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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.)

 

 

7723 N. Morton St., Spokane, WA

99208

(Address of principal executive offices)

(Zip Code)

 

 

(509) 434-8161

(Registrant’s 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 issuer’s 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

 

 

Item 1.  Financial Statements

4

Item 2.  Management’s 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

 

 

PART II – OTHER INFORMATION

21

 

 

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

21

Item 6.  Exhibits

21

 

 

SIGNATURES

21





2



PART I – FINANCIAL INFORMATION


Item 1.  Financial Statements


 

 

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

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

2012

 

 

2011

ASSETS

 

(unaudited)

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash

$

10,745

 

$

415,090

 

Accounts receivable

 

 

1,475

 

 

66,883

 

Prepaid expenses and other current assets

 

63,852

 

 

92,195

 

     Total Current Assets

 

 

76,072

 

 

574,168

 

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $140,993 and $88,976

 

325,740

 

 

377,757

MINERAL PROPERTIES AND INTERESTS (Note 4)

 

885,556

 

 

835,237

RECLAMATION BONDS (Note 4)

 

150,581

 

 

149,981

 

 

 

 

 

 

 

TOTAL ASSETS

$

1,437,949

 

$

1,937,143

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

Accounts payable

$

111,928

 

$

6,771

 

Accrued expenses

 

75,273

 

 

22,886

 

Derivative liability-put option (Notes 7 and 9)

 

-

 

 

25,193

 

Derivative liability-conversion option (Notes 7 and 8)

 

188,560

 

 

230,714

 

Interest payable (Note 8)

 

885,521

 

 

419,559

 

Notes payable-net of discount (Note 8)

 

4,935,896

 

 

4,710,286

 

Convertible debt-net of discount (Note 6)

 

587,264

 

 

534,764

 

     Total Current Liabilities

 

 

6,784,442

 

 

5,950,173

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

Asset retirement obligation (Note 4)

 

62,141

 

 

57,502

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

6,846,583

 

 

6,007,675

 

 

 

 

 

 

 

 

COMMITMENTS  (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' DEFICIT (Note 3)

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized

 

 

 

 

 

 

Series A:  958,033 shares issued and outstanding

 

958

 

 

958

 

Series A-1: No shares issued and outstanding

 

-

 

 

-

 

Series A-2: 180,000 and 100,000 shares issued and outstanding, respectively

 

180

 

 

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

 

 

8,316

 

Additional paid-in capital

 

6,088,487

 

 

5,058,563

 

Accumulated deficit prior to exploration stage

 

(1,016,591)

 

 

(1,016,591)

 

Accumulated deficit during exploration stage

 

(10,490,131)

 

 

(8,121,878)

 

     Total Stockholders' Deficit

 

(5,408,634)

 

 

(4,070,532)

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$

1,437,949

 

$

1,937,143

 

 

 

 

 

 

 

 

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




4




DESERT HAWK GOLD CORP

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Period from

 

 

 

 

 

 

 

 

May 1, 2009

 

 

 

 

 

 

 

 

 

 

 

 

(Inception of

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

Exploration Stage)

 

 

 

 

September 30,

 

September 30,

 

September 30,

 

September 30,

 

to September 30,

 

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

 

 

INCOME EARNED DURING EXPLORATION STAGE

 

 

 

 

 

 

 

 

 

   

 

Concentrate sales

 

 

-

 

18,442

 

-

 

903,022

 

969,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

General project costs

 

 

31,008

 

124,570

 

134,906

 

1,047,299

 

1,620,651

 

Exploration expense

 

57,346

 

74,999

 

216,865

 

204,635

 

1,587,449

 

Consulting

 

39,260

 

30,000

 

111,200

 

150,670

 

573,604

 

Officers and directors fees

 

75,000

 

59,188

 

181,923

 

249,486

 

1,022,858

 

Legal and professional

 

16,929

 

10,423

 

69,339

 

75,919

 

433,788

 

General and administrative

 

35,226

 

50,599

 

118,686

 

156,650

 

564,226

 

Depreciation

 

17,402

 

16,360

 

52,017

 

49,982

 

142,359

 

Gain on termination of joint venture agreement

 

(200,000)

 

-

 

(200,000)

 

-

 

(200,000)

 

 

 

 

72,171

 

