral lease | $ | - | $ | - | $ | 525,000 | ||
Common stock issued as incentive with convertible notes |
| - |
| - |
| 210,000 | ||
Common stock issued for reclamation bond |
| - |
| - |
| 42,802 | ||
Equipment acquired with note payable |
| - |
| - |
| 15,995 | ||
Common stock issued for accrued liabilities-officer wages |
| - |
| 131,259 |
| 131,259 | ||
Prepaid interest liability |
| - |
| - |
| 441,175 | ||
Repayment premium obligation |
| - |
| - |
| 588,325 | ||
Common stock issued for accrued interest |
| 22,500 |
| - |
| 67,500 | ||
Preferred stock issued in connection with debt amendment |
| 920,000 |
| 700,000 |
| 1,620,000 | ||
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7
NOTE 1 ORGANIZATION AND DESCRIPTION OF BUSINESS
Desert Hawk Gold Corp. (the Company) was incorporated on November 5, 1957, in the State of Idaho as Lucky Joe Mining Company. On July 17, 2008 the Company merged with its wholly-owned subsidiary, Lucky Joe Mining Company, a Nevada corporation, for the sole purpose of effecting a change in domicile from the State of Idaho to the State of Nevada. Lucky Joe Mining Company (Nevada) was the continuing and surviving corporation and each outstanding share of Lucky Joe Mining Company (Idaho) was converted into one outstanding share of Lucky Joe Mining Company (Nevada). On April 3, 2009, the Company filed a Certificate of Amendment with the State of Nevada changing the name of the Company to Desert Hawk Gold Corp.
The Company was originally incorporated to pursue the mining business through the acquisition of prospective mining claims in the Wallace and Kellogg mining districts of Northern Idaho. The Company never successfully generated any revenue or joint ventures from any of the activities it pursued and abandoned the mining business as a viable business model when the commodity prices cycled downward. The Company remained dormant until it recommenced its mining activities and entered the exploration stage on May 1, 2009. The Company is considered an exploration stage company and its financial statements are presented in a manner similar to a development stage company as defined in ASC 915-10-05 and interpreted by the Securities and Exchange Commission for mining companies in Industry Guide 7.
On December 31, 2009, the Company acquired all of the outstanding stock of Blue Fin Capital, Inc. (Blue Fin), a Utah corporation owning mining claims in Arizona. The Company issued a total of 2,713,636 shares of its common stock to the shareholders of Blue Fin for all of the outstanding shares of Blue Fin. Blue Fin was acquired from a related party, so the acquisition was recorded at the historical cost of Blue Fin. Blue Fin became a wholly-owned subsidiary of the Company and all inter-company accounts have been eliminated.
These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited interim financial statements should be read in conjunction with the Companys audited financial statements for the year ended December 31, 2011. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented. Operating results for the nine month period ended September 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mineral Exploration and Development Costs
The Company accounts for mineral exploration and development costs in accordance with ASC Topic 930 Extractive Activities - Mining. All exploration expenditures are expensed as incurred, previously capitalized costs are expensed in the period the property is abandoned. Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines are capitalized and amortized on units of production basis over proven and probable reserves.
Mineral Properties and Leases
The Company accounts for mineral properties in accordance with ASC Topic 930 Extractive Activities-Mining. Costs of acquiring mineral properties and leases are capitalized by project area upon purchase of the associated claims (see Note 4). Mineral properties are periodically assessed for impairment of value.
Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. At September 30, 2012, common stock equivalents outstanding are 1,146,433 shares of common stock into which the convertible debt (see Note 6) and 2,758,033 shares of preferred stock into which the DMRJ debt (see Note 3) can be converted. However, the diluted earnings per share are not presented because its effect would be anti-dilutive due to the Companys net loss.
Going Concern
As shown in the accompanying financial statements, the Company had an accumulated deficit incurred through September 30, 2012 and limited cash at September 30, 2012, which raises substantial doubt about the Companys ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
8
The Company will need significant funding to continue operations and increase development through the next fiscal year. The timing and amount of capital requirements will depend on a number of factors, including demand for products and services and the availability of opportunities for expansion through affiliations and other business relationships. Management intends to continue to seek new capital from equity securities issuances to provide funds needed to increase liquidity, fund internal growth, and fully implement its business plan.
If the going concern assumption were not appropriate for these consolidated financial statements, then adjustments would be necessary to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.
Reclassifications
Certain reclassifications have been made to conform the prior periods data to the current presentation. These reclassifications have no effect on the results of reported operations or stockholders deficit.
NOTE 3 - CAPITAL STOCK
Common Stock
The Company is authorized to issue 100,000,000 shares of common stock. All shares have equal voting rights and have one vote per share. Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company.
An equity financing was initiated in third quarter of 2011. This financing raised $355,833 through sales of 309,420 shares of common stock. This offering concluded January 31, 2012. A separate equity financing was initiated February 20, 2012 for the sale of up to 2,000,000 shares of stock. No sales were recorded in conjunction with this offering, which ended June 30, 2012.
An equity financing was initiated August 21, 2012 for the sale of up to 1,150,000 shares of common stock. As of September 30, 2012 no sales had been recorded in conjunction with this offering. Under the terms of this offering, stock can be converted to cash generated from the sale of gold, for a period of 12 months after commencement of operations at the Kiewit project. Proceeds from 5% of the gold produced during the first year of production will be allocated to fund this option. Each investor will receive the right to convert a minimum of one-half and up to all of his shares (on a pro rata basis) into the value of the number of ounces represented by the total investment, determined using a base price of $1,000 per ounce. As of November 6, 2012, this offering had raised $110,000 through sales of 110,000 shares of stock.
Preferred Stock
In July 2010 the Company filed a Certificate of Designations with the State of Nevada to create 958,033 shares of Series A Preferred Stock. The Series A Preferred Shares have voting rights with the common stock equal to the conversion value of the preferred shares into common shares.
In July 2010 the Company issued 958,033 shares of its Series A Preferred Stock to DMRJ Group in connection with financing (see Note 8). These preferred shares are convertible into shares of the Companys common stock at the rate of one common share for each preferred share converted, subject to certain adjustments.
In connection with the Fourth Amendment to the DMRJ Group funding (see Note 8), on May 3, 2011, the Company created and designated 2,500,000 shares of its authorized preferred stock as Series A-1 Preferred Stock and 1,000,000 shares as Series A-2 Preferred Stock. During the quarter ended June 30, 2011, 100,000 shares of Series A-2 Preferred stock were issued in connection with this Fourth Amendment. These shares are convertible by the holder into 1,000,000 shares of the Companys common stock, subject to the beneficial ownership rules detailed below.
Each share of Series A-1 Preferred Stock and Series A-2 Preferred Stock is convertible at the option of the holder at any time into that number of shares of common stock equal to (i) for the Series A-1 Preferred Stock ten times the Series A-1 Issue Price ($0.70) divided by the conversion price for Series A-1 Preferred and (ii) for the Series A-2 Preferred Stock ten times the Series A-2 Issue Price ($1.00) divided by the conversion price for such Series A-2 Preferred Stock. The initial conversion price of the Series A-1 preferred stock is $0.70 per share and the conversion price of the Series A-2 preferred stock is $1.00. If the Company issues or sell shares of its common stock, or grant options or other convertible securities which are exercisable or convertible into common shares, at prices less than the conversion price of Series A-1 or A-2 shares, except in certain exempted situations, then the conversion price of the Series A-1 and A-2 shares will be reduced to this lower of sale or conversion price. The Series A-1 and A-2 shares may not be converted into common shares if the beneficial owner of such shares would thereafter exceed 4.9% of the outstanding common shares.
