Attached files
| file | filename |
|---|---|
| EX-95 - MINE SAFETY DISCLOSURE - Desert Hawk Gold Corp. | f10k2020ex95_desert.htm |
| EX-32.2 - CERTIFICATION - Desert Hawk Gold Corp. | f10k2020ex32-2_desert.htm |
| EX-32.1 - CERTIFICATION - Desert Hawk Gold Corp. | f10k2020ex32-1_desert.htm |
| EX-31.2 - CERTIFICATION - Desert Hawk Gold Corp. | f10k2020ex31-2_desert.htm |
| EX-31.1 - CERTIFICATION - Desert Hawk Gold Corp. | f10k2020ex31-1_desert.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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) |
(IRS employer identification number) |
| 1290 Holcomb Ave, Reno, NV 89502 |
| (Address of principal executive offices) (Zip Code) |
Registrant’s telephone number, including area code: (775) 337-8057
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the last price at which the common stock was last sold as of the last business day of the registrant’s most recently competed second fiscal quarter was $8,963,007.
The number of shares outstanding of the registrant’s common stock on April 19, 2021, was 26,831,603.
DOCUMENTS INCORPORATED BY REFERENCE
None
Table of Contents
Throughout this report, unless otherwise designated, the terms “we,” “us,” “our,” “the Company” and “our company” refer to Desert Hawk Gold Corp., a Nevada corporation. All amounts in this report are in U.S. Dollars, unless otherwise indicated.
i
Forward Looking Statements
The statements contained in this report that are not historical facts, including, but not limited to, statements found in the section entitled “Risk Factors,” 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, 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 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:
| ● | environmental hazards; |
| ● | metallurgical and other processing problems; |
| ● | unusual or unexpected geological formations; |
| ● | need for additional funding to continue operations; | |
| ● | global economic and political conditions; |
| ● | staffing considerations in remote locations; |
| ● | disruptions in credit and financial markets; |
| ● | global productive capacity; |
| ● | changes to existing mining laws or regulations; |
| ● | 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). | |
| ● | disruptions due to global pandemics or civil unrest |
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.
ii
General
Desert Hawk Gold Corp. (the “Company”) was incorporated on November 5, 1957, in the State of Idaho as Lucky Joe Mining Company. In 2008 we changed our corporate domicile to the State of Nevada by merging with a wholly owned subsidiary formed solely for this purpose. Our Nevada corporation was incorporated on July 17, 2008. We have no subsidiaries.
We are currently engaged in the extraction of gold and related precious metals from our Kiewit mining property located in the Gold Hill Mining District in Tooele County, Utah. In addition, we have commenced crushing and performing cyanide vat and heap leaching on various ores from a third party at our Goldhill processing plant.
DMRJ Settlement
On July 14, 2010, we entered into an Investment Agreement, which was amended from time to time, (the “Investment Agreement”) with DMRJ Group I, LLC (“DMRJ”) to provide funding for our mining operations. Under the terms of the Investment Agreement, we borrowed approximately $15,000,000 through the year ended December 31, 2017 resulting in a balance due to DMRJ of $25,511,561 including principal and interest. As further consideration for the loans, we issued to DMRJ 958,033 shares of Series A Preferred Stock, 180,000 shares of Series A-2 Preferred Stock, and 444,529.69 shares of Series B Preferred Stock. DMRJ owned approximately 77% of stock of the Company (on a fully diluted basis). The preferred shares and debt were subsequently transferred to affiliated entities of DMRJ.
In the third quarter of 2016, control of the management of DMRJ was given to court appointed trustees of the affiliated assignees of the debt and preferred shares, Platinum Partners Value Arbitrage Fund L.P. (“PPVA”) and Platinum Partners Credit Opportunities Master Fund, LP (“PPCO”). On December 19, 2016, the SEC filed the complaint against defendants Platinum Management, PPCO, and management of the DMRJ, charging the defendants with a complex, multi-pronged, fraudulent scheme to inflate returns to investors, and cover up massive losses and liquidity problems. In July 2011, a federal jury in the Eastern District of New York convicted two executives of Platinum Partners L.P., the parent of DMRJ, of securities fraud, securities fraud conspiracy and wire fraud conspiracy. One of the defendants convicted in the lawsuit, David Levy, served as a director of our company from 2015 through April 2016.
After 2016 neither DMRJ nor its affiliates were able to provide further funding and on February 13, 2018, we entered into an Assignment and Assumption Agreement with DMRJ, PPVA, and PPCO (the “Assumption Agreement”), whereby we agreed to repurchase the debt and preferred shares for payment of $625,000. The transaction closed on or about March 8, 2018. Upon closing DMRJ also released all security interest in the assets of the Company. Following closing of the Assumption Agreement, we cancelled all of the debt owed DMRJ. We also cancelled all of the preferred shares and terminated each of the series of preferred stock. Each of the parties to the Assumption Agreement also agreed to indemnify the other for breach of any representation or covenant made under the agreement.
Funding for the closing of the Assumption Agreement was furnished by Ibearhouse, LLC and West C Street, LLC, note holders and shareholders of the Company. Under the terms of a Stock Purchase Agreement dated February 28, 2018 (the “SPA”), the Company exchanged 4,500,000 shares of common stock to the convertible debt holders for $625,000 in cash and several concessions as to the convertibility, due dates and default provisions on their outstanding debt. Under the terms of the SPA these investors waived their rights to convert under prior 2009 promissory notes to eliminate any rights to convert the amounts due under the notes into shares of our common stock or to accelerate repayment upon default. These investors also agreed to amend their prior 10% Secured Convertible Promissory Note dated October 14, 2016, in the principal amount of $125,000, their 10% Senior Secured Convertible Promissory Note dated November 15, 2016, in the principal amount of $25,000, and their 15% Convertible Promissory Note dated November 30, 2009, as amended, in the principal amount of $300,000. Each of these promissory notes was repaid in full on March 7, 2019.
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Prepaid Forward Gold Contract Funding Transaction and Amended Agreement
During the first quarter of 2019, the Company entered into and closed a Prepaid Forward Gold Purchase Agreement (the “Purchase Agreement”) with PDK Utah Holdings L.P. (“PDK”) for the sale and purchase by PDK of gold produced from the Company’s mining property. Under the terms of the Purchase Agreement, PDK initially agreed to purchase a total of 73,910 ounces of gold from the Company. The Company agreed to deliver ounces of gold produced from the Kiewit property to PDK. The Company would receive proceeds from PDK at the then current spot price less a discount specified in the Purchase Agreement. Prepayment was to be made in three tranches, with the initial tranche in the amount of $11,200,000 having been made upon execution of the Purchase Agreement on or about March 7, 2019 (the “Initial Funding”), $4,500,000 for Tranche 2 to occur at least six months following the Initial Funding date, and $5,500,000 for Tranche 3 to occur at least 10 months following the Initial Funding date, provided that all conditions precedent for funding Tranches 2 and 3 are met. From the Initial Funding, the Company paid an upfront fee of $600,000 to PDK for expenses incurred in connection with the transaction.
The Purchase Agreement contains a participation payment whereby PDK receives a portion of the proceeds from gold sold by the Company to a third party. The amount of proceeds due to PDK is based upon a percentage of proceeds over a set gold price per ounce. In addition, PDK may reduce the required number of ounces to be sold in exchange for common shares of the Company. As security for the obligations of the Company under the Purchase Agreement, the Company has granted PDK a security interest in all of the assets of the Company and has issued and recorded a Leasehold Deed of Trust, Assignment of Leases, Rents, As Extracted Collateral and Contracts, Security Agreement and Fixture Filing. The Purchase Agreement contains representations and warranties, as well as affirmative and negative covenants customary to a transaction of this nature.
On October 31, 2019, the Company and PDK amended the Purchase Agreement and entered into the Amended Prepaid Forward Agreement (the “Amended Agreement”) to adjust the second and third tranches paid to the Company, to reduce the total number of ounces of gold subject to the Purchase Agreement, and to revise other provisions therein. The second tranche was reduced from $4,500,000 to $1,600,000, and the third tranche was reduced from $5,500,000 to $1,400,000. The second tranche was received on October 31, 2019 upon execution of the Amended Agreement and the third tranche was received on December 27, 2019, with funds to be dedicated in accordance with the revised budget furnished with the Amended Agreement. The amendment also reduced the total number of ounces of gold prepaid under the agreement from 73,910 to 47,045.
The forward gold sales contract liability due under the terms of the Purchase Agreement at December 31, 2020 is $13,600,000 which is the $14,200,000 received from PDK in Tranches 1-3, less the $600,000 upfront fee paid by the Company.
Under the terms of the Amended Agreement, the Company is obligated to deliver gold in the following quantities:
| Months | Gold Ounces per Month | Total Gold Ounces | ||||||
| December 2020 | 655 | 655 | ||||||
| January 2021 to March 2021 | 896 | 2,688 | ||||||
| April 2021 to March 2022 | 911 | 10,932 | ||||||
| April 2022 to March 2023 | 1,396 | 16,752 | ||||||
| April 2023 to December 2023 | 1,753 | 15,777 | ||||||
| January 2024 | 241 | 241 | ||||||
| 47,045 | ||||||||
The Amended Agreement also altered the total amount that PDK may reduce the number of ounces of gold to be delivered under the Amended Agreement in exchange for common shares of the Company. Under the Amended Agreement, PDK may reduce the required number of ounces by up to 8,000 ounces in exchange for common shares of the Company.
The first gold delivery under the Amended Agreement was due on December 24, 2020, and recurring deliveries are due on the fourth business day prior to the last calendar day of each scheduled delivery month. On December 1, 2020, we notified PDK that we would not be able to make our December delivery and elected to use one of the delivery postponement options under the Amended Agreement. This provision permits us to delay delivery by up to 30 days by delivering the amount of gold due on the previous month’s due date, plus interest calculated at the default interest rate. At the end of this 30-day extension period we were unable to deliver the December payment. We have also failed to make the gold deliveries for January, February and March of 2021 and anticipate that we will be unable to make deliveries until at least third quarter of this fiscal year. The failure to make gold deliveries under the Amended Agreement provides PDK with certain remedies, including termination of the agreement, demand for early payment of the entire delivery obligations, and enforcement of foreclosure rights against the assets pledged as security under the agreement. We are involved in ongoing discussions with representatives of PDK in an attempt to resolve these late payments and to renegotiate the gold delivery schedule.
| 2 |
Clifton Amended Lease Agreement
In March 2019, we, The Woodman Mining Company, and Clifton Mining Company (“Clifton”) entered into a Second Amended and Restated Lease Agreement (the “Amended Lease”). Under the terms of the Amended Lease, we relinquished our leasehold interest in all but 10 of the patented claims, on which we retained only the surface rights, and 66 of the unpatented lode mining claims previously held by us. The mining claims retained by us represent the area of interest known as the Kiewit property, which has been the principal focus of our mining activities. The lease term is for 20 years and for so long thereafter as the mining claims are being actively used by us for commercial mining purposes. The Cactus Mill Property was returned to Clifton as part of this agreement.
Under the terms of the Amended Lease, Clifton’s right to receive a 6% royalty interest from production on the Kiewit project was terminated. We also acquired from third parties and cancelled the remaining 1% outstanding royalty interest thereon.
As consideration for entering into the Amended Lease, the Company issued 5,500,000 shares of its common stock with a fair value of $2,200,000 which increased the carrying value of the mineral properties and interests. In addition, the Company and Clifton entered into a Registration Rights Agreement to register for resale the shares issued to Clifton which requires the Company to register the shares within 18 months (which is September 7, 2020) following the Initial Funding. In the event the Company does not register the shares within the 18-month period, the Company is obligated to pay Clifton a royalty equal to 2.5% of the net smelter returns from the minerals generated from the Company’s mining claims. We have agreed to maintain the effectiveness of the Registration Rights Agreement for period of three years. The Registration Rights Agreement contains mutual indemnification provisions. The registration of these shares was filed and became effective on April 14, 2020.
Buyer Royalty Agreement
As part of the Purchase Agreement finalized in March 2019, the existing royalties were bought out by the Company from Clifton and two other minority royalty holders at a cost of $900,000 which increased the carrying value of the mineral properties and interests. The buyer of the Purchase Agreement, PDK, acquired a 4% net smelter royalty (NSR), previously held by Clifton, on the Kiewit property for $2,200,000. PDK remitted the funds for the NSR directly to Clifton. PDK will receive a 4% NSR on proceeds from the sale of gold and silver from the Kiewit and JJS properties.
H&H Metals Agreement
On March 29, 2018, we entered into a five-year Agency Agreement (the “Agency Agreement”) with H&H Metals Corp., a New York corporation (“H&H”). Under the terms of the Agency Agreement H&H agreed to provide us certain advisory services in regard to natural resources activities and to assist us in securing purchasers for minerals produced from its mining properties.
On January 16, 2019, as a condition for entering into the Purchase Agreement, we negotiated a termination of the Agency Agreement (the “Termination Agreement”) with H&H. Under the terms of the Termination Agreement, we paid H&H $600,000 in cash and agreed to pay an additional $200,000 within 18 months. We also issued 250,000 shares of our common stock with a fair value of $100,000 to H&H. In addition, Phillip H. Holme, a principal of H&H, became a director of the Company and served until his death on or about April 30, 2020.
Acquisition of Additional Mining Claims
On March 26, 2019, we negotiated an option to purchase 64 patented mining claims from Ben Julian, LLC, an Idaho limited liability company, for $500,000. The claims are located contiguous to our existing Kiewit claims, except for one claim located in the Dugway Mining District. On June 13, 2019, we entered into a letter agreement with Clifton Mining Company whereby Clifton would purchase 44 of the optioned claims and we would acquire the remaining 20 claims. Each party would pay one-half of the total purchase price for the claims. The purchase price was paid by each party and the closing of the acquisition occurred on June 14, 2019. The Company received and has recorded a quitclaim deed for the 20 patented claims, which are called the JJS Property.
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Mining Operations
On January 7, 2014, we received final approval from the BLM of the Kiewit Large Mine Permit which allowed us to develop the Kiewit deposit and put it into production. Development began in June 2014. Construction at the site was funded by loan advances from DMRJ under the Investment Agreement. The first sale of minerals from the mine occurred in October 2014. We suspended operations in June 2016 because of depressed metal prices and lack of funds. We resumed operations in spring 2018 and again suspended operations in October 2018 for lack of funding. Since securing funding in March 2019, we have recommenced mining operations.
Third-Party Ore Processing
During 2020 we commenced processing ore for a third party under our existing mining permit, which allowed for 5,000 tons of this ore to be processed and has since then been increased to 30,000 tons. We have completed pilot processing of the ore and determined that we can profitably process the material furnished by the third party. We are in negotiations with this party to enter into a longer-term arrangement to continue to provide such processing services.
Distribution, Sales, and Raw Materials
We currently sell our products solely to Asahi Refining. We use several raw materials such as cyanide, caustic, and limestone, in processing and we are not dependent upon any single supplier for our raw materials. We also currently are dependent upon one customer for our product although other customers are available.
Competition
The precious metal exploration and mining industry is highly fragmented. We expect to compete with many other exploration companies looking for gold, silver and other minerals. We are among the smallest of the exploration companies in existence and are a very small participant in the precious metal industry. However, we generally expect to compete favorably with other exploration companies since the claims held by us in the Gold Hill Mining District consolidate the principal mining areas and limit the ability of other exploration companies to commence material exploration activities in the district. Furthermore, if we are able to successfully recover gold, as well as silver and other by-products from our claims, it is likely that we will be able to sell all minerals that we are able to recover.
Government Compliance
Our operations are subject to extensive federal and state laws and regulations designed to conserve and prevent the degradation of the environment. These laws and regulations require obtaining various permits before undertaking certain exploration or mining activities and may result in significant delays, substantial costs and the alteration of proposed operating plans. We believe we have all necessary environmental permits and authorizations to support existing operations.
