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 Company’s 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 year’s 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.

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 Company’s 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 Company’s 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 Company’s common stock. The conversion rate of the preferred stock to shares of the Company’s 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).

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 Group’s 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 Group’s 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.

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.