In connection with the Forbearance Agreement of the DMRJ Group funding arrangement (see Note 8) dated June 29, 2012, an additional 80,000 shares of Series A-2 Preferred stock were issued. These shares are convertible by the holder into 800,000 shares of the Companys common stock, subject to the beneficial ownership rules mentioned above.
9
NOTE 4 MINERAL PROPERTIES AND INTERESTS
Mineral properties and interests as of September 30, 2012 and December 31, 2011 are as follows:
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| September 30, 2012 |
| December 31, 2011 |
Yellow Hammer Site |
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Initial Lease Fee | $ | 175,000 | $ | 175,000 |
Asset Retirement Obligation |
| 30,908 |
| 30,908 |
Total |
| 205,908 |
| 205,908 |
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Kiewit, Cactus Mill and all other sites |
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Initial Lease Fee |
| 600,000 |
| 600,000 |
Annual Lease Payment |
| 50,000 |
| - |
Asset Retirement Obligation |
| 26,913 |
| 26,594 |
Total |
| 676,913 |
| 626,594 |
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Blue Fin Claims |
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Initial Claim Fee |
| 2,735 |
| 2,735 |
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Total |
| 2,735 |
| 2,735 |
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Total Mineral Properties and Leases | $ | 885,556 | $ | 835,237 |
The Company holds operating interests within the Gold Hill Mining District in Tooele County, Utah, consisting originally of 419 unpatented mining claims, including an unpatented mill site claim, 42 patented claims, and seven Utah state mineral leases located on state trust lands, all covering approximately 33 square miles. In August 2010 and 2011, as a result of further evaluation, the Company allowed certain of the claims and interests to lapse back to Clifton Mining. The Company has retained 299 unpatented claims, including the unpatented mill site claim, 42 patented claims, and three Utah state mineral leases located on state trust lands. All but four of these mining claims and interests were obtained under the terms of the Amended and Restated Lease Agreement effective July 24, 2009, with Clifton Mining Company and Woodman Mining Company as lessors. Rights to the four Yellow Hammer patented claims were obtained under the terms of the Amended and Restated Lease Agreement dated July 24, 2009, with the Jeneane C. Moeller Family Trust. The properties are located approximately 190 miles west-southwest of Salt Lake City, Utah, and 56 miles south southeast of Wendover, Utah. The Company intends to concentrate its exploration activities on the Kiewit project consisting of seven of the unpatented Kiewit claims, the Clifton Shears, Cane Springs, Oquirrh Springs, the Frankie, the Rustler, the Lion Vein, and the Lucy L sites. Each of these is a potential near-term development target. Mineral extraction activities on the property at this time will be open-pit and the Company anticipates conducting underground mining exploration in the future. Annual lease fees are required on the 299 claims that make up the Companys Gold Hill property. Of these, four claims are within the Yellow Hammer site. Annual claims fees are currently $140 per claim plus administrative fees. The Company renewed 299 of the above claims in August 2012, at a total cost of about $42,159.
Kiewit Gold Project
The Company, through its lease agreement with Clifton Mining, has purchased all data, core samples and related reports from Dumont Nickel Inc. (which in 2010 changed its name to DNI Metals Inc. and was the former owner of the leases) associated with the aforementioned properties. In addition, the Company has access to all data and related information available and held by Clifton Mining. Desert Hawk has made application for a Large Mining Operations Permit to construct a heap leach facility and commence production activities on these claims. Tentative approval of the NOI was received from the Utah Division of Oil, Gas and Mining (DOGM) on September 28, 2012. A 30 day public comment period closes November 13, 2012. Conditional final approval will be issued if there are no substantive public comments. The NOI is expected to be issued during fourth quarter 2012 after posting of the required reclamation bond in the approximate amount of $1,278,000.
In January 2010 the Company submitted a Notice of Intent to Commence Large Mining Operations application to DOGM for three surface mines and a leach gold operation on the Kiewit unpatented claims. In February 2010 the Company submitted a Plan of Operations to the Bureau of Land Management. The Plan of Operations is deemed to be substantially complete and along with the Environmental Assessment is expected to be issued by the BLM during fourth quarter 2012.
10
Cactus Mill Plant
Located on the Cactus Mill site are two process facilities. A 150 ton per day mill built by Woodman Mining and operated until the 1980s using equipment to process copper, gold, silver, and tungsten ores from the district. In addition, there is a second facility, constructed in the 1990s, for custom milling precious metals concentrates. Equipment from both mills was used to construct a 240 ton per day pilot mill capable of recovering copper, gold, silver and tungsten ores initially extracted from the Yellow Hammer claims. In September 2010 the Company completed its rebuild of the pilot mill and testing of the pilot plan was conducted. Commencement of processing activities began in fourth quarter 2010. Pursuant to the Companys lease agreement with Clifton Mining, it has access to Cane Springs, a natural flowing spring approximately 1,000 feet above the Cactus Mill site, as well as the Cane Springs mine shaft located approximately one-quarter mile south of the Cactus Mill property. The Company holds a permit from the Utah Division of Oil, Gas and Mining for the pilot plant which allows flotation and gravity concentration. The Company commenced operation of the Cactus Mill pilot plant in November 2010, and processed and sold concentrates on a pilot test basis through June of 2011. Operations at the Cactus Mill pilot plant have been temporarily suspended.
Yellow Hammer Claims
The Company holds a Small Mine Permit for the Yellow Hammer site from the Utah Division of Oil, Gas and Mining and has posted reclamation bonds totaling $60,800. This permit stipulates that the Company may conduct exploration or mining operations on these claims so long as such activities are limited to an area within nine acres.
Exploration Expenditures
Exploration expenditures incurred by the Company during the three and nine months ended September 30, 2012 and 2011 were as follows:
|
|
| Three Months Ended September 30, 2012 |
|
| Three Months Ended September 30, 2011 |
|
| Nine Months Ended September 30, 2012 |
|
| Nine Months Ended September 30, 2011 |
Assaying |
| $ | 940 |
| $ | 3,390 |
| $ | 13,541 |
| $ | 15,609 |
Permitting |
|
| 56,406 |
|
| 50,557 |
|
| 203,247 |
|
| 98,485 |
Geological consulting fees |
|
| - |
|
| 20,579 |
|
| - |
|
| 84,759 |
Maps and miscellaneous |
|
| - |
|
| 473 |
|
| 77 |
|
| 5,782 |
Total Exploration Expenditures |
| $ | 57,346 |
| $ | 74,999 |
| $ | 216,865 |
| $ | 204,635 |
NOTE 5 JOINT VENTURE
On February 7, 2012, we signed a letter of intent (LOI) with Shoshone Silver/Gold Mining Company (Shoshone) whereby Shoshone would acquire a 50% interest in our mineral properties located in Tooele County, Utah. The terms of the LOI were that Shoshone would contribute $10 million in project equity, as well as a $2 million project loan to have been used for the startup of the Kiewit gold heap leach operation. Under the terms of the deal, Shoshone had a 120 day exclusive right to provide the $10 million, for which $100,000 was advanced to us as a nonrefundable deposit. Shoshone would also provide a $2 million, 10% interest loan, with a four year maturity, which bears a preferential payback from operational cash flow. The two companies would have been 50-50 partners on the entire project with a four man operating committee consisting of two members from each company. The proceeds of the Shoshone transaction, which was originally scheduled to close in June but had been extended to September 30, 2012, would have been used to retire the DMRJ Group debt as well as fund a portion of the heap leach operation. The joint venture had not been finalized as of June 30, 2012 and an additional deposit of $100,000 had been agreed to as of June 29, 2012 to extend the agreement to joint venture the property until September 30, 2012. Although this additional deposit was received, other terms of the extension were not met and effective July 31, 2012 the joint venture agreement was terminated and the $200,000 received was recognized as gain on termination of a joint venture agreement.