Our Kiewit claims are located on unpatented claims located on federal land, which also requires compliance with applicable requirements administered by the BLM. These regulations impose specific conditions on the nature and extent of surface disturbance, the manner in which exploration and mining can be conducted, the disposition of spent mineralized material, the use and containment of chemical leaching agents and other solutions, spill prevention, liquid and solid waste disposition, ground water monitoring, and a number of other matters which if violated could result in fines, penalties or attendant adverse publicity.
We are also obligated to make annual payments to the BLM for each of our unpatented mining claims on federal land and to record an affidavit in the Tooele County Recorder’s Office reflecting the payment of the annual maintenance fees to the BLM and stating our intention to hold the claims. The 2020 annual maintenance fees and mineral lease fees payable to the BLM on our unpatented claims were $29,739 and this amount was paid in full within the required payment period. The required affidavit was also filed with the Tooele County Recorder. Proposals repeatedly have been introduced in Congress that would substantially modify the Mining Law of 1872, the statute pursuant to which unpatented mining claims are located and maintained. Bills have been introduced, but have not passed, that would require, among other things, the payment of royalties to the United States. Personal property tax levied by the state and collected by the local county are due each year and have been paid for 2019 and prior years. The 2020 personal property tax in the amount of $35,568 became due in November 2020 and has not yet been paid. The personal property taxes are expected in increase in 2021 over that in 2020 due to increases in personal property at the site along with projected future sales.
Mining and exploration operations are also subject to both federal and state laws and regulations pertaining to employee health and safety. We employ a mine safety administrator to monitor our obligations under these laws and regulations.
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Intellectual Property Rights
We own the Marks “DESERT HAWK” and “DESERT HAWK GOLD CORP” and also own corresponding federal trademark filing Serial Nos. 85/232,815, 85,232,819, 85/232,820, and 85/232,823, for use in connection with mining extraction, consulting in the fields of mining and milling, milling of ore, mining exploration and mineral exploration, copper ore, gold ore, silver ore, and tungsten ore.
Employees
At April 5, 2021, we had 29 full-time and 3 part-time employees, including our President, Rick Havenstrite, who devotes approximately 90% of his time or approximately 50 hours per week for this business. We also engage Marianne Havenstrite, wife of Rick Havenstrite, as our Treasurer and Principal Financial and Accounting Officer. Our officers are based out of our Reno, Nevada office, along with other office and engineering personnel. The remaining employees work at our Gold Hill project site.
The following material risks and uncertainties, together with the other information set forth in this Report, should be carefully considered by those who invest in our securities. Any of the following risks could materially and adversely affect our business, financial condition or operating results and could decrease the value of our Common Stock.
Risks Relating to Our Business
We have failed to make our gold deliveries under the Purchase Agreement with PDK, which constituted an Event of Default under the agreement.
We were unable to make the monthly gold deliveries to PDK in December 2020 and in January, February and March 2021, and we anticipate that we will be unable to make deliveries for several more months. The failure to make these gold deliveries, as required under the Purchase Agreement, constitute Events of Default under the terms of the agreement. As such, PDK has available certain remedies under the terms of the Purchase Agreement, including the right to terminate the Purchase Agreement, demand payment of an early termination amount as calculated in the agreement, or foreclose on the collateral provided under the agreement and governed by the separate collateral agreement. Interest on any unpaid obligations will be calculated at a default rate equal to LIBOR plus 2%. We do not have sufficient funds to satisfy the default obligations. If we are unable to negotiate a resolution of these default events and restructure the gold delivery obligations currently mandated, we may be unable to retain possession of the mining project and would be forced to cease operations.
The value of our property is subject to volatility in the price of gold and any other deposits we may seek or locate.
Our profitability will be significantly affected by changes in the market price of gold and silver, and other minerals. These mineral prices fluctuate widely and are affected by numerous factors, all of which are beyond our control. For example, the price of gold can be influenced by the sale or purchase of gold by central banks and financial institutions; interest rates; currency exchange rates; speculation; inflation or deflation; fluctuation in the value of the United States dollar and other currencies; global and regional supply and demand, including investment, industrial and jewelry demand; and the political and economic conditions of major gold producing countries throughout the world, such as Russia and South Africa. The price of gold and other minerals has fluctuated widely in recent years, and a decline in the price of gold or other minerals could cause a significant decrease in the value of our property, limit our ability to raise money, and render continued exploration and development of our property impracticable. For example, the price of gold has dropped significantly since August 2020, based in part on forecasts of a rapid global economic expansion this year, powered by vaccinations and U.S. stimulus payments according to some economists. If the price of gold makes operations unprofitable, then we could lose our rights to our property and be compelled to sell some or all of these rights. Additionally, the future development of our mining properties is heavily dependent upon the level of metals prices remaining sufficiently high to make the development of our property economically viable. An investor may lose its investment if the price of these minerals substantially decreases. The greater the decrease in the price of gold or other minerals, the more likely it is that an investor will lose money.
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To continue our operations, we may need to obtain additional financing from PDK or outside sources.
Other than future advances by PDK, we have no firm commitments or agreements to provide additional funding to have sufficient capital to fund our operations as they are currently planned or to fund the acquisition and exploration of new properties. We also may be unable to secure additional financing on terms acceptable to us, or at all. Our inability to raise additional funds on a timely basis could prevent us from achieving our business objectives and could have a negative impact on our business, financial condition, results of operations and the value of our securities. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership of existing stockholders may be diluted and the securities that we may issue in the future may have rights, preferences or privileges senior to those of the current holders of our common stock. Such securities may also be issued at a discount to the fair market value of our common stock, resulting in possible further dilution to the book value per share of common stock. If we raise additional funds by issuing debt, we could be subject to debt covenants that could place limitations on our operations and financial flexibility.
Our management may have conflicts of interest and only devote a portion of their business time to us which could materially and adversely affect us and our business.
Most of our management does not work for us exclusively and some serve on the boards of other companies, although we do not consider any of these other companies to be our direct competitors. Nevertheless, these other responsibilities may take away from time and focus of these parties on their responsibilities as management of our Company. It is possible that a conflict of interest may arise based on management’s other employment or board activities. Situations may arise where members of our management are presented with business opportunities which may be desirable not only for us, but also for the other companies with which they are affiliated.
We do not know if our properties contain any gold, silver, copper, tungsten, or other precious minerals that can be mined at a profit.
The properties on which we have the right to explore for and mine precious minerals are not known to have any proven or probable reserves. Whether a precious mineral deposit can be mined at a profit depends upon many factors. Some but not all of these factors include: the particular attributes of the deposit, such as size, grade and proximity to infrastructure; operating costs and capital expenditures required to start mining a deposit; the availability and cost of financing; the price of the gold or other mineral which is highly volatile and cyclical; and government regulations, including regulations relating to prices, taxes, royalties, land use, importing and exporting of minerals and environmental protection. We are also obligated to pay royalties and taxes on certain of our mining activities, which will make our ability to operate profitably more difficult.
We are a junior mining company with limited operating mining activities, and we may not be able to increase our mining activities in the future.
Our business is mining for gold, silver and other precious minerals. Mining operations in the United States are subject to many different federal, state and local laws and regulations, including stringent environmental, health and safety laws. In the event we increase operations on our mining properties, it is possible that we will be unable to comply with current or future laws and regulations, which can change at any time. It is possible that changes to these laws will be adverse to our mining operations. Moreover, compliance with such laws may cause substantial delays and require capital outlays in excess of those anticipated, adversely affecting any potential mining operations. Our future mining operations may also be subject to liability for pollution or other environmental damage. We are not currently insured against this risk because of high insurance costs.
| 6 |
We have a short operating history, have only lost money and may never achieve any meaningful revenue.
Our operating history consists of limited operations and continuation of preliminary exploration activities. Our expenses have consistently exceeded the revenue generated from our mining operations. Exploring for and mining precious minerals or resources is an inherently speculative activity. Our revenue could be adversely affected by many outside influences and we may never achieve revenue in amounts sufficient to provide for payment of our expenses.
Our property title may be challenged. We are not insured against any challenges, impairments or defects to our mineral claims or property title.
Our property is comprised of patented and unpatented lode claims created and maintained in accordance with the federal General Mining Law of 1872. Unpatented lode claims are unique U.S. property interests and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented lode claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations under the General Mining Law. Until the claims are surveyed, the precise location of the boundaries of the claims may be in doubt and our claims subject to challenge. If we discover mineralization that is close to the claims’ boundaries, it is possible that some or all of the mineralization may occur outside the boundaries. In such a case we would not have the right to extract those minerals. This uncertainty leaves us exposed to potential title suits. Defending any challenges to our property title will be costly and may divert funds that could otherwise be used for exploration activities and other purposes. In addition, unpatented lode claims are always subject to possible challenges by third parties or contests by the federal government, which, if successful, may prevent us from exploiting our discovery of commercially extractable gold. Challenges to our title may increase our costs of operation or limit our ability to explore on certain portions of our property. We are not insured against challenges, impairments or defects to our property title, nor do we intend to carry title insurance in the future.
We may not be able to maintain the infrastructure necessary to conduct mining activities.
Our mining activities depend upon adequate infrastructure. Reliable roads, bridges, power sources and water supply are important factors which affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of such infrastructure could adversely affect our mining activities and financial condition.
Our mining activities may be adversely affected by the local climate.
The local climate sometimes affects our mining activities on our properties. Earthquakes, heavy rains, snowstorms, and floods could result in serious damage to or the destruction of facilities, equipment or means of access to our property, or could occasionally prevent us temporarily from conducting mining activities on our property. Because of their rural location and the lack of developed infrastructure in the area, our mineral properties in Utah are occasionally impassable during the winter season. During this time, it may be difficult for us to access our property, maintain production rates, make repairs, or otherwise conduct mining activities on them.
Risks Relating to the Mining Industry
Mining for precious metals is an inherently speculative business. The properties on which we have the right to mine for precious minerals are not known to have any proven or probable reserves. If we are unable to extract gold, silver, or any other resources which can be mined at a profit, our business could fail.
Natural resource mining, and precious metal mining, in particular, is a business that by its nature is speculative. There is a strong possibility that we will not discover gold, silver, or any other resources which can be mined or extracted at a profit. Even if we do discover and mine precious metal deposits, the deposits may not be of the quality or size necessary for us or a potential purchaser of the property to make a profit from mining it. Few properties that are explored are ultimately developed into producing mines. Unusual or unexpected geological formations, geological formation pressures, fires, power outages, labor disruptions, flooding, explosions, cave-ins, landslides and the inability to obtain suitable or adequate machinery, equipment or labor are just some of the many risks involved in mineral exploration programs and the subsequent development of gold deposits. If we are unable to extract gold, silver, or any other resources which can be mined at a profit, our business could fail.
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Our business is subject to extensive environmental regulations which may make exploring or mining prohibitively expensive, and which may change at any time.
All of our operations are subject to extensive environmental regulations which can make exploration expensive or prohibit it altogether. We may be subject to potential liabilities associated with the pollution of the environment and the disposal of waste products that may occur as the result of exploring and other related activities on our properties. We may have to pay to remedy environmental pollution, which may reduce the amount of money that we have available to use for exploration. This may adversely affect our financial position, which may cause loss of investor investment. If we are unable to fully remedy an environmental problem, we might be required to suspend operations or to enter into interim compliance measures pending the completion of the required remedy. If a decision is made to mine our properties our potential exposure for remediation may be significant, and this may have a material adverse effect upon our business and financial position. All of our exploration and, if warranted, development activities may be subject to regulation under one or more local, state and federal environmental impact analyses and public review processes. It is possible that future changes in applicable laws, regulations and permits or changes in their enforcement or regulatory interpretation could have significant impact on some portion of our business, which may require our business to be economically re-evaluated from time to time. These risks include, but are not limited to, the risk that regulatory authorities may increase bonding requirements beyond our financial capability. Inasmuch as posting of bonding in accordance with regulatory determinations is a condition to the right to operate under all material operating permits, increases in bonding requirements could prevent operations even if we are in full compliance with all substantive environmental laws. We have been required to post substantial bonds under various laws relating to mining and the environment and may in the future be required to post further bonds to pursue additional activities. We may be unable or unwilling to post such additional bonds which could prevent us from realizing any commercial mining success or commencing mining activities.
Market forces or unforeseen developments may prevent us from obtaining the supplies, equipment and skilled manpower necessary to explore for mineral resources.
Precious metals exploration, and resource exploration in general, is a very competitive business. Competitive demands for contractors and unforeseen shortages of supplies and/or equipment could result in the disruption of our planned exploration and production activities. Current demand for exploration drilling services, equipment and supplies is robust and could result in suitable equipment and skilled manpower being unavailable at scheduled times for our exploration and production programs. Fuel prices are extremely volatile as well. We will attempt to locate suitable equipment, materials, manpower and fuel if sufficient funds are available. If we cannot find the equipment, supplies and skilled manpower needed for our various exploration and production programs, we may have to suspend some or all of them until equipment, supplies, funds and/or skilled manpower become available. Any such disruption in our activities may adversely affect our exploration activities and financial condition.
Risks Relating to Our Organization and Common Stock
There is currently no market for our common stock, and we cannot ensure that one will ever develop or be sustained.
There is currently no public market for our common stock. There can be no assurance that there will be an active market for our shares of common stock either now or in the future. If an active market is established, the market liquidity will be dependent on the perception of our operating business, among other things. We will take certain steps including utilizing investor awareness campaigns, press releases, road shows and conferences to increase awareness of our business and any steps that we might take to bring us to the awareness of investors may require we compensate consultants with cash and/or stock. There can be no assurance that there will be any awareness generated or the results of any efforts will result in any impact on our trading volume. Consequently, investors may not be able to liquidate their investment or liquidate it at a price that reflects the value of the business and trading may be at an inflated price relative to the performance of our company due to, among other things, availability of sellers of our shares. If a market should develop, the price may be highly volatile. Because there may be a low price for our shares of common stock, many brokerage firms or clearing firms may not be willing to effect transactions in the securities or accept our shares for deposit in an account. Even if an investor finds a broker willing to affect a transaction in the shares of our common stock, the combination of brokerage commissions, transfer fees, taxes, if any, and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of low-priced shares of common stock as collateral for any loans.
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Our principal shareholders, officers and directors own a substantial interest in our voting stock and investors will have a limited voice in our management.
Our principal shareholders, as well as our officers and directors, in the aggregate beneficially own a majority of our outstanding common stock, including shares of common stock issuable upon exercise or conversion within 60 days of the date of this filing. Additionally, the holdings of our officers and directors may increase in the future upon vesting or other maturation of exercise rights under any of the options they currently hold or which may in the future be granted or if they otherwise acquire additional shares of our common stock.
As a result of their ownership and positions, our principal shareholders, directors and executive officers collectively are able to influence all matters requiring shareholder approval, including the following matters:
| ● | election of our directors; |
| ● | amendment of our articles of incorporation or bylaws; and |
| ● | effecting or preventing a merger, sale of assets or other corporate transaction. |
In addition, their stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.
We are subject to the reporting requirements of federal securities laws, and compliance with such requirements can be expensive and may divert resources from other projects, thus impairing our ability to grow.
We are subject to the information and reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission and furnishing audited reports to stockholders will cause our expenses to be higher than they would have been if we were privately held.
It may be time consuming, difficult and costly for us to develop, implement and maintain the internal controls and reporting procedures required by the Sarbanes-Oxley Act and the Dodd-Frank Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures.
If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with any policies and procedures may deteriorate.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and rules implemented by the Securities and Exchange Commission have required changes in corporate governance practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs in 2020 and beyond and to make certain activities more time consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
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Any future trading price of our stock may be volatile.