366,139

 

684,936

 

1,934,641

 

5,744,935

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(72,171)

 

(347,697)

 

(684,936)

 

(1,031,619)

 

(4,775,030)

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

Interest  and other income

 

3,572

 

-

 

3,572

 

14

 

66,423

 

Change in fair value of derivatives

 

42,958

 

(127,178)

 

67,347

 

(103,850)

 

(53,885)

 

Loss on extinguishment of debt  (Note 8)

 

-

 

-

 

-

 

(2,149,404)

 

(2,149,404)

 

Financing expense

 

(31,698)

 

(67,708)

 

(1,069,266)

 

(464,853)

 

(1,917,029)

 

Interest expense

 

(224,183)

 

(207,619)

 

(684,970)

 

(481,405)

 

(1,661,206)

 

 

 

(209,351)

 

(402,505)

 

(1,683,317)

 

(3,199,498)

 

(5,715,101)

 

 

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

 

(281,522)

 

(750,202)

 

(2,368,253)

 

(4,231,117)

 

(10,490,131)

INCOME TAXES

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

 

 

$

(281,522)

$

(750,202)

$

(2,368,253)

$

(4,231,117)

$

(10,490,131)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED NET LOSS PER SHARE

$

(0.03)

$

(0.09)

$

(0.28)

$

(0.54)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED

 

8,430,578

 

8,086,844

 

8,394,924

 

7,849,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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




5




DESERT HAWK GOLD CORP

(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

 

 

 

 

 

 

 

 Period from

 

 

 

 

 

 

 May 1, 2009

 

 

 

 

 

 

 

 

 (Inception of

 

 

 

 

Nine Months Ended

 

Exploration Stage)

 

 

 

 

September 30,

 

September 30,

 

 to September 30,

 

 

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

$

(2,368,253)

$

(4,231,117)

$

(10,490,131)

Adjustments to reconcile net loss to net cash used by operating activities:

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

(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)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

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




 

 

 

 

 

 

 

 

 Period from

 

 

 

 

 

 

 

 

 May 1, 2009

 

 

 

 

 

 

 

 

 (Inception of

 

 

 

 

Nine Months Ended

 

Exploration Stage)

 

 

 

 

September 30,

 

September 30,

 

 to September 30,

 

 

 

 

2012

 

2011

 

2012

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

(404,345)

 

132,618

 

(14,902)

CASH, BEGINNING OF PERIOD

 

415,090

 

566,549

 

25,647

 

 

 

 

 

 

 

 

 

CASH, END OF PERIOD

$

10,745

$

699,167

$

10,745

 

 

 

 

 

 

 

 

 

NON-CASH FINANCING AND INVESTING ACTIVITIES:

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 



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 Company’s 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 Company’s 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 Company’s 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 period’s 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 Company’s 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 Company’s 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 Company’s 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:


 

 

September 30, 2012

 

December 31, 2011

     Yellow Hammer Site

 

 

 

 

          Initial Lease Fee

$

175,000

$

175,000

          Asset Retirement Obligation

 

30,908

 

30,908

               Total

 

205,908

 

205,908

 

 

 

 

 

     Kiewit, Cactus Mill and all other sites

 

 

 

 

          Initial Lease Fee

 

600,000

 

600,000

          Annual Lease Payment

 

50,000

 

-

          Asset Retirement Obligation

 

26,913

 

26,594

               Total

 

676,913

 

626,594

 

 

 

 

 

     Blue Fin Claims

 

 

 

 

         Initial Claim Fee

 

2,735

 

2,735

 

 

 

 

 

               Total

 

2,735

 

2,735

 

 

 

 

 

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 Company’s 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 1980’s using equipment to process copper, gold, silver, and tungsten ores from the district.  In addition, there is a second facility, constructed in the 1990’s, 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 Company’s 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 Company’s 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 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.



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 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).




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 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.




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 Trust’s Yellow Hammer property in the Gold Hill Mining District of Utah.  Pursuant to the agreement, Moeller Family Trust received 250,000 shares of the Company’s 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.


Kiewit property

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


The following discussion and analysis should be read in conjunction with the “Management’s 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 management’s 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.




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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.




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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 Company’s 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 Group’s 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 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.


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.




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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.




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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 Company’s 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 management’s 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)



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