These joint venture transactions have resulted in an event of default in regard to the DMRJ Group note payable. Negotiations regarding a future business relationship to fund the DMRJ Group note and provide equity for operations capital are currently ongoing. See Note 8.
11
NOTE 6 CONVERTIBLE DEBT
On November 18, 2009 the Company issued convertible promissory notes to two of its minority shareholders for a total of $600,000. The notes bear interest at 15% per annum. Interest-only is payable in equal monthly installments of $7,500. The notes were originally convertible at any time at a rate of $1.50 per share, but on July 14, 2010 the promissory notes were amended thereby reducing the conversion price to $.70 due to the note holders agreement to subordinate their debt to DMRJ Group (see Note 8). The notes are convertible into potentially 857,143 shares of common stock, and principal and interest are due November 30, 2012. On November 18, 2009, the holders of the notes were issued 300,000 bonus shares at a rate of one share for each $2 loaned, resulting in a debt discount of $210,000 that is being accreted over the life of the loan.
On July 5, 2011 the Company entered into an agreement with the two holders of the convertible debt to begin paying their monthly interest in stock rather than cash. The note holders have been issued 91,071 shares of stock each, valued at $.70, to convert accrued interest for the months of May 2011 through September 2012.
In the event the Company fails to repay the loan or interest thereon in full on the maturity date of November 30, 2012, the Company will be required to issue an additional 300,000 shares of common stock to the holders of the convertible debt. Funding of these notes payable is under discussion as part of the negotiations with DMRJ Group regarding a future business relationship. See Note 8.
NOTE 7 DERIVATIVE LIABILITIES
The fair value of outstanding derivative instruments not designed as hedging instruments on the accompanying Consolidated Balance Sheets was as follows:
Derivative Instruments |
|
| September 30, 2012 |
|
| December 31, 2011 |
|
|
|
|
| ||
Put option |
|
| Expired 3/30/12 |
| $ | 25,193 |
Conversion option |
| $ | 188,560 |
| $ | 230,714 |
A Black-Scholes option-pricing model was used to estimate the fair value, using Level 2 inputs, of the Companys derivatives using the following assumptions at September 30, 2012 and December 31, 2011:
|
| Number of Shares |
| Volatility |
| Risk-Free Rate |
| Expected Life (in years) |
| Stock price |
September 30, 2012 |
|
|
|
|
|
|
|
|
|
|
Conversion option |
| 414,589 |
| 80.91% |
| .10% |
| .13 | $ | 1.15 |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
Put option |
| 60,824 |
| 116.41% |
| .06% |
| .164 | $ | 1.15 |
Conversion option |
| 407,435 |
| 91.72% |
| .90% |
| .77 | $ | 1.15 |
NOTE 8 DMRJ GROUP FUNDING
On July 14, 2010, the Company entered into an Investment Agreement with DMRJ Group I, LLC (DMRJ Group). According to the original terms of the agreement, DMRJ Group had committed to loan the Company up to $6,500,000 pursuant to certain terms and conditions as evidenced by a promissory note, under which advances made to the Company were due not later than July 14, 2012. These loan advances could only be used by the Company to pay transaction fees and expenses incurred in connection with the loan transaction, to purchase certain mining equipment, and as working capital to advance our Yellow Hammer and Kiewit mining activities. The maximum amounts allocable to the Yellow Hammer and Kiewit projects were $2,500,000 and $2,750,000, respectively, and were subject to meeting certain milestones on the projects. Advances for operations on the Kiewit project were conditioned upon the Companys ability to obtain and maintain all environmental and mining permits necessary to commence mining activities and the timely payment of the initial Yellow Hammer advances. The Company had received loan advances from DMRJ Group for total principal due of $3,500,000 at September 30, 2012 and December 31, 2011.
Each principal advance amount bears interest of 15% per annum from the date of borrowing. The Company was also required to prepay one years interest on each loan advance, or on a shorter period if the advance was less than one year prior to the maturity date of the promissory note. This prepayment of interest was nonrefundable if the Company prepaid the advance or went into default. In addition, at the time the Company repays or prepays the advance, it was required to pay an additional amount (the Repayment Obligation) equal to 20% of the principal and interest amount being repaid or prepaid.
In July 2010, in connection with this agreement, the Company issued 958,033 shares of its Series A Preferred Stock to DMRJ Group at $.001 par value for $958 cash. The Company recorded a discount to the DMRJ Group loan proceeds in the amount of $669,664, which was the common stock price of $.70 less the cash received for the preferred stock.
12
Loan advances made for the Yellow Hammer and Kiewit projects were subject to mandatory prepayments by the Company. Yellow Hammer advances were originally to be repaid, together with prepayment interest and any outstanding monthly interest, commencing on or before the fifth business day of the month beginning February 2011 and each month thereafter through September 2011. Kiewit advances were to be repaid, together with prepayment interest and any outstanding monthly interest, beginning in month seven after the initial advance on this project and continuing through month twelve. However, the repayment dates have been deferred due to waivers, forbearances, and amendments to the Initial Investment Agreement as stated in the following paragraphs.
Pursuant to a Security Agreement dated July 14, 2010, the Company has secured repayment of any advances made by DMRJ Group with all of its assets.
In connection with the DMRJ Group transaction, both of the Companys convertible note holders, each of whom had loaned $300,000 to the Company on November 18, 2009, agreed to subordinate their debt to DMRJ Group. In consideration for their agreement to subordinate their loans, the Company reduced the conversion price of the loans from $1.50 to $0.70 per share (see Note 6). All other material terms of the convertible loans remain unchanged.
On February 25, 2011, the Company entered into a Second Amendment to Investment Agreement with DMRJ Group which amended the Investment Agreement, dated as of July 14, 2010, as amended by the First Amendment and Waiver dated as of November 8, 2010. The Second Amendment allowed the Company to receive a term loan advance of up to $125,000. This advance was made without satisfying the provisions requiring the Company to meet certain milestones in connection with its Kiewit properties and permitting the Company to use the funds for working capital and ordinary course general corporate purposes not inconsistent with or prohibited by the Investment Agreement. The advance was not deemed to be a Kiewit Advance, which means that it was not subject to the mandatory prepayment requirements under the Investment Agreement.
On March 6, 2011, the Company entered into a Forbearance Agreement with DMRJ Group pursuant to which DMRJ Group agreed to forbear until April 6, 2011, from exercising its rights and remedies with respect to an event of default by virtue of the Companys failure to make a mandatory prepayment as required under the Investment Agreement. The Company failed to make the mandatory prepayment to DMRJ Group on March 7, 2011, as required in the Investment Agreement. Pursuant to the Forbearance Agreement if the Company cured this prepayment default on or prior to April 6, 2011 no default interest would be due with respect to the period between the date of the prepayment default and April 6, 2011.
On March 11, 2011, the Company entered into a Third Amendment to Investment Agreement with DMRJ Group. This amendment allowed the Company to make a further request for a term loan advance under the Investment Agreement of up to $500,000 without satisfying the provisions requiring the Company to meet certain milestones in connection with the Kiewit properties and permitting the Company to use the funds for working capital and ordinary course general corporate purposes not inconsistent with or prohibited by the Investment Agreement. Two $125,000 term loan advances were received as part of this amendment. These advances are not deemed to be Kiewit Advances, which means that they were not subject to the mandatory prepayment requirements under the Investment Agreement.