If a market for our common stock is ever established, the market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
| ● | our inability to maintain existing permits; |
| ● | changes in the prices of gold and silver; |
| ● | changes in our industry; |
| ● | competitive pricing pressures; |
| ● | our ability to obtain working capital financing; |
| ● | additions or departures of key personnel; |
| ● | limited “public float” in the hands of a small number of persons whose sales or lack of sales could result in positive or negative pricing pressure on the market price for our common stock; |
| ● | our ability to execute our business plan; |
| ● | sales of our common stock; |
| ● | operating results that fall below expectations; |
| ● | loss of any strategic relationship; |
| ● | regulatory developments; |
| ● | economic and other external factors; and |
| ● | period-to-period fluctuations in our financial results; and inability to develop or acquire new or needed technology. |
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We have not paid cash dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
Our common stock may be deemed a “penny stock,” which would make it more difficult for our investors to sell their shares.
Our common stock may be subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules generally apply to companies whose common stock is not listed on the NASDAQ Stock Market or other national securities exchange and trades at less than $4.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
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Exercise of options or future convertible instruments may have a dilutive effect on our common stock.
We have outstanding vested options to purchase 2,400,000 shares of our common stock at $0.40 per share. If the price per share of our common stock at the time of exercise of these or future options or warrants, or conversion of any future convertible notes or any other convertible securities is in excess of the various exercise or conversion prices of such convertible securities, exercise or conversion of such convertible securities would have a dilutive effect on our common stock. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our common stock and which result in additional dilution of the existing ownership interests of our common stockholders.
Our Articles of Incorporation allow for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.
Global health crises may adversely affect our planned operations.
Our business could be materially and adversely affected by the risks, or the public perception of the risks, related to a pandemic or other health crisis, such as the recent outbreak of novel coronavirus (COVID-19). A significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect our planned operations. Such events could result in the complete or partial closure of our operations. In addition, it could impact economies and financial markets, resulting in an economic downturn that could impact our ability to raise capital.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As a non-accelerated filer, we are not required to provide disclosure under this item.
Kiewit Project, Utah
The Kiewit gold property located in the Gold Hill Mining District in Tooele County, Utah, is our principal mineral property and is an exploration stage property. In June 2019 we also acquired 20 patented mining claims contiguous to our Kiewit property, known as the JJS Property. We have not determined to what extent we will develop these new claims. We were attracted to the Gold Hill Mining District because of its similarities to productive mining districts and its past positive exploration results. The gold potential of the Gold Hill Mining District is enhanced by similarities to surrounding gold deposits. We believe the scale, number and frequency of the Gold Hill Mining District gold-bearing exposures and geochemical anomalies compare favorably to similar attributes of other productive mining districts.
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Location, Infrastructure, and Geography of Kiewit
The Gold Hill Mining District is in Tooele County, Utah, located at 40º 07’ 00” North latitude, 113º 49’ 40” West longitude. The district includes the north end of the Deep Creek Mountains, one of the nearly north-south ranges that are common in the Great Basin. On the east and north, the mountain area is separated by gravel slopes from the flat plain of the Great Salt Lake Desert, and on the west, it is bounded by the Deep Creek Valley and groups of irregular low hills. It is approximately 190 miles west-southwest of Salt Lake City, Utah, and approximately 56 miles south southeast of Wendover, Utah. The project is reached by taking Alternate 93A south from Wendover approximately 28 miles and turning east on to the Ibapah Highway, a paved two-lane road. Approximately 17 miles east is a maintained two-lane county road which provides access to the property approximately 11 miles southeast to the town of Gold Hill, Utah. The Kiewit mine and the mill site are accessible by dirt roads maintained year-round. Access to the property is maintained all year.
Power is supplied by the Company’s diesel generators and water for mining operations is supplied from an existing groundwater well. Drinking water is obtained from a local vendor.
At April 5, 2021 we had 29 full-time and 3 part-time employees. All employees are assigned to work at the Kiewit site, with the exception of the officers, a bookkeeper and one engineer, who work from the corporate office in Reno, Nevada, with periodic site visits.
The Gold Hill area lies within the region of the interior drainage that includes western Utah and most of Nevada, and, like the remaining portions of that area, is a high desert semi-arid climate. The area is composed of a highly dissected group of hills of relatively low relief. The elevation of the Kiewit Mine is approximately 5,500 feet. The Gold Hill area is bounded on the east by the Great Salt Lake Desert at an altitude of about 4,300 feet, on the north by Dutch Mountain with a higher elevation of 7,735 feet, on the west by Clifton Flat at an approximate elevation of 6,600 feet, and on the south by Montezuma Peak with an elevation of 7,369 feet.
Pronounced differences in temperatures between night and day are common, with the dryness of the air mitigating the high temperatures which predominate the summer days. Annual precipitation averages approximately 12 inches with about half falling in the months from February to May. Rainfall during summer to early fall is commonly in the form of severe thunderstorms. Snow may be expected between October and May. Fieldwork in the area is generally permitted throughout most of the year.
The higher portions of the Deep Creek Range and small areas near the summits of the adjoining mountains support a fairly heavy growth of yellow pine. The lower slopes of these mountains have a sparse covering of juniper and piñon trees. On the lower hills and on the gravel slopes surrounding them, these trees give way to sagebrush. The floor of the Great Salt Lake Desert in the north-east corner of the district is almost completely barren of vegetation.
Kiewit Mining Claims
The Kiewit mining claims consist of 66 unpatented and surface rights to 10 patented mining claims covering approximately 3 square miles located in the Gold Hill Mining District in Tooele County, Utah.
The Kiewit mining claims were part of a larger group of mining claims leased from Clifton Mining Company and its subsidiary, The Woodman Mining Company, in July of 2009. The original lease with Clifton was amended in June of 2010. In March 2019, the lease agreement was again amended by a Second Amended and Restated Lease Agreement (the “Amended Lease”). Under the terms of the Amended Lease, the Company relinquished its leasehold interest in all but the current Kiewit patented and unpatented claims. The lease term is 20 years and for so long thereafter as the mining claims are being actively used by the Company for commercial mining purposes. The Company is required to pay all property payment and payment obligations with respected to the leased premises.
Under the terms of the Amended Lease, Clifton’s right to receive a 6% royalty interest from production on the Kiewit project was terminated. The Company also acquired from third parties and cancelled the remaining 1% outstanding royalty interest thereon, for which the Company paid each of two parties $50,000.
As consideration for entering into the Amended Lease, the Company issued 5,500,000 shares of its common stock with a fair value of $2,200,000 which increased the carrying value of the mineral properties and interests. The Company also paid $13,390 in satisfaction of delinquent amounts owed Clifton and $42,802 in a reclamation bond transfer. In addition, the Company and Clifton entered into a Registration Rights Agreement to register for resale the shares issued to Clifton which requires the Company to register the shares within 18 months (which is September 7, 2020) following the Initial Funding. In the event the Company does not register the shares within the 18-month period, the Company is obligated to pay Clifton a royalty equal to 2.5% of the net smelter returns from the minerals generated from the Company’s mining claims. The registration of these shares was filed and became effective on April 14, 2020. The Company has agreed to maintain the effectiveness of the Registration Rights Agreement for a period of three years.
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Desert Hawk may mortgage or pledge its leasehold interest under the Amended Lease for purposes of financing exploration, development, and mining operations on the leased premises, including corporate overhead for such operations, but it cannot otherwise encumber the leased premises without Clifton’s prior, written discretionary consent. In connection with the PDK funding, the Company granted to PDK a security interest in all of the assets of the Company and issued and recorded a Leasehold Deed of Trust which included an assignment of leases, rents, as extracted collateral and contracts, a security agreement and fixture filing.
The Amended Lease cannot be assigned or subleased without the prior written consent of Clifton. Further, PDK may, without Clifton’s consent, hold a foreclosure sale, take title to the Company’s interest under the Amended Lease, or transfer or assign the Company’s interest under the Amended Lease. The Company may surrender the Amended Lease as to all or any part of the leased premises, after proper reclamation of all portions of the land to be surrendered affected by its operations. However, so long as any mortgage of PDK remains in effect, the Amended Lease cannot be modified, and Clifton will not accept a surrender of any of the leased premises or a termination or release of the Amended Lease, without the prior written consent of PDK, which consent cannot be unreasonably withheld or delayed.
Kiewit Geology and Mineralization
The Gold Hill area hosts lithologic units ranging in age from the Cambrian through to Quaternary Periods including six Paleozoic sedimentary formations of Carboniferous-age from the Cordilleran miogeosyncline. Geology of the Gold Hill Mining District is dominated by a large Jurassic granodiorite stock intruding the Carboniferous sedimentary package consisting of carbonates (limestone and dolomite) and lesser clastic sequences, notably shale and quartzite. The contact between the granodiorite and sediments is clearly intrusive at many localities. In other exposures, the contact is a post-intrusive fault contact or localized detachment fault.
Other lithologies in the District include silica breccias, jasperoids and assorted (locally tuffaceous) volcanics, minor small, intrusive plugs and dikes of probable Tertiary age also occur in the area. Most of the present-day surface is covered with colluvial slope wash and the canyons and narrow washes have alluvial fill of various thicknesses.
The Kiewit historic gold zone is hosted within a structural zone traceable on the surface for a distance of approximately 2.5 miles across the full length of the Kiewit project area and beyond. This structure trends north-north-easterly with a gentle westerly dip ranging 20-30 degrees, often occupying dip-slopes across the area. The zone comprises a 30 to 165-foot-thick, gently westerly dipping gold bearing oxidized quartz stockwork section in granodiorite. The zone is mostly exposed on the surface and occupies the dip-slope located at the southern part of the Kiewit project area. Projected western and northern extensions of the stockwork dip under Carboniferous Sedimentary rocks, although it is ultimately truncated by the Rodenhouse Fault located approximately 2,500 feet to the west.
The Kiewit gold zone is part of a typical low-sulfidation gold bearing epithermal system. It is manifested as a zone of quartz and quartz-carbonate veining and stockworks within the more laterally extensive (2.5 miles long and up to 1,650 feet wide) Kiewit structural zone fault/fracture system. The Kiewit structural zone comprises a group of lithologies overlying a major fault zone that is manifested as a three to 16 feet thick silica breccia unit in granodiorite. A basal three to six-foot thick quartz-carbonate vein overlies this basal silica breccia and is followed up-section by a fault-bounded interval of relatively unaltered granodiorite that forms the footwall of the stockworks. At some locations, this footwall granodiorite is absent and the stockwork zone is instead in fault-contact with the basal quartz-carbonate vein. The footwall of the stockwork zone is defined by faulting, with a north-north-easterly trend and shallow westerly dip. The “footwall” fault appears to have developed after the stockwork and served to juxtapose altered and mineralized rocks of the historic gold zone over relatively mineralized and fresh granodiorite. The amount of displacement along this fault is unknown and the structure may be regarded as a detachment zone.
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Precious metals mineralization at Kiewit occurs primarily as electrum and is hosted in a stockwork zone associated with a low angle fault zone. The stockwork zone comprises argillic-propylitic altered granodiorite with randomly oriented to anastomosing veinlets, as well as veins with variable mix of white to grey chalcedony/quartz and white to beige carbonate and adularia. The veins are commonly less than two centimeters wide but larger veins with apparent thickness up to one meter or greater are present on surface and in diamond drill core. The larger veins display typical epithermal style open space fillings and have variable textures.
The mineralized stockwork is reported by Dumont to generally contain up to 30 randomly oriented veinlets making up 30% of the rock volume. The highest gold grades are also reported by Dumont to generally be associated with the larger veins or where vein density is greatest which suggests that the gold mineralization is spatially associated with the quartz-carbonate veins.
Kiewit Exploration Programs and Mining Activities
The Kiewit mining claims are without known reserves but beginning in 2014 the Company started extraction of gold without determining mineral reserves. The Kiewit mine is a small open pit, heap leach operation that produces gold and silver. Initial production at Kiewit commenced in June 2014 and was suspended in June 2016. Production was suspended due to low metal prices and undercapitalized operations. A fresh water well failure in July 2016, due to suspected sabotage, caused a complete leach pad shut-down. Fresh water pumping was re-started in mid-March 2017 mostly to reduce solution volumes as no sodium cyanide (NaCN) was being added. The mine resumed leaching activities in the spring of 2018 and recovered some gold but suspended operations again in October 2018 to secure funding for continued operations. In April 2019 we recommenced mining operations with our first sale in September 2019. During fourth quarter 2020, we also commenced processing ore for a third party under our existing mining permit, which allowed for 5,000 tons of this ore to be processed and has since then been increased to 30,000 tons.
History of Previous Mining Activities
The Gold Hill area is one of the oldest mining districts in the State of Utah. It reflects 43 known historical producing deposits mined primarily from the mid-1800s until the end of World War II. These deposits included gold, silver, copper, bismuth, lead, zinc, tungsten, arsenic, molybdenum, cobalt, and beryllium. Exploration and mining activities commenced in the mid-1800s as travel westward through the area to California was at its peak. Lead mineralization first attracted the attention of travelers prompting early prospecting. Placer gold was first discovered in the Gold Hill area in 1858. These early prospectors were hampered by repeated attacks of local Native American tribes and the area was abandoned until 1869 when the settlements of Gold Hill and Clifton were re-established.
A lead smelter was constructed at Clifton in 1872 and relocated to Gold Hill in 1874. However, mining activity did not commence in earnest until 1892 when a mill and smelter were constructed at Gold Hill. Substantial quantities of gold and silver ore were processed at this site between 1892 and 1896. Mining activity gradually diminished until 1905 when exploration for copper revived the area. With the outbreak of World War I and the completion of the Deep Creek Railroad between Gold Hill and Wendover, a new revival of interest in the area commenced. Gold, silver, copper and lead were produced and approximately 3,000 residents lived in Gold Hill and Clifton at the time.
Tungsten was produced beginning in 1912. Significant amounts of gold and bismuth were also reportedly extracted during this period. Two mines produced tungsten in 1914 and 1917 and were operated primarily for the strategic requirement of tungsten during the two world wars. Gold and silver mining ceased completely with the beginning of World War II since the few remaining miners focused their attention on the production of strategic metals such as arsenic and tungsten to support the war effort.
Arsenic was produced beginning with the outbreak of World War I and was used primarily for pesticides in the cotton fields of the south. Two former copper producers also produced arsenic between 1923 and 1925. One of the mines reopened during World War II to produce arsenic for the war effort. None of the arsenic deposits previously mined are located on our claims.
The first large-scale geological study of the area was published in 1935 by T. B. Nolan as U.S. Geological Survey Professional Paper 177 and is referred to herein as the Nolan Report. The Nolan Report provided the first detailed data on the mining district.
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The mining district remained largely dormant during the period after World War II through the mid-1970s. Between this period and the mid-1990s, several mining companies began to consolidate the fragmented land holdings in the area and a more regional-scale exploration operation was conducted. In 1993 Clifton Mining Company acquired several of the mining claims in the area and subsequently purchased Woodman Mining Company which also held claims in the district. After purchase of the claims, Clifton Mining commenced additional exploration activities and in 1997 developed road access up the Clifton Hills area. Clifton completed construction of a 50 ton per day mill at the Cactus Mill site and started construction of a 500 ton per day gravity-flotation mill at the same location. In 1999 Clifton Mining borrowed funds which financed upgrades to the mill.
Between 1994 and 1997 Kennecott Utah Copper, now owned by Rio Tinto, explored a large region of the district. In December 2002 Clifton Mining and Woodman Mining entered into an option-joint venture agreement with Dumont Nickel Inc., which in 2010 changed its name to DNI Metals Inc. The joint venture ultimately covered approximately 10.3 square miles of mineral properties but did not include the Yellow Hammer claims which were controlled by the Moeller family. In 2003 Dumont commenced exploring the properties with the objective of identifying bulk mineable gold, copper and silver targets through regional work as well as several drill programs. Beginning in 2004 Dumont completed a regional-scale grid and reconnaissance rock and soil sampling exploration program with detailed, targeted exploration work over the Clifton Shears Corridor, the Kiewit Zone and the prior zone owned by Kennecott. Ultimately, Dumont determined that the scale of the project was too small and decided to sell its interest in the project. In July 2009 Dumont completed the sale of all its mineral properties in this area to Clifton Mining Company for $255,000 cash and a 0.5% net smelter return royalty against future production proceeds from the Cane Springs Property and from portions of the Kiewit project claims. The joint venture and the option agreement were both subsequently dissolved and terminated.
Processing Plant and Mining Equipment
The Kiewit mine is an open pit mine using conventional open pit mining methods with drilling, blasting, loading with a wheeled loader and truck haulage to the ore stockpile near the crusher. We recommenced operation of the mine in April 2019. We also use a top hammer drill for all blast holes and a dozer to move waste and for road building, as required. We also use a grader and water truck for haul road maintenance. At the leach pad we use a wheeled loader to feed the crusher and a dozer to level the pad.
The current processing facility can process approximately one million tons per year, which we plan to increase to three million tons if resource expansion dictates. We anticipate that this expansion will require an update or amendment of some permits. Ores are crushed, truck-stacked and heap-leached at the Company’s mine site. Pregnant solutions are passed through a conventional carbon column with the resultant gold-bearing carbon refined off-site.
Mining Permits
The Kiewit mining claims exist entirely on federal Bureau of Land Management unpatented mining claims. The heap leach pad and process area are located on patented mining claims approximately 3,000 feet to the southwest of the Kiewit claims.
In February 2010 we filed an application with Utah Division of Oil, Gas and Mining for a Large Mining Operations Permit to commence large mining operations for three open pit mines and a heap leach gold facility. Final approval was received in November 2012. In February 2010 we also submitted a Plan of Operation to the BLM. Final approval was received in January 2014. A separate Groundwater Discharge Permit through the Utah Department of Environmental Quality was issued on December 7, 2010.
In addition to completing the notice of intent filing, the BLM requires an analysis of our Plan of Operation in compliance with the National Environmental Protection Act. Approval of the Environmental Assessment was issued in January 2014 and development of the project began in February 2014 after posting a reclamation Bond in the amount of $1,348,000. In December 2020, we were notified that the reclamation cost estimate for the Kiewit properties had been escalated from $1,348,000 to $1,537,000, an increase of $189,000. This amount escalated the cost estimate to December 31, 2021 at which time a new cost estimate will be calculated to escalate the cost through 2026. This additional surety amount of $189,000 is due to the Utah Division of Oil, Gas and Mining by March 25, 2021 and was remitted on March 10, 2021.
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The Company believes it has all necessary environmental permits and authorizations to support existing operations. As we expand or update the current mining plan of operations (the “POO”), we will require an update or amendment of some permits and before we can implement any changes in our operating parameters, we will need to modify our existing permits or seek new permits. We anticipate that the following permitting modifications will be required:
| ● | POO Modification: A POO modification would be required to support our planned increased production capacity, expansion of the mine pit, and the expansion of the leach pad. The POO modification must be submitted to the BLM, and the process would require National Environmental Policy Act compliance, including public review and comment. We submitted the modification in first quarter 2020 and anticipate obtaining this modification by third quarter 2021. |
| ● | Air Quality Permit to Construct: A modification to the Air Quality Permit to Construct would be required for production increases from the one million tons per annum to the three-million-ton level. We submitted our application in first quarter 2020 and expect permit issuance by third quarter 2021. |
| ● | Water Discharge Permit: A modification to our existing water discharge permit would be required for the expansion including enlargement of the heap leach facility. The permit includes monitoring of the heap leach leak detection system and groundwater monitoring wells in the vicinity of the heap leach and process area. We submitted the modification in third quarter 2020 and expect permit issuance by third quarter 2021. |
| ● | Reclamation Plan: A Reclamation Plan Approval would be required by the Utah DOGM Office. However, the Aggregate Mine Land Reclamation Act would require approval by the Inspectors Office of the POO amendment addressing new infrastructure and disposal facilities. We submitted the POO amendment for approval in first quarter 2020 and anticipate permit approval by third quarter 2021. |
We have engaged outside consultants to assist us in seeking modification or new permits to accomplish the above.
2020 Mining Activities
During 2020 we mined and crushed 474,500 tons of mineralized material and 1,300,000 tons of waste from the open-pit Kiewit Pit.
Using the funds from the PDK transaction, in January 2020 we commenced a drilling program on the Kiewit and JJS mining claims to determine the definition of the mineralized body and resource classification of the resources in connection with the proposed completion of a technical report on the claims. Our drilling plan included drilling 30 holes for a total footage of 7,500 feet. Although drilling has commenced on the JJS property, permitting has not been completed and production has not yet begun.
Planned 2021 Exploration and Mining Activities
We intend to continue our drilling program during the second and third quarters of 2021 at a further cost of approximately $175,000.
We also intend to continue extraction of mineralized material and to upgrade and expand the current facilities, as resource expansion dictates.
Offices and Other Facilities
Our corporate office is located in Reno, Nevada and Mr. Havenstrite, our President, operates from this office and also works on site at our mining property in Tooele County, Utah. Monthly rent for the office space in Reno is $1,500. Financial and engineering activities are performed in this office and rent includes use of the business equipment and supplies needed to perform these functions. This office space is used primarily for RMH Overhead, LLC and Overhead Door Co. of Sierra Nevada/Reno, Inc., businesses owned by Mr. Havenstrite. Agreements for the use of the office space facilities with these parties are month-to-month and can be cancelled at any time.
We rent a core-logging facility located on the Tooele County airport grounds in Wendover, Utah. The facility includes a separate core splitting and sawing room, field supply storage rooms and sufficient floor space for logging tables and racks to hold over 21,000 feet of HQ core boxes. Monthly rent for this space is $350 and the rental arrangement is terminable at any time.
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Our company is not a party to any legal proceedings reportable pursuant to this item.
ITEM 4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this annual report.
ITEM 5. MARKET FOR Registrant’s COMMON EQUITY, RELATED STOCKHOLDER MATTERS and Issuer Purchases of Equity Securities
Market Information
There is currently no public trading market for our Common Stock. We intend to apply for the quotation of our Common Stock on an automated quotation system. There can be no assurance that any application for the quotation of our Common Stock on an automated quotation system will be approved. If any such application is not approved and our common stock ultimately is not quoted on an automated quotation system, we intend to engage a market maker to apply for quotation on the OTCQB Market operated by OTC Markets Group, Inc. There can be no assurance that a market maker will agree to file the necessary documents with the Financial Industry Regulatory Authority (FINRA); nor can there be any assurance that such an application for quotation will be approved.
Holders
At April 5, 2021, we had approximately 655 holders of our Common Stock. We have appointed Pacific Stock Transfer Company, Las Vegas, Nevada, to act as the transfer agent of our Common Stock.
Dividends
We have never declared or paid any cash dividends on our Common Stock since inception. We do not anticipate paying any cash dividends to stockholders in the foreseeable future. Our Prepaid Forward Gold Purchase Agreement prohibits us from declaring, making or paying any dividends so long as any gold remains to be delivered or any amounts remain to be paid by us under the agreement. In addition, any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, we have elected not to provide the information required by this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial statements and related notes thereto as filed with this report.
Overview
We are a mineral exploration company located in the Gold Hill Mining District in Tooele County, Utah. We are currently focused on exploration and development of our Kiewit claims and operation of a heap leach processing facility.
We were originally incorporated in the State of Idaho on November 5, 1957. For several years we bought and sold mining leases and claims, but in 1995 we ceased all principal business operations. In 2008, we changed our corporate domicile 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 located in Tooele County, Utah. We hold leasehold interests within the Gold Hill Mining District consisting of 66 unpatented mining claims and 10 patented claims. From these claims we have centered our exploration activities on the Kiewit site.
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During 2018 we settled our outstanding debt with DMRJ Group I, LLC and repurchased and retired all outstanding preferred shares issued to them under the 2010 Investment Agreement with them. During 2019 we secured funding of $13,600,000 (net) from PDK Utah Holdings LP under the terms of the Prepaid Forward Gold Purchase Agreement dated March 7, 2019. We also renegotiated our lease with Clifton Mining and released all but the current unpatented and patented mining claims. We also reacquired the existing royalties from Clifton and its affiliates and issued a royalty to PDK equal to 4% of the net smelter returns from our mine. An additional 20 claims, known as the JJS Property, were acquired.
We suspended our mining operations in June 2016 because of depressed metal prices and lack of funds. We resumed operations in spring 2018 and again suspended operations in October 2018 for lack of funding. Since securing funding in March 2019, we have recommenced mining operations.
Results of Operations for the Years Ended December 31, 2020 and 2019
During the years ended December 31, 2020 and 2019, we had net losses of $1,840,593 and $3,776,293, respectively. This represents a decrease in net loss of $1,935,700 for the year ended December 31, 2020. The decrease for the year ended December 31, 2020 is generally attributable to the decrease in operating loss and to the gain on extinguishment of SBA debt in 2020, along with the losses on settlement of consulting contract and redeemable stock as reflected in 2019. Revenue from operations increased six-fold in 2020 over 2019 due to the resumption of mining operations which did not occur until fourth quarter of 2019.
Liquidity and Cash Flow
Net cash used by operating activities was $1,413,857 during the year ended December 31, 2020, compared with $7,001,224 cash used during the year ended December 31, 2019. The decrease in cash used by operating activities of $5,587,367 is primarily attributable to the decrease in operating losses, inventory adjustments, and the increase in accounts payable and accrued liabilities in 2020 over that in 2019.
Net cash used by investing activities was $651,082 during the year ended December 31, 2020 compared to $1,993,224 during the year ended December 31, 2019. The decrease in cash used by investing activities of $1,342,142 is attributable to increased additions to property and equipment and to an increase in mineral properties and interests during 2019.
Net cash provided by financing activities was $121,794 during the year ended December 31, 2020, compared with $11,102,164 provided during the year ended December 31, 2019. This decrease in cash provided by financing activities of $10,980,370 is primarily a result of the proceeds from the Purchase Agreement signed in March 2019.
As a result, cash decreased by $1,943,145 during the year ended December 31, 2020, leaving us a cash balance of $173,287 as of December 31, 2020, as compared to an ending cash balance of $2,116,432 as of December 31, 2019.
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 audited financial statements for a discussion of those policies.
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Inventories
The recovery of gold from certain oxide ores is achieved through the heap leaching process. Under this method, mineralized material is placed on a leach pad where it is treated with a chemical solution, which dissolves the gold contained in the material. The resulting “pregnant” solution is further processed in a plant where gold is recovered. The Company records ore on leach pad, solution in carbon columns in process and gold concentrate, at average production cost per gold ounce, less provisions required to reduce inventory to net realizable value. Production costs include the cost of mineralized material processed; direct and indirect materials and consumables; direct labor; repairs and maintenance; utilities; amortization of property, equipment, and mineral properties; and mine administrative expenses. Costs are removed from ore on leach pads as ounces are recovered, based on the average cost per recoverable ounce of gold on the leach pad.
Estimates of recoverable gold on the leach pad are calculated from the quantities of material placed on the leach pad (measured tons added to the leach pad), the grade of material placed on the leach pad (based on assay data) and an estimated recovery percentage (based on ore type). The nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, actual gold ounces recovered are regularly monitored and estimates are refined based on actual results over time. As of December 31, 2020, the Company had a limited operating history and actual results only over a short period of time.
Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis. The ultimate recovery of gold from a leach pad will not be known until the leaching process is concluded. The quantification of material inventory on the leach pad is based on estimates of the quantities of gold at each balance sheet date that the Company expects to recover during the next 12 to 24 months. Inventory is stated at the lower of cost or net realizable value, which for December 31, 2020 is net realizable value. A portion of the December 31, 2020 inventory has been classified as non-current. This classification has been made based on the amount of gold expected to be sold over the next twelve months based on prior year sales. See Note 5.
Mineral Properties and Interests
The Company capitalizes costs for acquiring mineral properties and ongoing mineral lease payments and expenses costs to maintain mineral rights. Upon reaching the production stage, the capitalized costs are amortized using the units-of-production method on the basis of periodic estimates of ore resources. Estimates for ore resources are a key component in determining units of production rates. Estimates of ore resources, mineralized material, and other resources may change, possibly in the near term, resulting in changes to rates in future reporting periods. The Company does not have proven and probable resources at this time.
Mineral Exploration and Development Costs
Until proven and probable resources (as defined by SEC Guide 7) are established, all exploration expenditures are expensed as incurred. Once such reserves are established, expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operations, are capitalized and will be amortized on units of production basis over proven and probable reserves. Previously capitalized costs are expensed in the period the property is abandoned.
Revenue Recognition
Concentrate Sales: The Company’s product consists of gold bearing carbon which is shipped offsite to be turned into an unrefined gold concentrate, which is then further refined to become gold and silver bullion. The Company’s performance obligation in these transactions is generally the transfer of concentrate to the customer. Revenue is recognized upon the completion of the performance obligations and transfer of control of the product to the customer, and when the transaction price and number of ounces can be determined or reasonably estimated.
Processing Income: The Company processes ore for another company. Once processed, the unrefined gold concentrate is shipped to a refinery where it is refined into gold and silver bullion. The Company receives a percentage of the proceeds from the sale of the gold and silver concentrate which is credited to the Company’s account at the refinery. Management has determined the performance obligation is met when the Company delivers the unrefined gold concentrate to the refinery and recognizes revenue at that time.
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Sales and accounts receivable for sales are recorded net of charges from the customer which represent components of the transaction price. Charges are estimated by management upon transfer of risk based on contractual terms, and actual charges typically do not vary materially from management’s estimates. Revenue from the sale of concentrate 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. Revenue proceeds are recorded net of the impact of royalties and participation agreements. See Note 18.
Reclamation and Remediation
The Company’s operations have been, and are subject to, standards for mine reclamation that have been established by various governmental agencies. The Company records the fair value of an asset retirement obligation as a liability in the period in which the Company incurs a legal obligation for the retirement of tangible long-lived assets. A corresponding asset is also recorded and depreciated over the life of the asset. After the initial measurement of the asset retirement obligation, the liability is adjusted when there are changes in the estimated future cash flows due to change in estimated costs or change in time until reclamation will commence. Determination of any amounts recognized is based upon numerous estimates and assumptions, including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rates. Such assumptions are based on the Company’s current mining plan and the best available information for making such estimates. See Note 13.
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.
Financial Instruments
The Company’s financial instruments include cash and cash equivalents as well as various notes payable and the prepaid gold contract liability. All instruments are accounted for on a historical cost basis, which, due to the short maturity and interest rates of these financial instruments, approximates fair value at December 31, 2020 and 2019.
Going Concern
As shown in the accompanying financial statements, the Company had an accumulated deficit of $11,291,811 through December 31, 2020 and net loss of $1,840,593 for the year ended December 31, 2020 along with negative working capital of $3,748,321, 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.
Although production restarted in 2019, it has not yet reached optimum levels. The timing and amount of capital requirements will depend on a number of factors, including demand for products, metals market pricing, and the availability of opportunities for expansion through affiliations and other business relationships. Although management has procured funding through a forward sales agreement (Note 3) they intend 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. The ability of the Company to continue as a going concern is dependent on the Company’s ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they are due.