The Company failed to make its mandatory prepayment of $1,011,616 to DMRJ Group on April 7, 2011, as required pursuant to the Investment Agreement with DMRJ Group, and thus entered into a Fourth Amendment.
On April 21, 2011, the Company entered into a Fourth Amendment to Investment Agreement with DMRJ Group. This amendment allowed the Company to make a further request for a term loan advance under the Investment Agreement of up to $625,000 without satisfying the provisions requiring the Company to meet certain milestones in connection with the Kiewit properties and permitting the Company to use the funds for working capital and ordinary course general corporate purposes not inconsistent with or prohibited by the Investment Agreement. The advance was not deemed to be a Kiewit Advance, which means that it was not subject to the mandatory prepayment requirements under the Investment Agreement. The Amendment also eliminated the requirement of the Investment Agreement to make mandatory prepayments for the Yellow Hammer advances.
The Fourth Amendment also contained provisions for DMRJ Group to elect to convert the outstanding payable balances to shares of Series A-1 Preferred Stock (for the Yellow Hammer Advances) and Series A-2 Preferred Stock (for the Term Loan Advances). See description of the Preferred Stock in Note 3.
The Series A-1 and Series A-2 Preferred Stock are convertible into shares of the Companys common stock. The conversion rate of the preferred stock to shares of the Companys common stock is adjustable based upon factors not found in a standard fixed-for-fixed pricing model. As such, the Company considered the provisions of ASC 815 Derivatives and Hedging, and recorded the fair value of $108,279 for the embedded conversion option liability associated with the amended agreement with an offset to the carrying value of the debt. The assumptions used in the Black-Scholes option pricing model at May 3, 2011, were as follows: (1) dividend yield of 0%; (2) expected volatility of 96.8%, (3) risk-free interest rate of 0.40%, and (4) expected life of 1.25 years. The conversion option liability is adjusted to its fair value at the end of each reporting period with the change in fair value recognized in net income (loss). The conversion option derivative liability at September 30, 2012 is recorded at $188,560 (see Note 7).
13
Also in connection with entering the Fourth Amendment the Company issued 100,000 shares of Series A-2 Preferred Stock valued at $700,000 to DMRJ Group. The value was determined by calculating the number of common shares into which the Series A-2 Preferred shares were convertible (1,000,000 common shares) times the current fair value for shares of common stock ($0.70). The Company recognized the amount in the loss on extinguishment of debt related to the Fourth Amendment.
The Company considered the impact of ASC 470-50 Debt-Modifications and Extinguishments on the accounting treatment of the Fourth Amendment. ASC 470-50 states that a transaction resulting in a significant change in the nature of a debt instrument should be accounted for as an extinguishment of debt. The difference between the reacquisition price and the net carrying amount of the extinguished debt was recognized currently in income of the period of extinguishment. The Company concluded that the amendment constituted a substantial modification. During the quarter ended June 30, 2011, the Company recognized a loss on extinguishment of the DMRJ note of $2,149,404 representing the difference between the fair value of the amended note, including consideration and fees, and the carrying value of the original note, including related unamortized discount.
A summary of DMRJ Group-related amounts as of September 30, 2012 and December 31, 2011 is as follows:
|
|
|
|
|
| September 30, 2012 | December 31, 2011 | ||
| $ |
| $ |
|
Yellow Hammer Advances | 2,500,000 | 2,500,000 | ||
20% accrued repayment obligation |
| 588,235 |
| 588,235 |
15% accrued prepaid interest obligation |
| 441,175 |
| 441,175 |
|
| 3,529,410 |
| 3,529,410 |
Term Loan Advance Principal |
| 1,000,000 |
| 1,000,000 |
20% accrued repayment obligation |
| 235,294 |
| 235,294 |
15% accrued prepaid interest obligation |
| 176,470 |
| 176,470 |
|
| 1,411,764 |
| 1,411,764 |
Total principal |
| 4,941,174 |
| 4,941,174 |
Less related discounts and unamortized balances |
| (5,278) |
| (230,888) |
|
|
|
|
|
Carrying Value | $ | 4,935,896 | $ | 4,710,286 |
This debt is all current in nature and was due in three installments (which include interest payable) of $1,550,000 on June 30, 2012, $2,945,000 on September 30, 2012 and $1,370,492 on December 31, 2012. On June 29, 2012 a Forbearance Agreement was signed and the payment terms were changed to allow the Company three additional months to pay the June 30, 2012 loan payment, in exchange for the issuance of 80,000 shares of Series A-2 Preferred Stock, carrying a value to DMRJ Group of $920,000. This value was determined by calculating the number of common shares into which the Series A-2 Preferred shares were convertible (800,000 common shares) times the current fair value (most recent sales price) for shares of common stock ($1.15). Financing expense in the amount of $920,000 was recognized for the quarter ended June 30, 2012 for this stock issuance pursuant to the Forbearance Agreement. Pursuant to the Forbearance Agreement DMRJ Group agreed to forbear from exercising its rights relating to a payment default if the payment due on June 30, 2012 was not paid. The Company failed to make the payment on June 30, 2012, and therefore an event of default occurred under the investment agreement, subject to DMRJ Groups agreement to forbear exercise its rights because of this default. Because additional terms of the Forbearance Agreement were not met, it terminated on July 31, 2012.
The Company failed to make the loan payment of $4,495,000 on September 30, 2012, and therefore an event of default occurred under the Investment Agreement, subject to DMRJ Groups agreement to forbear exercise its rights because of this default. Under the Investment Agreement, DMRJ Group therefore has the right, at its option, to notify the Company and declare the full amount of all of the loans immediately due and payable, foreclose on the security for the loans, or exercise any other legal rights based upon breach of the agreement. DMRJ Group has not notified the Company of its intent to exercise any of its rights based upon default of the Company under the agreement. Negotiations regarding a future business relationship to fund the DMRJ Group note and provide equity for operations capital are currently ongoing.
14
On October 17, 2012, the Company entered into a Fifth Amendment with DMRJ Group. The Fifth Amendment provides for the Company to receive up to $100,000 in additional funds in two advances (October Term Loan Advances) of $50,000 each. The first $50,000 advance was received on October 17, 2012. The advances are not deemed to be Kiewit Advances, which means that they will not be subject to the mandatory prepayment requirements under the Investment Agreement. In addition, the maturity date of the entire loan balance due to DMRJ Group is moved from December 31, 2012 to December 15, 2012. The amount to be due under the newly executed Fifth Amendment is $5,865,492 as of October 17, 2012; plus accrued interest at 2% per month, for a total due at December 15, 2012 of $6,148,857.
NOTE 9 COMMITMENTS
Mining Properties
During the year ended December 31, 2009 the Company entered into a Joint Venture Agreement with the Moeller Family Trust for the leasing of the Trusts Yellow Hammer property in the Gold Hill Mining District of Utah. Pursuant to the agreement, Moeller Family Trust received 250,000 shares of the Companys restricted common stock. If the Company does not place the Yellow Hammer property into commercial production within a three year period it will be required to make annual lease payments to the Trust of $50,000. Under the terms of the Joint Venture agreement, the Company will be required to pay a 6% net smelter royalty on the production of base metals and a net smelter royalty on gold and silver based on a sliding scale of between 2% and 15% based on the price of gold and silver, as applicable. The Company put the property into commercial production in 2011 which resulted in royalty payments to the Moeller Family Trust in the amount of $90,360 during 2011. Operations have been temporarily suspended and royalties are not currently accruing.
Also during the year ended December 31, 2009, the Company entered into a Joint Venture Agreement with the Clifton Mining Company and the Woodman Mining Company for the leasing of their property interests in the Gold Hill Mining District of Utah. Under the terms of the Joint Venture agreement, the Company will be required to pay a 4% net smelter royalty on base metals in all other areas except for production from the Kiewit gold property and a net smelter royalty on gold and silver, except for production from the Kiewit gold property, based on a sliding scale of between 2% and 15% based on the price of gold or silver, as applicable. The Company will also be required to pay a 6% net smelter return on any production from the Kiewit gold property. Additionally, if the Company did not place the Kiewit, Clifton Shears/smelter tunnel deposit, and the Cane Springs deposits into commercial production within the three year period ending July 24, 2012, it was required to make annual lease payments to Clifton Mining in the amount of $50,000 per each of the three locations. The terms of this lease were renegotiated on June 30, 2012 and payment due dates for the properties for 2012 have been extended as shown below. The July 24, 2012 and October 24, 2012 payments were timely made. Negotiations regarding the December 24, 2012 Cane Springs property lease payment are currently ongoing.
July 24, 2012 | |
Clifton Shears/smelter tunnel property | October 24, 2012 |
Cane Springs property | December 24, 2012 |
In September 2009, the Company acquired all of the rights and interests of Clifton Mining in a $42,802 reclamation contract and cash surety deposit with the State of Utah Division of Oil, Gas and Mining for the property covered by the joint venture. As consideration for Clifton Mining selling its interest in the reclamation contract and surety deposit, the Company issued 60,824 shares to Clifton Mining. For a period of two years the Company had the right to repurchase the shares for $48,000 or during the 180-day period after this two year period, Clifton Mining had the option to put the shares to the Company for $48,000. In connection with the issuance of this put option, management concluded that the 60,824 shares should be recorded as a derivative liability, and not as equity. The put option expired March 30, 2012.
Employment Agreements
In September 2010, the Company entered into employment agreements with its Chief Executive Officer (CEO) and its President and entered into a consulting agreement with one of its directors. Each agreement is for an initial term of between three months and four years and provides for base salary or fees of $120,000 per year. As of September 30, 2012, the salaries and payments under these contracts are accruing rather than being paid. As of September 30, 2012, the total amount included in accrued expenses for officer wages is $75,000 and for director consulting fees is $30,000.
NOTE 10 SUBSEQUENT EVENTS
DMRJ Loan
On October 17, 2012, the Company entered into a Fifth Amendment with DMRJ Group. The Fifth Amendment provides for the Company to receive up to $100,000 in additional funds in two advances (October Term Loan Advances) of $50,000 each. The advances are not deemed to be Kiewit Advances, which means that they will not be subject to the mandatory prepayment requirements under the Investment Agreement. In addition, the maturity date of the entire loan balance due to DMRJ is moved from December 31, 2012 to December 15, 2012. The amount to be due under the newly executed Fifth Amendment is $5,865,492 as of October 17, 2012; plus accrued interest at 2% per month, for a total due at December 15, 2012 of $6,148,857.
Stock Offering
An equity financing was initiated August 21, 2012 for the sale of up to 1,150,000 shares of common stock. As of September 30, 2012 no sales were recorded in conjunction with this offering, however, 110,000 shares of stock under this offering had been sold as of November 6, 2012. Under the terms of this offering, stock can be converted to cash generated from the sale of gold, for a period of 12 months after commencement of operations at the Kiewit project. Proceeds from 5% of the gold produced during the first year of production will be allocated to fund this option. Each investor will receive the right to convert a minimum of one-half and up to all of his shares (on a pro rata basis) into the value of the number of ounces represented by the total investment, determined using a base price of $1,000 per ounce.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
Forward-looking statements
The statements contained in this report that are not historical facts are forward-looking statements that represent managements beliefs and assumptions based on currently available information. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, need for financing, competitive position, potential growth opportunities, potential operating performance improvements, ability to retain and recruit personnel, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words believes, intends, may, should, anticipates, expects, could, plans, or comparable terminology or by discussions of strategy or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.
Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this quarterly report. While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to, the following:
·
a decline in metal prices;
·
environmental hazards;
·
metallurgical and other processing problems;
·
unusual or unexpected geological formations;
·
global economic and political conditions;
·
disruptions in credit and financial markets;
·
global productive capacity;
·
changes in product costing; and
·
competitive technology positions and operating interruptions (including, but not limited to, labor disputes, leaks, fires, flooding, landslides, power outages, explosions, unscheduled downtime, transportation interruptions, war and terrorist activities).
Mining operations are subject to a variety of existing laws and regulations relating to exploration, permitting procedures, safety precautions, property reclamation, employee health and safety, air and water quality standards, pollution and other environmental protection controls, all of which are subject to change and are becoming more stringent and costly to comply with. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.
These risk factors could cause our results to differ materially from those expressed in forward-looking statements.
16
Overview
Desert Hawk Gold Corp. (the Company) is an exploration stage company, which means we are engaged in the search for mineral deposits or reserves which could be economically and legally extracted or produced. None of our mining properties has any known reserves and our proposed programs on these properties are exploratory in nature. Our proposed projects are located in the Gold Hill Mining District in Tooele County, Utah.
We were originally incorporated in the State of Idaho on November 5, 1957. For several years the Company bought and sold mining leases and claims, but in 1995 we ceased all principal business operations. In 2008 we changed the domicile of the Company from the State of Idaho to the State of Nevada. In May 2009 we raised funds to recommence mining activities. In July 2009 we entered into agreements to commence exploration activities on mining claims in the Gold Hill Mining District.
We are currently focused primarily on the permitting of the Kiewit and Clifton Shears projects. Tentative approval of the Notice of Intent (NOI) was received from the Utah Division of Oil, Gas and Mining (DOGM) on September 28, 2012. This tentative approval will be subject to a 30 day public comment period, which closes November 13, 2012, after which conditional final approval will be issued if there are no substantive public comments. The NOI is expected to be issued during fourth quarter 2012 after posting of the required reclamation bond in the approximate amount of $1,278,000. The Plan of Operations is deemed to be substantially complete and along with the Environmental Assessment is expected to be issued by the BLM during fourth quarter 2012.
We currently hold leasehold interests within the Gold Hill Mining District consisting of 299 unpatented mining claims, including an unpatented mill site claim, 42 patented claims, and three Utah state mineral leases located on state trust lands, all covering approximately 33 square miles. The Company intends to concentrate its exploration activities on the Kiewit project consisting of seven of the unpatented Kiewit claims, the Clifton Shears, Cane Springs, Oquirrh Springs, the Frankie, the Rustler, the Lion Vein, and the Lucy L sites. Each of these is a potential near-term development target. Mineral extraction activities on the property at this time will be open-pit and the Company anticipates conducting underground mining exploration in the future.
Refurbishing of our Cactus Mill plant was completed in the fall of 2010 and processing of mineralized material was ongoing through December of 2011. Operations were suspended in December 2011 due to the lack of a Large Mine Permit as well as difficulties recovering tungsten in the mill. The tungsten recovery issues continue to be a work in progress but at a minimum, will require some modification to the existing mill circuit.
We have continued to conduct limited exploration activities through the third quarter of 2012. Several veins within the Clifton Shears, including the Lion Vein, have been sampled with ongoing geological work taking place. Confirmation work at the Frankie and continued exploration of the Kiewit and Rainbow Hill areas have also been a priority. We do not have any proven or probable reserves on any of our mineral claims or mining leases.