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 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
We have provided the financial statements required by this item immediately following the signature page of this report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreement or reportable event requiring disclosure under this item has occurred.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Rick Havenstrite, our principal executive officer, and Marianne Havenstrite, our principal financial officer, as of December 31, 2020, conducted an evaluation, as of the end of the period covered by this report, of whether our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Exchange Act) were effective to provide assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
We have concluded that while the information that we are required to disclose has been effectively accumulated and communicated to our management, our disclosure controls and procedures were not effective in terms of making timely filings with the SEC. As of the date of this report, we are current in our reporting obligations and we believe the adjustments we have made to our controls and procedures will help us ensure that future reports are made in a timely manner.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of our company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed our internal control over financial reporting as of December 31, 2020, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment.
Based on our assessment, management has concluded that our internal control over financial reporting was not effective, as of the end of the fiscal year, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles, because management identified a material weakness in the Company’s internal control over financial reporting related to the segregation of duties. This is due primarily to the limited staff and small size of the Company, although internal controls have improved over the prior year with the addition of an additional staff member in our accounting department, resulting in increased segregation of duties. Additionally, a material weakness was identified in transactions where we:
| ● | Incorrectly recorded reclamation bonds and accounts payable prior to the bond being purchased in March 2021. |
| ● | Incorrectly valued inventory based upon errors within management’s estimate of the cost per ounce of gold. |
| ● | Incorrectly recorded amortization of mineral properties and interest as a result of the change in estimate of the number of ounces to be produced from its mineral properties and interest. |
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While the Company does adhere to internal controls and processes that were designed and implemented by an experienced accounting firm, it is difficult with a very limited staff to maintain appropriate segregation of duties in the initiating and recording of transactions, thereby creating a segregation of duties weakness. Due to: (i) the significance of segregation of duties to the preparation of reliable financial statements; (ii) the significance of potential misstatement that could have resulted due to the deficient controls; and (iii) the absence of sufficient other mitigating controls, we determined that this control deficiency resulted in more than a remote likelihood that a material misstatement or lack of disclosure within the annual or interim financial statements may not be prevented or detected.
Management’s Remediation Initiatives
Management has evaluated, and continues to evaluate, avenues for mitigating our internal controls weaknesses, but mitigating controls to completely mitigate internal control weaknesses have been deemed to be impractical and prohibitively costly, due to the size of our organization at the current time. Management expects to continue to use reasonable care in following and seeking improvements to effective internal control processes that have been and continue to be in use at the Company. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks.
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 December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Current Management
The following table sets forth as of April 5, 2021, the names and ages of, and position or positions held by, our executive officers and directors, the employment background of these persons, and any directorships held by the current directors during the last five years. The Board of Directors believes that all the directors named below are highly qualified and have the skills and experience required for effective service on the Board of Directors. The directors’ individual biographies below contain information about their experience, qualifications and skills that led the Board of Directors to nominate them.
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| Name | Age | Positions |
Director Since |
Employment Background | ||||
| Howard Crosby | 68 | Director, Chairman | 2016 | Mr. Crosby served as our Chief Executive Officer from April 2016 until April 2017. Since 1989, Mr. Crosby has been president of Crosby Enterprises, Inc., a family-owned business advisory consulting firm. From 1994 to June of 2006 he served as president and director of Cadence Resources Corporation, a publicly traded oil and gas company. He served as an officer and director of Independence Resources PLC from March of 2010 until October of 2013. He served as a director of White Mountain Titanium Corporation from 2004 until March of 2016. Both Independence Resources and White Mountain Titanium were previously reporting companies with the SEC. He currently serves as President and Director of Shoshone Silver/Gold Mines, Inc. Mr. Crosby is also a director or advisor to a number of privately held companies. He received a bachelor’s degree from the University of Idaho in 1975. Mr. Crosby has extensive experience in corporate finance and strategic planning and provides valuable insight on business strategy development and strategic partnership to our Board of Directors. | ||||
| Rick Havenstrite | 62 | Director, President and Chief Executive Officer | 2009 | Mr. Havenstrite has served as our President since April 2009 and as Chief Executive Officer since April 2017 and has been employed by us to manage our mining operations since August 2009. Since May 1999 he has been the co-owner, with his wife, and President of Overhead Door Company of Sierra/Nevada, Inc., a commercial and residential door installation company and since 2004 has been a partner in RMH Overhead, LLC. From 1998 until 1999 he was employed by Nevada Star Resources, a small copper mining company, as Manager of the Nevada Star Milford Copper Project in Utah; from 1996 until 1998 he was employed by Centurion Mines Corp, an exploration mining company, as Vice-president of Operations on the Milford Copper Project; from 1992 until 1996 he was General Manager of Nevada Operations for Arimetco Mining in Yerington Nevada, a mid-size copper mining company; from 1991 until 1992 he was employed by Newmont Minerals, a small gold mining company, as Manager of the Golden Assets Mine in Montana; from 1983 to 1990 he was employed by Silver King Mines, which subsequently changed its name to Alta Gold Corp., a mid-sized diversified mining company, beginning his employment with the company as Project Engineer at the Buckskin Mine from 1983 to 1985, subsequently moving with the company to Ely, Nevada where he was the Mine Superintendent and then Mine Manager of the Robison Mine from 1985 to 1988, and finally serving as Manager of Mining for Alta Gold’s operating mines in Nevada, Idaho, Oregon and Colorado; and from 1980 until 1983 he was employed by Utah International, a large diversified mining company, as a mine engineer of the Springer Tungsten Mine in Nevada and the Navajo Coal mine in New Mexico. Mr. Havenstrite graduated in 1980 with a Bachelor of Science degree in Mining Engineering from the University of Reno, Mackay School of Mines. He is a registered Professional Mining Engineer with the State of Utah and is an inactive Professional Mining Engineer in the State of Nevada. |
| Marianne Havenstrite | 62 | Treasurer and Principal Financial Officer | -- | Ms. Havenstrite has been our Principal Financial Officer from May 2013 to April 2016 and since March 2017. Since May 1999 she has been the co-owner with her husband, and has served as Vice-president, of Overhead Door Company of Sierra/Nevada, Inc., a commercial and residential door installation company and since 2004 has been a partner in RMH Overhead, LLC. She received her Bachelor of Science degree in accounting from the University of Nevada, Reno in 1980. | ||||
| John P. Ryan | 59 | Director | 2017 | Mr. Ryan served as our Chief Financial Officer for a short time period beginning in April 2016 until March 2017. He has been an active entrepreneur in the resources sector for over twenty years. Since 1995 he has been self-employed through his own company, Quest Consulting, providing consulting services for both private and public mining companies. He has extensive experience in the natural resource sector having served as an officer and/or director of companies such as Cadence Resources from 1995 to 2005 High Plains Uranium from 2004 to 2007, U.S. Silver Corporation from 2006 to 2009, and Western Goldfields, Inc. from 2001 to 2005. From December 2012 through April 2017 he served as a director of Mineral Mountain Mining and Milling Company. Mr. Ryan has extensive executive experience and provides our Board of Directors with valuable insights regarding mining operations as well as public company expertise. Mr. Ryan has acted as a professional Director in a number of cases of turnaround and/or distressed company scenarios. Mr. Ryan obtained a B.S. in Mining Engineering from the University of Idaho in 1985 and a Juris Doctor from Boston College in 1992. |
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Rick Havenstrite and Marianne Havenstrite are husband and wife.
Each director is elected until the next annual meeting of shareholders and until his successor is elected and qualified, except as otherwise provided in the Bylaws or required by law. We did not hold an annual meeting of the shareholders for the fiscal year ended December 31, 2020, and we have not scheduled an annual meeting for the current year. Whenever the authorized number of directors is increased between annual meetings of the stockholders, a majority of the directors then in office has the power to elect such new directors for the balance of a term and until their successors are elected and qualified. There are no family relationships between any director, executive officer, or person nominated or chosen by us to become a director, other than the relationship between our President, Rick Havenstrite, and our Treasurer/Principal Financial Officer, Marianne Havenstrite, who are married.
Officers are to be elected by the Board of Directors at its first meeting after every annual meeting of stockholders. Each officer holds his office until his successor is elected and qualified or until his earlier resignation or removal.
Involvement in Certain Legal Proceedings
During the past ten years there have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any of the executive officers or directors, and none of these persons has been involved in any judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity, any judicial or administrative proceedings based on violations of federal or state securities, commodities, banking or insurance laws or regulations, or any disciplinary sanctions or orders imposed by a stock, commodities or derivatives exchange or other self-regulatory organization.
Committees
Because of its small size, the Board of Directors carries out the duties of the committees. We do not have compensation, audit, nominating, or other standing committees of the Board of Directors.
Nominating Procedures
Recommendations for candidates to stand for election as directors are made by the Board of Directors. We have not adopted a policy which permits security holders to recommend candidates for election as directors or a process for stockholders to send communications to the Board of Directors. There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.
Code of Ethics
On March 21, 2011, we adopted a Code of Ethics which applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as to other employees or contractors and anyone associated with our company. We will provide any person, without charge and upon request, a copy of the Code of Ethics.
Audit Committee
Our Board of Directors performs the duties that would normally be performed by an audit committee. Our Board of Directors believes that its current members have sufficient knowledge and experience necessary to fulfill the duties and obligations of the audit committee for our company. The Board of Directors has determined that we do not have an audit committee financial expert, due to lack of funds.
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ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth information concerning the annual compensation awarded to, earned by, or paid to the named executive officer for all services rendered in all capacities to our company for the years ended December 31, 2020 and 2019:
SUMMARY COMPENSATION TABLE
| Name & Principal Position | Year |
Salary and $ |
Option $ |
All Other $ |
Total $ |
||||||||||||||
| Rick Havenstrite, President and CEO | 2020 | 144,000 | - | 17,000 | (1) | 161,000 | |||||||||||||
| 2019 | 116,692 | - | 12,000 | 128,692 | |||||||||||||||
| (1) | Mr. Havenstrite earned $17,000 and $12,000 in 2020 and 2019, respectively (paid to RMH Overhead, a company owned by Mr. Havenstrite), as rent paid by us for office space in Reno, Nevada. Of the $17,000 earned in 2020, $14,000 was paid and $3,000 was accrued. |
In September 2010 we entered into an employment agreement with Mr. Havenstrite as President of our company. The term of the agreement was originally for four years, expiring September 1, 2014, with automatic one-year extensions unless notice is given by either party. The employment agreement was renewed for one-year terms beginning September 1, 2015, through 2020. Mr. Havenstrite is required under the terms of the agreement to devote a minimum of 75% of his business time to the affairs of our company. Nevertheless, he may serve on the board of directors or serve as an officer of up to three companies not engaged in business which may reasonably compete with our business, provided that he would not be required to render any material services with respect to the operations or affairs of any other business which would exceed 25% of his entire business time. In spite of the minimum percentage of his time required in his employment agreement, Mr. Havenstrite currently devotes approximately 90% of his time, or approximately 50 hours per week, to our business and approximately 10%, or five hours per week, of his business time to Overhead Door Company of Sierra/Nevada, Inc., his overhead door business in Reno, Nevada. He does not anticipate devoting more than 20% of his time to the business of his overhead door company during the term of his employment contract with us. The annual base salary is $120,000 plus performance compensation of between 10% and 100% of the annual base salary based upon fulfillment of annual performance goals established by the Board of Directors or the Compensation Committee (if any). Effective May 1, 2019, the base annual salary was increased to $144,000. No performance bonuses have been paid under the employment agreement since its commencement.
Under our employment agreement with Mr. Havenstrite, if we terminate the agreement without cause or if the agreement is constructively terminated by us, we have agreed to pay him a severance package equal to one and one-half times the largest annual base salary plus the largest annual performance compensation received by him under the agreement, payable 75% within 30 days and the balance within 30 days of the first anniversary of the termination.
Outstanding Equity Awards at 2020 Fiscal Year End
The following table sets forth the outstanding equity awards for each named executive officer as of December 31, 2020:
| Option Awards | ||||||||
| Name | Number of securities underlying unexercised options (#) exercisable |
Option exercise price ($) |
Option expiration date | |||||
| Rick Havenstrite | 1,000,000 | $ | 0.40 | February 23, 2023 | ||||
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Compensation of Directors
The following table sets forth the compensation of directors for the year ended December 31, 2020:
Director Compensation
| Name | Fees earned or paid in cash ($) | All other ($) | Total ($) | |||||||||
| Howard Crosby | 72,500 | 1,500 | 73,500 | |||||||||
| John Ryan | 20,000 | - | 20,000 | |||||||||
| Phillip Holme(1) | 5,000 | - | 5,000 | |||||||||
(1) Mr. Holme served as a director during 2020 until his death on or about April 30, 2020.
Director compensation for Howard Crosby is $6,000 per month and for Mr. Ryan is $5,000 per quarter.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information furnished by current management and others, concerning the ownership of our common stock as of April 5, 2021, of (i) each person who is known to us to be the beneficial owner of more than 5% of our common stock, without regard to any limitations on conversion or exercise of convertible securities or warrants; (ii) all directors and named executive officers; and (iii) our directors, named executive officers, and executive officers as a group:
| Name and Address of Beneficial Owner |
Amount and Nature of Beneficial Ownership(1) |
Percent of Class(1) | ||||||
| Rick Havenstrite 1290 Holcomb Ave. Reno, NV 89502 |
5,137,066 | (2) | 18.5 | % | ||||
| Howard Crosby 1290 Holcomb Ave. Reno, NV 89502 |
1,000,000 | (3) | 3.6 | % | ||||
| John P. Ryan 5968 N. Govt. Way #305 Dalton Gardens, ID 83815 |
600,000 | (4) | 2.2 | % | ||||
| Executive Officers and Directors as a Group (3 Persons) |
6,737,066 | 23.2 | % | |||||
| H&H Metals Corp. 509 Madison Ave., Ste. 1902 New York City, NY 10022 |
1,500,000 | (5) | 5.6 | % | ||||
|
Ibearhouse, LLC Kelley Price 7806 NE 10th Street Medina, WA 98039 |
3,760,353 | 14.0 | % | |||||
|
West C Street, LLC Richard Meadows 21838 NE 102nd Street Redmond, WA 98053 |
2,260,353 | 8.4 | % | |||||
| Clifton Mining Company 101 South 200, Suite 700 Salt Lake City, UT 84111 |
5,810,824 | 21.7 | % | |||||
| Marianne Havenstrite 1290 Holcomb Ave. Reno, NV 89502 |
5,137,066 | (6) | 18.5 | % | ||||
| (1) | This table is based upon information supplied by officers, directors and principal stockholders and is believed to be accurate. Unless otherwise indicated in the footnotes to this table, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of our common stock subject to options, warrants, or other conversion privileges currently exercisable or convertible, or exercisable or convertible within 60 days of the date of this table, are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. Where more than one person has a beneficial ownership interest in the same shares, the sharing of beneficial ownership of these shares is designated in the footnotes to this table. As of the date of this table, we had 26,831,603 shares outstanding. |
| 26 |
| (2) | Of these shares, 1,000,000 are owned of record jointly by Mr. and Mrs. Havenstrite. These shares also include vested options to purchase 1,000,000 shares. |
| (3) | Represents exercisable options to purchase 1,000,000 shares. |
| (4) | Includes exercisable options to purchase 200,000 shares. |
| (5) | H&H Metals Corp. is an entity controlled by James Holme. |
| (6) | Of these shares, 3,137,066 are owned of record by Mrs. Havenstrite’s husband, Rick Havenstrite and 1,000,000 are owned of record jointly by Mr. and Mrs. Havenstrite. Also includes exercisable options to purchase 1,000,000 by Mr. Havenstrite. |
To our knowledge, except as noted above, no person or entity is the beneficial owner of more than 5% of the voting power of our Common Stock.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides disclosure as of December 31, 2020, of compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance:
Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | -0- | N/A | -0- | |||||||||
| Equity compensation plans not approved by security holders | 2,400,000 | $ | 0.40 | -0- | ||||||||
| Total | 2,400,000 | $ | 0.40 | -0- | ||||||||
On March 28, 2018 the Board of Directors adopted the 2018 Stock Incentive Plan (the “Plan”). The purposes of the Plan are (a) to enhance our ability to attract and retain the services of qualified employees, officers, directors, consultants, and other service providers upon whose judgment, initiative and efforts the successful conduct and development of our business largely depends, and (b) to provide additional incentives to such persons or entities to devote their utmost effort and skill to the advancement and betterment of our company, by providing them an opportunity to participate in the ownership of our Company and thereby have an interest in the success and increased value of our Company.