We have previously entered into an agreement with DMRJ Group, LLC (DMRJ Group) through which we can borrow up to $6,500,000 for our mining operations and our general and administrative expenses, of which we have $3,000,000 remaining available to us upon reaching certain milestones. This note is currently in default. On October 17, 2012, the Company entered into a Fifth Amendment with DMRJ Group. The Fifth Amendment provides for the Company to receive up to $100,000 in additional funds in two advances (October Term Loan Advances) of $50,000 each. The advances are not deemed to be Kiewit Advances, which means that they will not be subject to the mandatory prepayment requirements under the Investment Agreement. In addition, the maturity date of the entire loan balance due to DMRJ Group is moved from December 31, 2012 to December 15, 2012. The amount to be due under the newly executed Fifth Amendment is $5,865,492 as of October 17, 2012; plus accrued interest at 2% per month, for a total due at December 15, 2012 of $6,148,857. Negotiations regarding a future business relationship to fund the DMRJ Group note and provide equity for operations capital are currently ongoing.
On February 7, 2012, we signed a letter of intent (LOI) with Shoshone Silver/Gold Mining Company (Shoshone) whereby Shoshone would acquire a 50% interest in our mineral properties located in Tooele County, Utah. The terms of the LOI were that Shoshone would contribute $10 million in project equity, as well as a $2 million project loan to be used for the startup of the Kiewit gold heap leach operation. Under the terms of the deal, Shoshone would have a 120 day exclusive right to provide the $10 million, for which $100,000 was advanced to us as a nonrefundable deposit. On June 29, 2012, as part of the Forbearance Agreement with DMRJ Group, this agreement was extended to September 30, 2012 in exchange for additional non-refundable deposits of $100,000 each to be due to the Company on or before July 5 and July 31, 2012. The July 5, 2012, payment was received on July 9, 2012. The July 31, 2012 payment was not received and Shoshone has notified the Company that it will not be funding the additional $100,000. Effective July 31, 2012 the joint venture agreement was terminated and the $200,000 received was recognized as gain on termination of a joint venture agreement.
Historically, we have incurred net losses for the years ended December 31, 2011 and 2010, and have also incurred a loss for the nine months ended September 30, 2012. If we are unable to negotiate a long-term funding arrangement, we will not be able to meet our obligations to repay the loan advances to DMRJ Group and will likely lose our interest in all of our assets and mining claims.
17
Third Quarter Highlights
We are currently focused primarily on the permitting of the Kiewit and Clifton Shears projects. Tentative approval of the Notice of Intent (NOI) was received from the Utah Division of Oil, Gas and Mining (DOGM) on September 28, 2012. This tentative approval will be subject to a 30 day public comment period, which closes November 13, 2012, after which conditional final approval will be issued if there are no substantive public comments. The NOI is expected to be issued during fourth quarter 2012 after posting of the required reclamation bond in the approximate amount of $1,278,000. The BLM initiated an Environmental Assessment (EA) of the project in December 2011. JBR Consultants of Salt Lake City, Utah, is completing this review on behalf of the BLM. The Plan of Operations is deemed to be substantially complete and along with the EA is expected to be issued by the BLM during fourth quarter 2012.
On February 7, 2012, we signed a letter of intent (LOI) with Shoshone Silver/Gold Mining Company (Shoshone) whereby Shoshone would acquire a 50% interest in our mineral properties located in Tooele County, Utah. The terms of the LOI are that Shoshone would contribute $10 million in project equity, as well as a $2 million project loan to be used for the startup of the Kiewit gold heap leach operation. Under the terms of the deal, Shoshone would have a 120 day exclusive right to provide the $10 million, for which $100,000 was advanced to us as a nonrefundable deposit. On June 29, this agreement was verbally extended to September 30, 2012 in exchange for additional non-refundable deposits of $100,000 each to be due to the Company on or before July 5 and July 31, 2012. The July 5, 2012, payment was received on July 9, 2012. The July 31, 2012 payment was not received and Shoshone has notified the Company that it will not be funding the additional $100,000. Effective July 31, 2012 the joint venture agreement was terminated and the $200,000 received was recognized as gain on termination of a joint venture agreement.
During 2010 to 2011 draw advances totaling $3.5 million were obtained through a funding agreement with DMRJ Group. No additional advances were taken during the first nine months of 2012. Term loan advances under the terms of the Fourth Amendment, and all prior advances, were due in three payments due on June 30, 2012, September 30, 2012, and December 31, 2012. This note is now in default.
On June 29, 2012 the Company entered into a forbearance agreement with DMRJ Group which extended the due date of the June 30, 2012 loan payment to September 30, 2012 in exchange for 80,000 shares of Series A-2 Preferred Stock. Pursuant to the Companys Investment Agreement with DMRJ Group, on June 30, 2012, the Company was obligated to repay $1,550,000 of the funds previously loaned to the Company by DMRJ Group. Pursuant to the forbearance agreement DMRJ Group agreed to forbear from exercising its rights relating to a payment default if the payment due on June 30, 2012 was not paid. The Company failed to make the payment on June 30, 2012, and therefore an event of default occurred under the investment agreement, subject to DMRJ Groups agreement to forbear exercise its rights because of this default. Because the terms of the forbearance agreement were not met, it was terminated on July 31, 2012.
The Company failed to make the loan payment of $4,495,000 on September 30, 2012, and therefore an event of default occurred under the Investment Agreement, subject to DMRJ Groups agreement to forbear exercise its rights because of this default. Under the Investment Agreement, DMRJ Group therefore has the right at its option to notify the Company and declare the full amount of all of the loans immediately due and payable, foreclose on the security for the loans, or exercise any other legal rights based upon breach of the agreement. DMRJ Group has not notified the Company of its intent to exercise any of its rights based upon default of the Company under the agreement.
On October 17, 2012, the Company entered into a Fifth Amendment with DMRJ Group. The Fifth Amendment provides for the Company to receive up to $100,000 in additional funds in two advances (October Term Loan Advances) of $50,000 each. The advances are not deemed to be Kiewit Advances, which means that they will not be subject to the mandatory prepayment requirements under the Investment Agreement. In addition, the maturity date of the entire loan balance due to DMRJ is moved from December 31, 2012 to December 15, 2012. The amount to be due under the newly executed Fifth Amendment is $5,865,492 as of October 17, 2012; plus accrued interest at 2% per month, for a total due at December 15, 2012 of $6,148,857. Negotiations regarding a future long-term business relationship to fund the DMRJ Group note and provide equity for operations capital are currently ongoing.
An equity financing was initiated August 21, 2012 for the sale of up to 1,150,000 shares of common stock. As of September 30, 2012 no sales were recorded in conjunction with this offering however, 110,000 shares of stock had been sold as of November 6, 2012. Under the terms of this offering, stock can be converted to cash generated from the sale of gold, for a period of 12 months after commencement of operations at the Kiewit project. Proceeds from 5% of the gold produced during the first year of production will be allocated to fund this option. Each investor will receive the right to convert a minimum of one-half and up to all of his shares (on a pro rata basis) into the value of the number of ounces represented by the total investment, determined using a base price of $1,000 per ounce.
In September 2010, the Company entered into employment agreements with its Chief Executive Officer (CEO) and its President and entered into a consulting agreement with one of its directors. Each agreement is for an initial term of between three months and four years and provides for base salary or fees of $120,000 per year. As of September 30, 2012, the salaries and payments under these contracts are accruing rather than being paid. The total amount accrued as of September 30, 2012 for officer wages is $75,000 and for director consulting fees is $30,000.
18
Results of Operations for the Nine Months Ended September 30, 2012 and 2011
Operations were suspended in December 2011 due to the lack of a Large Mine Permit as well as difficulties recovering tungsten in the mill. The tungsten recovery issues continue to be a work in progress but at a minimum, will require some modification to the existing mill circuit.
During the nine months ended September 30, 2012, the Company had a net loss of $2,368,253 compared to a net loss of $4,231,117 during the nine months ended September 30, 2011. This represents a decreased net loss of $1,862,864 for the nine months ended September 30, 2012 which is attributable to the reduction in expenses due to cessation of pilot mill operations along with reductions in debt-related expenses from the prior year. The operating loss for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011, decreased by $346,683 due to the scaled-back operations and the proceeds from the joint venture agreement. In addition, other expense, consisting mostly of interest and financing costs, for the nine months ended September 30, 2012, decreased by $,1,516,181 over the period ending September 30, 2011. This reduction was due to reductions in debt related expense.
Liquidity and Cash Flow
Net cash used by operating activities was $373,895 during the nine month period ended September 30, 2012, compared with $960,339 during the nine month period ended September 30, 2011. The decrease in the amount of cash used by operating activities is primarily attributable to reduction in net loss from operations and suspension of mill operations.
Net cash used by investing activities was $50,600 during the nine month period ended September 30, 2012, compared to $152,173 cash used during the nine month period ended September 30, 2011. The decrease in cash used by investing activities is attributable to the reduction in fixed asset purchases and reductions in leases and bond acquisitions.
Net cash provided by financing activities was $20,150 during the nine month period ended September 30, 2012, compared with $1,245,130 cash provided during the nine month period ended September 30, 2011. Cash provided from financing for the nine month period ended September 30, 2012 was from issuance of stock while cash provided during the nine month period ended September 30, 2011 was primarily from DMRJ Group loan proceeds along with issuance of common stock from sales of stock. The DMRJ Group loan is now in default and negotiations regarding a future business relationship to fund the DMRJ Group note and provide equity for operations capital are currently ongoing.
As a result of the above, cash decreased by $404,345 during the nine month period ended September 30, 2012, leaving the Company with a cash balance of $10,745 as of September 30, 2012.
Critical Accounting Policies
The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have changed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules, and the use of judgment, to the specific set of circumstances existing in our business. Discussed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. See Note 2, Summary of Significant Accounting Policies, in our attached unaudited consolidated financial statements for a discussion of those policies.
Mineral Exploration and Development Costs
We account for mineral exploration costs in accordance with ASC 932 Extractive Activities. All exploration expenditures are expensed as incurred, previously capitalized costs are expensed in the period the property is abandoned. Expenditures to explore new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a units-of-production basis over proven and probable reserves.
Mineral Properties
We account for mineral properties in accordance with ASC 930 Extractive Activities-Mining. Costs of acquiring mineral properties are capitalized by project area upon purchase of the associated claims. Mineral properties are periodically assessed for impairment of value and any diminution in value.
19
Revenue
As an exploration stage company, our revenue from operations is referred to as income earned during the exploration stage. Revenue is recognized when title and risk of ownership of metals or metal bearing concentrate have passed and collection is reasonably assured. Revenue from the sale of metals may be subject to adjustment upon final settlement of estimated metal prices, weights and assays, and are recorded as adjustments to revenue in the period of final settlement of prices, weights and assays; such adjustments are typically not material in relation to the initial invoice amounts.
Reclamation and Remediation
Remediation, reclamation and mine closure costs are based principally on legal and regulatory requirements. Management estimates costs associated with reclamation of mining properties as well as remediation costs for inactive properties. The Company uses assumptions about future costs, capital costs and reclamation costs. Such assumptions are based on the Companys current mining plan and the best available information for making such estimates.
For non-operating properties, the Company accrues costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable. Such costs are based on managements estimate of amounts expected to be incurred when the remediation work is performed.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we have elected not to provide the disclosure required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Control and Procedures
Our CEO, who is also our principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (the Evaluation Date), has concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to provide assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Exchange Act) that occurred during our most recent quarter ended June September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
20
PART II OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 5, 2011 the Company entered into an agreement with West C Street LLC and Ibearhouse LLC, the holders of convertible debt acquired from us in 2009, permitting payment of their monthly interest in stock rather than cash. Since then, we have issued a total of 182,142 shares of stock, valued at $.70, to the note holders to convert accrued interest for the months of May 2011 through September 2012. These shares were issued without registration under the Securities Act by reason of the exemption from registration afforded by the provisions of Section 4(a)(5) and/or Section 4(a)(2) thereof, and Rule 506 promulgated thereunder, as a transaction by an issuer not involving any public offering. Each of the note holders was an accredited investor as defined in Regulation D. Each investor delivered appropriate investment representations with respect to these issuances and consented to the imposition of restrictive legends upon the stock certificates representing the shares. Each investor represented that it had not entered into the transaction with us as a result of or subsequent to any advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media or broadcast on television or radio, or presented at any seminar or meeting. Each investor was afforded the opportunity to ask questions of our management and to receive answers concerning the terms and conditions of the transaction. No underwriting discounts or commissions were paid in connection with the stock issuance.
Item 6. Exhibits
Exhibit No. | Description |
31.1 | Rule 15d-14(a) Certification by Principal Executive Officer and Principal Financial Officer |
32.1 | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to 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.
Desert Hawk Gold Corp.
Date: November 14, 2012
By: /s/ Robert E. Jorgensen
Robert E. Jorgensen, Chief Executive Officer
(Principal Executive and Financial Officer)
21
Certification
I, Robert E. Jorgensen, certify that:
1.
I have reviewed this Form 10-Q quarterly report of Desert Hawk Gold Corp. for the quarter ended September 30, 2012;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a15(f) and 15d15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5.