There are 2,400,000 shares of common stock authorized for non-qualified and incentive stock options, restricted stock units, restricted stock grants, and stock appreciation rights under the Plan, which are subject to adjustment in the event of stock splits, stock dividends, and other situations. No shares remain available for grants under the Plan.
| 27 |
The Plan is administered by our board of directors; however, the board of directors may designate administration of the Plan to a committee consisting of at least two independent directors. Only employees of our Company or of an “Affiliated Company”, as defined in the Plan, (including members of the board of directors if they are employees of our Company or of an Affiliated Company) are eligible to receive incentive stock options under the Plan. Employees of our Company or of an Affiliated Company, members of the board of directors (whether or not employed by our company or an Affiliated Company), and “Service Providers”, as defined in the Plan, are eligible to receive non-qualified options, restricted stock units, and stock appreciation rights under the Plan. All awards are subject to Section 162(m) of the Internal Revenue Code.
No option awards may be exercisable more than ten years after the date it is granted. In the event of termination of employment for cause, the options terminate on the date of employment is terminated. In the event of termination of employment for disability or death, the optionee or administrator of optionee’s estate or transferee has six months following the date of termination to exercise options received at the time of disability or death. In the event of termination for any other reason other than for cause, disability or death, the optionee has 30 days to exercise his or her options.
The Plan will continue in effect until all of the stock available for grant or issuance has been acquired through exercise of options or grants of shares, or until ten years after its adoption, whichever is earlier. Awards under the Plan may also be accelerated in the event of certain corporate transactions such as a merger or consolidation or the sale, transfer or other disposition of all or substantially all of our assets.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
Under the Amended and Restated 15% Convertible Promissory Notes entered into on July 14, 2010 (the “Notes”), as corrected, between the Company and West C Street and Ibearhouse (the “Note Holders”), each a 5% shareholder of the Company, an agreement was made with the Note Holders to begin paying the monthly interest pursuant to the Notes in stock rather than cash. We issued 150,000 shares to each of the Note Holders on each of November 30, 2017, 2016 and 2015 as penalty shares in connection with the extensions of the due dates of the Notes for three one-year periods. During the year ended December 31, 2018, we accrued $32,425 as interest payable to each Note Holder and accrued interest payable for each of these Notes at December 31, 2018 was $171,175. We also issued 150,000 shares to each of the Note Holders in June 2019 as penalty shares for the period ending November 30, 2018.
Effective February 28, 2018, we entered into amendments to the Notes pursuant to which no interest is payable until May 31, 2019, and the interest rate on the Notes was changed to 10%. The Note Holders also waived past defaults under the Notes of non-payment of past-due interest payments and released the convertibility feature of the Notes. These Notes were fully repaid by us in 2019.
Effective February 28, 2018, we entered into a Stock Purchase Agreement (the “SPA”) with Ibearhouse and West C Street where the Company exchanged 4,500,000 shares of common stock to the convertible debt holders for $625,000 in cash and several concessions as to the convertibility, due dates and default provisions on their outstanding debt.
On October 14, 2016, the Company entered into 10% Secured Convertible Promissory Notes with each of the Note Holders in the principal amounts of $125,000. The notes are secured by all of the assets of the Company. Interest payments on the notes are deferred until May 31, 2019 and the notes mature on May 31, 2019. The notes were convertible by the holders at any time prior to maturity at the lesser of (i) $0.25 per share; or (ii) the price of any convertible debt or equity funding (including the purchase of DMRJ Group’s interest by any third party.) During the year ended December 31, 2018, we accrued $12,500 as interest payable to each Note Holder and accrued interest payable for each of these Notes at December 31, 2018 was $29,692. These secured notes were fully repaid by us in 2019.
On August 7, 2017, the Note Holders funded an additional aggregate of $500,000 under similar terms. These funds were used to sustain minimum operations of the Company until resolution of the DMRJ Group debt with the trustees. On February 28, 2018 both of these notes were amended to allow for the maturity date and the payment date for accrued interest to be changed to May 31, 2019. During the year ended December 31, 2018, we accrued $24,732 as interest payable to each Note Holder and accrued interest payable for each of these Notes at December 31, 2018 was $33,570. These notes were fully repaid by us in 2019.
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Since 2009 we have leased our corporate office space from RMH Overhead, LLC (“RMH”), an entity owned and controlled by Mr. Havenstrite, our President and a director. From 2009 until February 2014 monthly rent was $500 per month and from March 2014 until February 2020 monthly rent has been $1,000. Expansion into additional office space effected a rental increase to $1,500 per month effective March 1, 2020. The rental agreement is month-to-month and can be cancelled by either party at any time. During 2020 we paid an aggregate of $14,000 and accrued rent in the amount of $3,000, for a total of $17,000 in rent for this space.
On June 20, 2016, the Company entered into an agreement with RMH to lease certain mining and crushing equipment, some of which was previously owned by the Company. The terms of the lease were 24 monthly payments of $9,212 which included interest at 15%. At the conclusion of the lease term, the equipment may be purchased by the Company for a nominal fee. Although the 24-month lease term had expired at December 31, 2018, $69,562 remained due on this agreement. This account, including late fees, was fully paid by us in 2019.
In addition, on February 1, 2021, RMH purchased a CAT 740B Articulated Haul Truck from a dealer who had previously provided this equipment to the Company under a rent purchase option agreement. We owed the dealer five monthly payments along with a major repair billing and the dealer had requested the return of the truck. RMH paid the dealer the five past due payments plus an amount to complete the purchase of the truck. The Company paid the past due repair invoice and the truck was obtained with no encumbrances. Beginning February 1, 2021, we began renting this truck from RMH at a rate of $10,000 per month on a simple month-to-month rental arrangement.
Marianne Havenstrite, wife of Rick Havenstrite, is employed by the Company and acts as our Treasurer and Principal Financial Officer. For the year ended December 31, 2020 Mrs. Havenstrite earned $96,000. Mrs. Havenstrite currently devotes approximately 80% of her time, or approximately 40 hours per week, to our business and approximately 20%, or approximately ten hours per week, of her business time to Overhead Door Company of Sierra/Nevada, Inc., her overhead door business in Reno, Nevada. We do not have a formal compensation agreement with Mrs. Havenstrite.
On February 23, 2018, the Board approved the grant of an aggregate of 2,400,000 options under the 2018 Plan exercisable at $0.40 per share which terminate February 23, 2023 in the amounts and to the following:
| ● | Rick Havenstrite – 1,000,000 options; | |
| ● | Howard Crosby – 1,000,000 options; | |
| ● | John Ryan – 200,000 options; and | |
| ● | Linde Havenstrite – 200,000 options. |
On March 29, 2018, we entered into a five-year Agency Agreement (the “Agency Agreement”) with H&H Metals Corp., a New York corporation, (“H&H”) a 5% shareholder. Under the terms of the Agency Agreement H&H agreed to provide us certain advisory services in regard to natural resources activities and to assist us in securing purchasers for minerals produced from its mining properties. As a condition for entering into the Prepaid Forward Gold Purchase Agreement, we negotiated a termination of the Agency Agreement (the “Termination Agreement”). Under the terms of the Termination Agreement, we paid H&H $600,000, agreed to pay an additional $200,000 within 18 months, and paid $36,000 as a payment against the final shipment of ore by the Company.
On March 26, 2019, we entered into an option to purchase 64 patented mining claims for $500,000. On June 13, 2019, we entered into a letter agreement with the Clifton Mining Company whereby it would purchase 44 of the optioned claims and we would acquire the remaining 20 claims, which we call the JJS Property. Each party would pay one-half of the total purchase price for the claims. The purchase price was paid by each party and the closing of the acquisition occurred on June 14, 2019.
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Policies and Procedures Regarding Related Party Transactions
We have not adopted a specific policy pursuant to which an actual or proposed financial transaction, arrangement or relationship with a related person is subject to review or approval or, if applicable, ratification, by our Board of Directors. Under Nevada law any contract or other transaction between the company and one or more of its officers or directors or another entity in which one or more of the directors or officers are directors or officers or are financially interested may be void or voidable unless (i) the common relationship is disclosed to the remaining disinterested directors who thereafter approve or ratify the contract or transaction; (ii) the common relationship is disclosed to shareholders and shareholders holding a majority of the voting power of the company, including shares held by the interested officer or director, approve or ratify the contract or transaction, or (iii) the contract or transaction is fair as to the company at the time it is authorized or approved.
Independent Directors
Our securities are not listed on a national securities exchange or in an inter-dealer quotation system which has requirements that directors be independent. As a result, we have adopted the independence standards of the NYSE American (formerly known as the American Stock Exchange and more recently the NYSE MKT) to determine the independence of our directors. These standards provide that a person will be considered an independent director if he or she is not an officer of the Company and is, in the view of the Company’s Board of Directors, free of any relationship that would interfere with the exercise of independent judgment. Our Board of Directors has determined that John P. Ryan would be considered independent.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board of Directors selected Assure CPA, LLC (formerly “DeCoria, Maichel & Teague, P.S.”), 7307 N. Division, Suite 222, Spokane, WA 99208 as the independent registered public accounting firm to examine the financial statements of the Company for the fiscal year ending December 31, 2020. Assure CPA, LLC have audited the financial statements of the Company since the fiscal year ended December 31, 2011.
Fees Paid
Audit fees are comprised of amounts billed for the audit of our annual financial statements, review of our quarterly financial statements and other fees that are normally provided in connection with statutory and regulatory filings or engagements. The aggregate fees billed for audit fees for the fiscal years ended December 31, 2020 and 2019 by our independent registered public accounting firms are as follows:
| Fiscal Year | Amount | |||
| 2020 | $ | 72,456 | ||
| 2019 | $ | 39,939 | ||
Audit related fees are comprised of amounts billed for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements, other than those previously reported as audit fees. We were not billed any audit related fees in addition to the audit fees shown above.
Tax fees are comprised of amounts billed for the preparation of our federal and state income tax returns. In 2020 and 2019, we were billed $6,914 and $836 for income tax preparation work for federal and state tax returns for 2014. Income tax returns have not yet been filed for 2016 through 2020. We do not expect any tax liability for any of the unfiled years.
All other fees represent amounts billed for products or services provided by our independent registered public accounting firm. In 2020 and 2019 we were not billed for other services.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
The following exhibits are included with this report:
| * | Management contract, or compensatory plan or arrangement, required to be filed as an exhibit. |
| ** | To be filed with subsequent filing. |
ITEM 16. FORM 10-K SUMMARY
None.
[SIGNATURE PAGE FOLLOWS]
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 19, 2021 | By: | /s/ Rick Havenstrite |
| Rick Havenstrite, Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| NAME | TITLE | DATE | ||
| /s/ Howard Crosby | Director and Chairman | April 19, 2021 | ||
| Howard Crosby | ||||
| /s/ Rick Havenstrite | President, CEO, and Director | April 19, 2021 | ||
| Rick Havenstrite | (Principal Executive Officer) | |||
| /s/ John P. Ryan | Director | April 19, 2021 | ||
| John P. Ryan | ||||
| /s/ Marianne Havenstrite | Treasurer | April 19, 2021 | ||
| Marianne Havenstrite | (Principal Financial and Accounting Officer) |
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act.
No annual report or proxy statement, form of proxy or other proxy soliciting material was sent or provided to shareholders during the year ended December 31, 2020.
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Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Desert Hawk Gold Corp
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Desert Hawk Gold Corp (the “Company”) as of December 31, 2020 and 2019, the related statements of operations, stockholders’ equity and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has accumulated losses since inception. This factor raised substantial doubt about its ability to continue as a going concern. Management’s plans in regard to this matter is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-1
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Ore on Leach Pad
As described in Notes 2 and 5 to the financial statements, the Company’s ore on leach pad balance is $6.8 million at December 31, 2020 consisting of a current balance of $5.3 million and a noncurrent balance of $1.5 million. The measurement and valuation of the ore on leach pad balance involves significant management estimates and assumptions related to the measure of metal content of ore placed on the leach pad, including recovery rates and ore grades. The carrying value of the metal expected to be extracted within twelve months is classified as current on the balance sheet. We identified the measurement and valuation for the ore on leach pad as a critical audit matter.
The principal considerations for our determination that the measurement and valuation for ore on leach pad is a critical audit matter is that certain management assumptions are complex and have a higher degree of estimation uncertainty and that changes in these assumptions could have a significant impact on the balance. In turn, auditing ore on leach pad requires significant auditor judgment.
Our audit procedures related to the accounting for ore on leach pad included the following, among others.
| ● | We obtained and tested the leach pad rollforward of the estimated ounces and costs added to, recovered from, and the resulting ending amounts of ounces and costs of the ore on leach pad balance, including testing of certain assumptions, such as recovery rates and ore grades. |
| ● | For the rollforward of estimated ounces, we assessed the completeness and accuracy of mining production information, including tests of tonnage processed. |
| ● | We evaluated management’s laboratory procedures related to assay testing used to estimate ore grade. |
| ● | We assessed the classification of the current and noncurrent portions of the ore on leach pad balance based upon estimated future sales. |
| ● | We evaluated management’s process for determining production information; estimating the recovery rates and ore grades; and tracking inventory rollforward related to recording the balance of ore on leach pad. |
We have served as the Company’s independent auditor since 2011.
/s/ Assure CPA, LLC
Assure CPA, LLC (formerly DeCoria, Maichel & Teague, P.S.)
Spokane, Washington
April 19, 2021
F-2
BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 173,287 | $ | 2,116,432 | ||||
| Inventories (Note 5) | 5,341,997 | 4,333,682 | ||||||
| Prepaid expenses and other current assets | 18,713 | 181,030 | ||||||
| Total Current Assets | 5,533,997 | 6,631,144 | ||||||
| INVENTORIES (Note 5) | 1,505,020 | - | ||||||
| PROPERTY AND EQUIPMENT, net (Note 6) | 5,389,660 | 5,287,515 | ||||||
| MINERAL PROPERTIES AND INTERESTS, net (Note 7) | 3,785,868 | 3,729,637 | ||||||
| RECLAMATION BONDS (Note 4) | 758,011 | 759,351 | ||||||
| TOTAL ASSETS | $ | 16,972,556 | $ | 16,407,647 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 1,470,700 | $ | 400,807 | ||||
| Royalties and upside participation payable (Note 3) | 787,162 | 36,074 | ||||||
| Accrued liabilities-officer and other wages (Notes 17 and 20) | 71,697 | - | ||||||
| Notes payable - equipment, current portion (Note 11) | 981,759 | 1,302,239 | ||||||
| Prepaid forward gold contract liability, current portion (Note 3) | 3,336,618 | 189,351 | ||||||
| Settlement of consulting contract payable (Note 14) | 200,000 | 200,000 | ||||||
| Total Current Liabilities | 6,847,936 | 2,128,471 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Notes payable - equipment (Note 11) | 226,427 | - | ||||||
| Asset retirement obligation (Note 13) | 1,233,514 | 826,637 | ||||||
| Prepaid forward gold contract liability (Note 3) | 10,263,382 | 13,410,649 | ||||||
| 11,723,323 | 14,237,286 | |||||||
| TOTAL LIABILITIES | 18,571,259 | 16,365,757 | ||||||
| COMMITMENTS AND CONTINGENCIES (Note 20) | ||||||||
| STOCKHOLDERS' EQUITY (DEFICIT) (Note 15) | ||||||||
| Preferred stock, $0.001 par value, 10,000,000 shares authorized; none issued or outstanding | - | - | ||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized; 26,831,603 and 26,631,603 shares issued and outstanding | 26,833 | 26,633 | ||||||
| Additional paid-in capital | 9,666,275 | 9,466,475 | ||||||
| Accumulated deficit | (11,291,811 | ) | (9,451,218 | ) | ||||
| Total Stockholders' Equity (Deficit) | (1,598,703 | ) | 41,890 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 16,972,556 | $ | 16,407,647 | ||||
F-3
STATEMENTS OF OPERATIONS
| Year Ended | ||||||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| REVENUE: | ||||||||
| Concentrate sales | $ | 5,341,997 | $ | 851,661 | ||||
| Processing income | 132,110 | - | ||||||
| Total revenue | 5,474,107 | 851,661 | ||||||
| EXPENSES: | ||||||||
| General project costs | 4,493,260 | 589,329 | ||||||
| Processing costs | 46,409 | - | ||||||
| Depreciation and amortization | 1,255,897 | 1,201,197 | ||||||
| Other operating costs | 686,673 | 333,389 | ||||||
| Consulting expense | 89,898 | 528,817 | ||||||
| Exploration expense | 342,350 | 99,761 | ||||||
| Officers and directors fees | 338,500 | 340,590 | ||||||
| Legal and professional | 118,908 | 184,679 | ||||||
| General and administrative | 293,343 | 231,308 | ||||||
| Loss on disposal of equipment | 162 | 51,950 | ||||||
| Total expenses | 7,665,400 | 3,561,020 | ||||||
| OPERATING LOSS | (2,191,293 | ) | (2,709,359 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest and other income | 4,198 | 6,032 | ||||||
| Interest expense - equipment financing | (84,629 | ) | (46,415 | ) | ||||
| Interest expense - other | (32,366 | ) | (34,794 | ) | ||||
| Loss on settlement of consulting contract (Note 14) | - | (900,000 | ) | |||||
| Loss on settlement of redeemable stock (Note 20) | - | (63,094 | ) | |||||
| Financing expense | - | (28,663 | ) | |||||
| Gain on forgiveness of CARES Act Loan (Note 12) | 463,497 | - | ||||||
| Total other income (expense) | 350,700 | (1,066,934 | ) | |||||
| INCOME (LOSS) BEFORE INCOME TAXES | (1,840,593 | ) | (3,776,293 | ) | ||||
| INCOME TAXES | - | - | ||||||
| NET INCOME (LOSS) | $ | (1,840,593 | ) | $ | (3,776,293 | ) | ||
| BASIC AND DILUTED NET INCOME (LOSS) PER SHARE | $ | (0.07 | ) | $ | (0.15 | ) | ||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-BASIC AND DILUTED | 26,723,953 | 25,591,877 | ||||||
F-4
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2020 and 2019
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders' | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
| Balance, December 31, 2018 | 20,881,603 | $ | 20,753 | $ | 7,120,355 | $ | (5,674,925 | ) | $ | 1,466,183 | ||||||||||
| Common stock issued in connection with acquiring mineral properties and interests (Note 7) | 5,500,000 | 5,500 | 2,194,500 | - | 2,200,000 | |||||||||||||||
| Common stock issued in connection with settlement of consulting contract (Note 14) | 250,000 | 250 | 99,750 | - | 100,000 | |||||||||||||||
| Common stock released in settlement of redeemable stock | 130 | 51,870 | - | 52,000 | ||||||||||||||||
| Net loss | - | - | - | (3,776,293 | ) | (3,776,293 | ) | |||||||||||||
| Balance, December 31, 2019 | 26,631,603 | $ | 26,633 | $ | 9,466,475 | $ | (9,451,218 | ) | $ | 41,890 | ||||||||||
| Common stock issued for cash at $1.00 per share | 200,000 | 200 | 199,800 | - | 200,000 | |||||||||||||||
| Net loss | - | - | - | (1,840,593 | ) | (1,840,593 | ) | |||||||||||||
| Balance, December 31, 2020 | 26,831,603 | $ | 26,833 | $ | 9,666,275 | $ | (11,291,811 | ) | $ | (1,598,703 | ) | |||||||||
F-5
STATEMENTS OF CASH FLOWS
| Year ended | ||||||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,840,593 | ) | $ | (3,776,293 | ) | ||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
| Depreciation and amortization | 1,255,897 | 1,196,489 | ||||||
| Adjustment to inventory | (204,127 | ) | 870,085 | |||||
| Accretion of asset retirement obligation | 92,514 | 74,692 | ||||||
| Gain on settlement of asset retirement obligation | - | (17,120 | ) | |||||
| Loss on disposal of equipment | 162 | 51,950 | ||||||
| Common stock issued for consulting contract settlement | - | 100,000 | ||||||
| Common stock issued for settlement of redeemable stock | - | 52,000 | ||||||
| Gain on forgiveness of CARES Act Loan (Note 12) | (463,497 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Inventories | (2,309,208 | ) | (4,010,426 | ) | ||||
| Prepaid expenses and other current assets | 162,317 | (140,555 | ) | |||||
| Accounts payable and accrued expenses | 1,069,893 | (252,088 | ) | |||||
| Royalties and upside participation payable (Note 3) | 751,088 | 36,074 | ||||||
| Accrued liabilities-officer and other wages (Notes 17 and 20) | 71,697 | (922,039 | ) | |||||
| Interest payable - related parties | - | (463,993 | ) | |||||
| Settlement of consulting contract payable | - | 200,000 | ||||||
| Net cash used by operating activities | (1,413,857 | ) | (7,001,224 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Additions to property and equipment | (652,422 | ) | (794,361 | ) | ||||
| Additions to mineral properties and interests (Note 7) | - | (1,150,000 | ) | |||||
| (Additions) refunds to reclamation bonds | 1,340 | (48,863 | ) | |||||
| Net cash used by investing activities | (651,082 | ) | (1,993,224 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock | 200,000 | - | ||||||
| Proceeds from prepaid forward gold contract liability, net (Note 3) | - | 13,600,000 | ||||||
| Proceeds from short-term notes payable - related parties | - | 91,680 | ||||||
| Proceeds from CARES Act Loan (Note 12) | 463,497 | - | ||||||
| Payment of obligation under capital lease - related party | - | (69,562 | ) | |||||
| Payment of notes payable - equipment | (541,703 | ) | (829,274 | ) | ||||
| Payment of short term note payable - related parties | - | (340,680 | ) | |||||
| Payment of convertible debt - related parties | - | (1,350,000 | ) | |||||
| Net cash provided (used) by financing activities | 121,794 | 11,102,164 | ||||||
| NET INCREASE (DECREASE) IN CASH | (1,943,145 | ) | 2,107,716 | |||||
| CASH, BEGINNING OF YEAR | 2,116,432 | 8,716 | ||||||
| CASH, END OF YEAR | $ | 173,287 | $ | 2,116,432 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||
| Cash paid for interest | $ | 91,301 | $ | 545,202 | ||||
| NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||
| Equipment acquired with notes payable - equipment (Note 11) | $ | 447,650 | $ | 1,807,402 | ||||
| Common stock issued for mineral properties and interests (Note 7) | - | 2,200,000 | ||||||
F-6
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Desert Hawk Gold Corp. (the “Company”), a Nevada Corporation, was incorporated on November 5, 1957. The Company commenced its current mining activities on May 1, 2009.
During the year ended December 31, 2009, the Company entered into Joint Venture Agreements with the Clifton Mining Company (“Clifton”), the Woodman Mining Company and the Moeller Family Trust for the lease of certain of their property interests in the Gold Hill Mining District of Utah. In 2011, the Company entered into an agreement with DMRJ Group, (a Platinum Partners related entity), which allowed for long term funding of the Kiewit project and helped to provide cash flow for operations during the period from 2009 until 2014 while the permitting process was ongoing. The final permit needed to begin development of the Kiewit property was received in January 2014 and development began in February 2014. Construction at the site was substantially complete at September 30, 2014. Revenue from the heap leach operation began in October 2014 with the first sales of gold concentrate.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles used in the United States of America (“U.S. GAAP”) and have been consistently applied in the preparation of the financial statements.
Accounting Method
The Company’s financial statements are prepared using the accrual basis of accounting in accordance with U.S. GAAP.
Accounting for Stock Options and Stock Awards Granted to Employees and Nonemployees
All transactions in which goods or services are received for the issuance of shares of the Company’s common stock or options to purchase shares of common stock are accounted for based on the fair value of the equity award issued. The Company estimates the fair value of stock-based compensation using the Black-Scholes model, which requires the input of some subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected life”), the estimated volatility of the Company’s common stock price over the expected term (“volatility”), the risk-free interest rate and the dividend yield. Changes in the subjective assumptions can materially affect the estimate of the fair value of stock-based compensation.
Risks and Uncertainties
As a mining company, the revenue, profitability and future rate of growth of the Company are substantially dependent on the prevailing prices for gold and silver. The prices of these metals are volatile and affected by many factors beyond the Company’s control, including prevailing interest rates and returns on other asset classes, expectations regarding inflation, speculation, currency values, governmental decisions regarding precious metals stockpiles, global and regional demand and production, political and economic conditions and other factors. A substantial or extended decline in commodity prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows, access to capital and the quantities of resources that the Company can economically produce. Further, the carrying value of the Company’s property and equipment, net; mining properties and interest, net; inventories and ore on leach pads are particularly sensitive to the outlook for commodity prices. A decline in the Company’s price outlook from current levels could result in material impairment charges related to these assets.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ materially from those estimates.
The more significant areas requiring the use of management estimates and assumptions relate to metal prices and mineral resources that are the basis for future cash flow estimates utilized in impairment calculations and units-of production amortization calculations, environmental, reclamation and closure obligations, estimates of recoverable silver and gold in leach pad inventories, fair value of common stock issued and valuation allowances for deferred tax assets, The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from the amounts estimated in these financial statements.
F-7
Reclassifications
Certain reclassifications have been made to conform prior periods’ amounts to the current presentation. These reclassifications have no effect on the results of operations, stockholders’ equity (deficit), and cash flows as previously reported.
Cash and Cash Equivalents
The Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less when purchased to be cash equivalents.
Reclamation Bonds
Reclamation bonds primarily represent bonds and are restricted primarily for reclamation funding which are carried at cost plus earned interest. Reclamation bonds are shown as a non-current asset and are included in the balance sheet. See Note 4.
Inventories
The recovery of gold from certain oxide ores is achieved through the heap leaching process. Under this method, mineralized material is placed on a leach pad where it is treated with a chemical solution, which dissolves the gold contained in the material. The resulting “pregnant” solution is further processed in a plant where gold is recovered. The Company records ore on leach pad, solution in carbon columns in process and gold concentrate at average production cost per gold ounce equivalent, less provisions required to reduce inventory to net realizable value. Production costs include the cost of mineralized material processed; direct and indirect materials and consumables; direct labor; repairs and maintenance; utilities; amortization of property, equipment, and mineral properties; and mine administrative expenses. Costs are removed from ore on leach pads as ounces are recovered, based on the average cost per recoverable ounce of gold on the leach pad.
Estimates of recoverable gold on the leach pad are calculated from the quantities of material placed on the leach pad (measured tons added to the leach pad), the grade of material placed on the leach pad (based on assay data) and an estimated recovery percentage (based on ore type). The nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, actual gold ounces recovered are regularly monitored and estimates are refined based on actual results over time. As of December 31, 2020, the Company had a limited operating history and actual results only over a short period of time.
Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis. The ultimate recovery of gold from a leach pad will not be known until the leaching process is concluded. The quantification of material inventory on the leach pad is based on estimates of the quantities of gold at each balance sheet date that the Company expects to recover during the next 12 to 24 months. Inventory is stated at the lower of cost or net realizable value, which for December 31, 2020 is net realizable value. A portion of the December 31, 2020 inventory has been classified as non-current. This classification has been made based on the amount of gold expected to be sold over the next twelve months based on prior year sales. See Note 5.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Maintenance and repairs are expensed as incurred. Replacements and betterments that extend the useful life of the property and equipment are capitalized. The cost and related accumulated depreciation of assets sold or retired are removed from the accounts and any resulting gain or loss is reflected in results of operations. Amortization of the Kiewit property facilities is calculated over the units-of-production method on the basis of periodic estimates of ore resources. Estimates for ore resources are a key component in determining units of production rates. Estimates of ore resources, mineralized material, and other resources may change, possibly in the near term, resulting in changes to rates in future reporting periods. The Company does not have proven and probable resources at this time. See Note 6.
F-8
Mineral Properties and Interests
The Company capitalizes costs for acquiring mineral properties and ongoing mineral lease payments and expenses costs to maintain mineral rights. Upon reaching the production stage, the capitalized costs are amortized using the units-of-production method on the basis of periodic estimates of ore resources. Estimates for ore resources are a key component in determining units of production rates. Estimates of ore resources, mineralized material, and other resources may change, possibly in the near term, resulting in changes to rates in future reporting periods. The Company does not have proven and probable resources at this time.
Mineral Exploration and Development Costs
Until proven and probable resources (as defined by SEC Guide 7) are established, all exploration expenditures are expensed as incurred. Once such reserves are established, expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operations, are capitalized and will be amortized on units of production basis over proven and probable reserves. Previously capitalized costs are expensed in the period the property is abandoned.
Impairment of Long-Lived Assets
The Company evaluates the carrying amounts of its long-lived assets for impairment whenever events and circumstances indicate the carrying value may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. Estimated undiscounted future net cash flows from each mineral property are calculated using estimated future production, three-year average metals prices, operating capital and costs, and reclamations costs. An impairment loss is recognized when the estimated discounted future cash flows expected to result from the use of an asset are less than the carrying amount of the asset. The Company’s estimates of future cash flows are subject to risks and uncertainties. It is reasonably possible that changes in estimates could occur which may affect the expected recoverability of the Company’s investments in mineral properties.
Provision for Taxes
Income taxes are provided based upon the liability method of accounting. Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. The Company evaluates its tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions will more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not standard are not recorded as a tax benefit or expense in the current year. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard to allow recognition of such an asset. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.
When applicable, the Company will recognize a liability for unrecognized tax benefits. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the periods presented. See Note 16.
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 the Company.
At December 31, 2020 and 2019, the common stock equivalents of 2,400,000 associated with the Company’s outstanding stock options were excluded from the calculation of diluted earnings per share because in 2020 and 2019 the options were antidilutive due to the net losses for the periods.
F-9
Revenue Recognition
Concentrate Sales: The Company’s product consists of gold bearing carbon which is shipped offsite to be turned into an unrefined gold concentrate, which is then further refined to become gold and silver bullion. The Company’s performance obligation in these transactions is generally the transfer of concentrate to the customer. Revenue is recognized upon the completion of the performance obligations and transfer of control of the product to the customer, and when the transaction price and number of ounces can be determined or reasonably estimated.
Processing Income: The Company processes ore for another company. Once processed, the unrefined gold concentrate is shipped to a refinery where it is refined into gold and silver bullion. The Company receives a percentage of the proceeds from the sale of the gold and silver concentrate which is credited to the Company’s account at the refinery. Management has determined the performance obligation is met when the Company delivers the unrefined gold concentrate to the refinery and recognizes revenue at that time.
Sales and accounts receivable for sales are recorded net of charges from the customer which represent components of the transaction price. Charges are estimated by management upon transfer of risk based on contractual terms, and actual charges typically do not vary materially from management’s estimates. Revenue from the sale of concentrate 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. Revenue proceeds are recorded net of the impact of royalties and participation agreements. See Note 18.