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 14, 2012
/s/ Robert E. Jorgensen
Robert E. Jorgensen, Chief Executive Officer
(Principal Executive Officer and Principal
Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Desert Hawk Gold Corp. (the Company) on Form 10-Q for the quarter ended September 30, 2012, as filed with the Securities and Exchange Commission (the Report), the undersigned principal executive and financial officer of the Company, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 14, 2012
/s/ Robert E. Jorgensen
Robert E. Jorgensen, Chief Executive Officer
(Principal Executive Officer and Principal Financial Officer)
DMRJ Group Series A Preferred Stock Shares (Details) (USD $)
|
1 Months Ended |
---|---|
Jul. 31, 2010
|
|
Issuance of shares of Series A Preferred Stock to DMRJ Group | 958,033 |
Par value of Series A preferred stock issued to DMRJ Group | $ 0.001 |
Value of shares issued to DMRJ Group | $ 958 |
Discount to the DMRJ Group loan proceeds | $ 669,664 |
Common stock price discount to the DMRJ Group loan | $ 0.70 |
SUBSEQUENT EVENTS DMRJ Loan (Details) (USD $)
|
Oct. 17, 2012
|
---|---|
Additional funds to receive | $ 100,000 |
Additional funds for each | 50,000 |
Amount due | 5,865,492 |
Interest rate accrued | 2.00% |
Total due at December 15, 2012 | $ 6,148,857 |
COMMITMENTS Clifton Mining (Details) (USD $)
|
Sep. 30, 2009
|
---|---|
Value of reclamation contract and cash surety deposit | $ 42,802 |
Value of right to repurchase of shares by the company | 48,000 |
Value of the option to put the shares to the company | $ 48,000 |
Number of shares recordes as a derivative liability | 60,824 |
CONVERTIBLE DEBT Promissoy Notes (Details) (USD $)
|
Nov. 18, 2009
|
---|---|
Convertible promissoy notes to two minority shareholders | $ 600,000 |
Interest rate of convertible promissoy notes | 1500.00% |
Monthly interest payable | 7,500 |
Conversion price per share | $ 1.50 |
Reduced conversion price | $ 0.70 |
Convertible common stock shares | 857,143 |
Bonues shares issued | 300,000 |
Rate of amount for on share of loaned | 2 |
Debt discount accreted over the life of the loan | $ 210,000 |
CAPITAL STOCK Preferred Stock (Details)
|
May 03, 2011
|
Jul. 31, 2010
|
---|---|---|
Designated preferred stock shares series A | 0 | 958,033 |
Preferred stock shares series A issued to DMRJ Group | 0 | 958,033 |
Designated preferred stock shares series A 1 | 2,500,000 | 0 |
Designated preferred stock shares series A 2 | 1,000,000 | 0 |
DMRJ Group Funding Summary of DMRJ group related amounts (Details) (USD $)
|
Sep. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Yellow Hammer Advances | $ 2,500,000 | $ 2,500,000 |
20% accrued repayment obligation | 588,235 | 588,235 |
15% accrued prepaid interest obligation | 441,175 | 441,175 |
Total Yellow Hammer Advances | 3,529,410 | 3,529,410 |
Term Loan Advance Principal | 1,000,000 | 1,000,000 |
20% accrued repayment obligation, | 235,294 | 235,294 |
15% accrued prepaid interest obligation, | 176,470 | 176,470 |
Total term loan advance principal | 1,411,764 | 1,411,764 |
Total principal | 4,941,174 | 4,941,174 |
Less related discounts and unamortized balances | (5,278) | (230,888) |
Carrying Value | $ 4,935,896 | $ 4,710,286 |
DMRJ Group Funding Investment agreement (Details) (USD $)
|
Jul. 14, 2010
|
Nov. 18, 2009
|
---|---|---|
Loan amount committed by DMRJ Group | $ 6,500,000 | |
Amount allocable to the Yellow Hammer | 2,500,000 | |
Amount allocable to the Kiewit projects | 2,750,000 | |
Convertible note holders, each of whom loaned to the Company | $ 300,000 | |
Reduced Conversion price of the loan per share from $1.50 | $ 0.70 |
COMMITMENTS Employment Agreements (Details) (USD $)
|
Sep. 30, 2012
|
Sep. 30, 2010
|
---|---|---|
Base salary or fees to CEO and President | $ 120,000 | |
Amount included in officer wages | 75,000 | |
Amount included in consulting fees | $ 30,000 |
MINERAL PROPERTIES AND INTERESTS
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Sep. 30, 2012
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MINERAL PROPERTIES AND INTERESTS | NOTE 4 MINERAL PROPERTIES AND INTERESTS
Mineral properties and interests as of September 30, 2012 and December 31, 2011 are as follows:
The Company holds operating interests within the Gold Hill Mining District in Tooele County, Utah, consisting originally of 419 unpatented mining claims, including an unpatented mill site claim, 42 patented claims, and seven Utah state mineral leases located on state trust lands, all covering approximately 33 square miles. In August 2010 and 2011, as a result of further evaluation, the Company allowed certain of the claims and interests to lapse back to Clifton Mining. The Company has retained 299 unpatented claims, including the unpatented mill site claim, 42 patented claims, and three Utah state mineral leases located on state trust lands. All but four of these mining claims and interests were obtained under the terms of the Amended and Restated Lease Agreement effective July 24, 2009, with Clifton Mining Company and Woodman Mining Company as lessors. Rights to the four Yellow Hammer patented claims were obtained under the terms of the Amended and Restated Lease Agreement dated July 24, 2009, with the Jeneane C. Moeller Family Trust. The properties are located approximately 190 miles west-southwest of Salt Lake City, Utah, and 56 miles south southeast of Wendover, Utah. The Company intends to concentrate its exploration activities on the Kiewit project consisting of seven of the unpatented Kiewit claims, the Clifton Shears, Cane Springs, Oquirrh Springs, the Frankie, the Rustler, the Lion Vein, and the Lucy L sites. Each of these is a potential near-term development target. Mineral extraction activities on the property at this time will be open-pit and the Company anticipates conducting underground mining exploration in the future. Annual lease fees are required on the 299 claims that make up the Companys Gold Hill property. Of these, four claims are within the Yellow Hammer site. Annual claims fees are currently $140 per claim plus administrative fees. The Company renewed 299 of the above claims in August 2012, at a total cost of about $42,159.
Kiewit Gold Project
The Company, through its lease agreement with Clifton Mining, has purchased all data, core samples and related reports from Dumont Nickel Inc. (which in 2010 changed its name to DNI Metals Inc. and was the former owner of the leases) associated with the aforementioned properties. In addition, the Company has access to all data and related information available and held by Clifton Mining. Desert Hawk has made application for a Large Mining Operations Permit to construct a heap leach facility and commence production activities on these claims. Tentative approval of the NOI was received from the Utah Division of Oil, Gas and Mining (DOGM) on September 28, 2012. A 30 day public comment period closes November 13, 2012. Conditional final approval will be issued if there are no substantive public comments. The NOI is expected to be issued during fourth quarter 2012 after posting of the required reclamation bond in the approximate amount of $1,278,000.
In January 2010 the Company submitted a Notice of Intent to Commence Large Mining Operations application to DOGM for three surface mines and a leach gold operation on the Kiewit unpatented claims. In February 2010 the Company submitted a Plan of Operations to the Bureau of Land Management. The Plan of Operations is deemed to be substantially complete and along with the Environmental Assessment is expected to be issued by the BLM during fourth quarter 2012.
Cactus Mill Plant
Located on the Cactus Mill site are two process facilities. A 150 ton per day mill built by Woodman Mining and operated until the 1980s using equipment to process copper, gold, silver, and tungsten ores from the district. In addition, there is a second facility, constructed in the 1990s, for custom milling precious metals concentrates. Equipment from both mills was used to construct a 240 ton per day pilot mill capable of recovering copper, gold, silver and tungsten ores initially extracted from the Yellow Hammer claims. In September 2010 the Company completed its rebuild of the pilot mill and testing of the pilot plan was conducted. Commencement of processing activities began in fourth quarter 2010. Pursuant to the Companys lease agreement with Clifton Mining, it has access to Cane Springs, a natural flowing spring approximately 1,000 feet above the Cactus Mill site, as well as the Cane Springs mine shaft located approximately one-quarter mile south of the Cactus Mill property. The Company holds a permit from the Utah Division of Oil, Gas and Mining for the pilot plant which allows flotation and gravity concentration. The Company commenced operation of the Cactus Mill pilot plant in November 2010, and processed and sold concentrates on a pilot test basis through June of 2011. Operations at the Cactus Mill pilot plant have been temporarily suspended.
Yellow Hammer Claims
The Company holds a Small Mine Permit for the Yellow Hammer site from the Utah Division of Oil, Gas and Mining and has posted reclamation bonds totaling $60,800. This permit stipulates that the Company may conduct exploration or mining operations on these claims so long as such activities are limited to an area within nine acres.
Exploration Expenditures
Exploration expenditures incurred by the Company during the three and nine months ended September 30, 2012 and 2011 were as follows:
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