Reclamation and Remediation
The Company’s operations have been, and are subject to, standards for mine reclamation that have been established by various governmental agencies. The Company records the fair value of an asset retirement obligation as a liability in the period in which the Company incurs a legal obligation for the retirement of tangible long-lived assets. A corresponding asset is also recorded and depreciated over the life of the asset. After the initial measurement of the asset retirement obligation, the liability is adjusted when there are changes in the estimated future cash flows due to change in estimated costs or change in time until reclamation will commence. Determination of any amounts recognized is based upon numerous estimates and assumptions, including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rates. Such assumptions are based on the Company’s current mining plan and the best available information for making such estimates. See Note 13.
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.
Financial Instruments
The Company's financial instruments include cash and cash equivalents as well as various notes payable and the prepaid gold contract liability. All instruments are accounted for on a historical cost basis, which, due to the short maturity and interest rates of these financial instruments, approximates fair value at December 31, 2020 and 2019.
Fair Value Measurements
When required to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the fair value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Level 1 uses quoted prices in active markets for identical assets or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses significant unobservable inputs. The amount of the total gains or losses for the period are included in earnings that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date.
At December 31, 2020 and December 31, 2019, the Company has no assets nor liabilities that require measurement at fair value on a recurring basis.
F-10
Going Concern
As shown in the accompanying financial statements, the Company had an accumulated deficit of $11,291,811 through December 31, 2020 and net loss of $1,840,593 for the year ended December 31, 2020 along with negative working capital of $3,748,321, 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.
Although production restarted in 2019, it has not yet reached optimum levels. The timing and amount of capital requirements will depend on a number of factors, including demand for products, metals market pricing, and the availability of opportunities for expansion through affiliations and other business relationships. Although management has procured funding through a forward sales agreement (Note 3) they intend 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. The ability of the Company to continue as a going concern is dependent on the Company’s ability to generate profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they are due.
COVID -19
The Company’s operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic spreading throughout the United States and elsewhere, causing disruptions to the Company’s business operations and management. These disruptions are most evident in the Company’s ability to retain and house employees and properly manage them while maintaining proper social distancing and with delays in obtaining materials and supplies. There has also been a reduction in the availability of equipment financing. These disruptions continue to hamper operations. It is management’s belief that disruptions relating to COVID will be mitigated in the future as a large percent of the population becomes vaccinated.
New Accounting Pronouncements
Accounting Standards Updates Adopted
In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and makes additions to the disclosure requirements on fair value measurements. The update was adopted as of January 1, 2020, and its adoption did not have a material impact on the Company’s financial statements.
Accounting Standards Updates to Become Effective in Future Periods
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update contains a number of provisions intended to simplify the accounting for income taxes. The update is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Management is evaluating the impact of this update on the Company’s financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.
NOTE 3 – PREPAID FORWARD GOLD CONTRACT LIABILITY
During 2019, the Company entered into and closed a Pre-Paid Forward Gold Purchase Agreement (the “Purchase Agreement”) with PDK Utah Holdings L.P. (“PDK”) for the sale and purchase by PDK of gold produced from the Company's mining property. Under the terms of the original Purchase Agreement, PDK initially agreed to purchase a total of 73,910 ounces of gold from the Company. The Company agreed to deliver ounces of gold produced from the Kiewit property to PDK. The Company would receive proceeds from PDK at the then current spot price less a discount specified in the Purchase Agreement. Prepayment was to be made in three tranches, with the initial tranche in the amount of $11,200,000 having been made upon execution of the Purchase Agreement on March 7, 2019 (the “Initial Funding”), $4,500,000 for Tranche 2 to occur at least six months following the Initial Funding date, and $5,500,000 for Tranche 3 to occur at least 10 months following the Initial Funding date, provided that all conditions precedent for funding Tranches 2 and 3 are met. From the Initial Funding, the Company paid an upfront fee of $600,000 to PDK for expenses incurred in connection with the transaction. The first gold delivery of 655 ounces was due December 2020 and was not made.
F-11
The Purchase Agreement contains a royalty provision whereby royalties of 4% are due on gold and silver recovered from mining operations at the Kiewit site and sold by the Company to a third party. Royalties are payable within 30 days following the end of each fiscal quarter. Royalties payable at December 31, 2020 and December 31, 2019 were $210,802 and $36,074. The December 31, 2020 balance includes royalties payable for the second, third and fourth quarters of 2020.
The Purchase Agreement contains a participation payment provision whereby PDK receives a portion of the proceeds from gold sold by the Company to a third party. The amount of proceeds due to PDK is based upon a percentage of proceeds over a set gold price per ounce. The upside participation amounts are payable within 4 days following each sale. Participation payments payable at December 31, 2020 and December 31, 2019 were $576,360 and nil. The December 31, 2020 balance includes participation payments payable for the third and fourth quarters of 2020.
In addition, under the agreement, PDK may reduce the required number of ounces to be sold in exchange for common shares of the Company. As security for the obligations of the Company under the Purchase Agreement, the Company has granted PDK a security interest in all of the assets of the Company and has issued and recorded a Leasehold Deed of Trust, Assignment of Leases, Rents, As Extracted Collateral and Contracts, Security Agreement and Fixture Filing. The Purchase Agreement contains representations and warranties, as well as affirmative and negative covenants customary to a transaction of this nature.
On October 31, 2019, the Company and PDK amended the Purchase Agreement and entered into the Amended Pre-Paid Forward Agreement (the “Amended Agreement”) to adjust the second and third tranches paid to the Company, to reduce the total number of ounces of gold subject to the Purchase Agreement, and to revise other provisions therein. The second tranche was reduced from $4,500,000 to $1,600,000, and the third tranche was reduced from $5,500,000 to $1,400,000. The second tranche was received on October 31, 2019 upon execution of the Amended Agreement and the third tranche was received on December 27, 2019, with funds to be dedicated in accordance with the revised budget furnished with the Amended Agreement. The amendment also reduced the total number of ounces of gold to be delivered under the agreement from 73,910 to 47,045.
Under the terms of the Amended Agreement, the Company is obligated to deliver gold in the following quantities:
Months | Gold Ounces per Month | Total Gold Ounces | ||||||
| December 2020 | 655 | 655 | ||||||
| January 2021 to March 2021 | 896 | 2,688 | ||||||
| April 2021 to March 2022 | 911 | 10,932 | ||||||
| April 2022 to March 2023 | 1,396 | 16,752 | ||||||
| April 2023 to December 2023 | 1,753 | 15,777 | ||||||
| January 2024 | 241 | 241 | ||||||
| 47,045 | ||||||||
The Amended Agreement also altered the total amount that PDK may reduce the number of ounces of gold to be delivered under the Amended Agreement in exchange for common shares of the Company. Under the Amended Agreement, PDK may reduce the required number of ounces by up to 8,000 ounces in exchange for common shares of the Company.
The 655 ounces required to be delivered in December 2020 was not delivered. As per the conditions of the Agreement, the Company notified the Buyer two business days prior to the monthly delivery date that the delivery would not be made, thus delaying the required delivery by 30 days. As of April 15, 2021, this delivery has not yet been made and the Company believes that it now is in default of the terms of the Agreement. Additionally, the January, February and March deliveries have not been made. Although invoices for the deliveries and payments due in February and March 2021 have been received, notice of default has not been received from PDK and the Company is in ongoing negotiations with the PDK in an effort to re-negotiate the terms of the agreement. See Note 21.
F-12
NOTE 4 – RECLAMATION BONDS
At December 31, 2020 and 2019, the Company has a surety bond of $674,000 in an escrow account with the bonding company for reclamation of its property. This escrowed amount is held at Bank of New York, Mellon for the Company’s benefit. It may not be released to the Company without the prior consent of the surety bondholder. The escrowed amount does not earn interest.
In March 2019, the Company returned the Cactus Mill property and the reclamation bond of $42,802 on that property to Clifton Mining Company.
In December 2020, the Company was notified that the reclamation cost estimate for the Kiewit properties had been escalated from $1,348,000 to $1,537,000, an increase of $189,000. This additional surety amount of $189,000 is due to the Utah Division of Oil, Gas and Mining by March 25, 2021 and was remitted on March 11, 2021.
Total reclamation bonds posted at December 31, 2020 and 2019 are $758,011 and $759,351, respectively, which consists of the above escrowed amount, along with certificate of deposits held with the state of Utah for the remaining bonds on the property, including exploration bonds.
NOTE 5 – INVENTORIES
Inventories at December 31, 2020 and 2019 consists of the following:
| December 31, 2020 | December 31, 2019 | |||||||
| Ore on leach pad | $ | 6,583,986 | $ | 3,903,297 | ||||
| Carbon column in process | 133,640 | 235,762 | ||||||
| Finished goods | 129,391 | 194,623 | ||||||
| Total | $ | 6,847,017 | $ | 4,333,682 | ||||
Inventories at December 31, 2020 and 2019 were valued at net realizable value because production costs were greater than the amount the Company expected to receive on the sale of the estimated gold ounces contained in inventories. The adjustment to inventory was $204,127 and ($870,085) at December 31, 2020 and 2019, respectively. A portion of the December 31, 2020 inventory has been classified as non-current. This classification has been made based on the amount of gold expected to be sold over the next twelve months based on prior year sales.
NOTE 6 - PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 2020 and 2019:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Equipment | $ | 6,361,808 | $ | 5,336,011 | ||||
| Furniture and fixtures | 6,981 | 6,981 | ||||||
| Electronic and computer equipment | 50,587 | 50,587 | ||||||
| Vehicles | 315,905 | 256,815 | ||||||
| Land improvements | 44,840 | 44,840 | ||||||
| 6,780,121 | 5,695,234 | |||||||
| Less accumulated depreciation | (3,129,046 | ) | (2,254,961 | ) | ||||
| 3,651,075 | 3,440,273 | |||||||
| Kiewit property facilities | 2,497,436 | 2,497,436 | ||||||
| Less accumulated amortization | (758,851 | ) | (650,194 | ) | ||||
| 1,738,585 | 1,847,242 | |||||||
| Total | $ | 5,389,660 | $ | 5,287,515 | ||||
F-13
For the Kiewit property facilities, amortization based on total units of production was $108,657 and $162,980 for the years ended December 31, 2020 and 2019. Depreciation expense on property and equipment was $889,108 and $562,537 for the years ended December 31, 2020 and 2019.
NOTE 7 – MINERAL PROPERTIES AND INTERESTS
Mineral properties and interests as of December 31, 2020 and 2019 are as follows:
| December 31, 2020 | December 31, 2019 | |||||||
| Kiewit and surrounding claims | $ | 3,700,000 | $ | 3,700,000 | ||||
| JJS property | 250,000 | 250,000 | ||||||
| Total | 3,950,000 | 3,950,000 | ||||||
| Less Accumulated amortization | (770,560 | ) | (475,401 | ) | ||||
| 3,179,440 | 3,474,599 | |||||||
| Asset retirement obligation | ||||||||
| Kiewit site | 718,289 | 452,193 | ||||||
| Kiewit exploration | 28,377 | 11,126 | ||||||
| JJS property | 31,016 | - | ||||||
| Total | 777,682 | 463,319 | ||||||
| Less accumulated amortization | (171,254 | ) | (208,281 | ) | ||||
| 606,428 | 255,038 | |||||||
| Total | $ | 3,785,868 | $ | 3,729,637 | ||||
On June 13, 2019, the Company entered into an agreement whereby the Company acquired 20 claims adjacent to the Kiewit property from Ben Julian, LLC for $250,000, known as the JJS Property. Although drilling has commenced on this property, permitting has not been completed and production has not yet begun.
In 2009, the Company entered into a Joint Venture Agreement with the Clifton Mining Company (“Clifton”) and the Woodman Mining Company for the lease of their property interests in the Gold Hill Mining District of Utah. In March 2019, the Company and Clifton entered into a Second Amended and Restated Lease Agreement (the “Amended Lease”). Under the terms of this Amended Lease, the Company relinquished its leasehold interest in all but 10 of the patented mining claims, for which it retained only the surface rights, and 66 of the unpatented lode mining claims previously held by the Company. The Cactus Mill property was returned to Clifton Mining Company as part of this agreement.
As consideration for entering into the Amended Lease, the Company issued 5,500,000 shares of its common stock with a fair value of $2,200,000 which increased the carrying value of the mineral properties and interests. In addition, the Company and Clifton entered into a Registration Rights Agreement to register for resale the shares issued to Clifton which requires the Company to register the shares within 18 months (which is September 7, 2020) following the initial funding received under the Purchase Agreement (Note 3). In the event the Company does not register the shares within the 18-month period, the Company is obligated to pay Clifton a royalty equal to 2.5% of the net smelter returns from the minerals generated from the Company’s mining claims. The registration of these shares was filed and became effective on April 14, 2020.
Under the terms of the initial 2009 Joint Venture Agreement, the Company was required to pay a 4% net smelter royalty (“NSR”) on base metals in all other areas except for production from the Kiewit gold property and a NSR 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 was also required to pay Clifton a 6% NSR on any production from the Kiewit gold property.
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As part of the Purchase Agreement (Note 3) finalized in March 2019, these NSRs were bought out by the Company from Clifton and two other minority royalty holders at a cost of $900,000 which increased the carrying value of the mineral properties and interests. The buyer of the Purchase Agreement (Note 3), PDK, acquired a 4% NSR, previously held by Clifton, on the Kiewit property for $2,200,000. PDK remitted the funds for the NSR directly to Clifton. PDK will receive a 4% net NSR on proceeds from the sale of gold and silver from the Kiewit and JJS properties.
In early 2020, the Company revised its estimate of gold ounces to be produced from its mineral properties and interests. The updated estimate of total gold ounces to be produced from the property considered actual gold ounce recoveries since production began and internally estimated ounces contained in mineral resources based on drilling and actual data. The new estimate resulted in increased gold ounces at January 1, 2020 from 39,480 gold ounces to 92,500 gold ounces. Amortization of the mineral properties and interests based on total units of production was $258,132 and $475,682 for the years ended December 31, 2020 and 2019, respectively. Amortization and accumulated amortization for the year ended December 31, 2020 was based on the updated estimate.
NOTE 8 – SHORT-TERM NOTES PAYABLE – RELATED PARTIES
On January 1, 2019, the Company had outstanding short-term notes payable with the Company’s president totaling $249,000. The Company borrowed an additional $91,680 during the first quarter 2019. Interest expense recognized on these loans was nil and $3,382 for the years ended December 31, 2020 and 2019, respectively. These short-term notes were repaid in full, in March 2019 as part of the terms of the Purchase Agreement.
NOTE 9 – CONVERTIBLE DEBT – RELATED PARTIES
On January 1, 2019, the Company had outstanding convertible promissory notes to two of its minority shareholders, for a total of $1,350,000 plus accrued interest of $456,750. All of these notes were paid in full, including accrued interest, on March 7, 2019 with funds received under the Purchase Agreement. Interest expense recognized on these loans was $31,412 for the year ended December 31, 2019.
NOTE 10 – OBLIGATION UNDER CAPITAL LEASE - RELATED PARTY
A capital lease was entered into on June 20, 2016 with RMH Overhead, LLC for mining and crushing equipment valued at $185,618, some of which had been previously owned by the Company. RMH Overhead, LLC is an entity owned by the Company’s president, Rick Havenstrite. Lease payments were paid in full, including accrued interest and late fees, in March 2019 with funds received under the Purchase Agreement. The equipment was being amortized over the estimated useful life of the equipment. The Company now owns the equipment which is included in property and equipment on the balance sheet.
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NOTE 11 – NOTES PAYABLE – EQUIPMENT
The following is a summary of the equipment notes payable:
| December 31, 2020 | December 31, 2019 | |||||||
| Note payable to Wheeler Machinery, collateralized by a 374 DL Excavator, due in 12 monthly installments of $19,575, beginning June 2020, including interest at 8%, with a balloon payment due in June 2021 of $150,164.(1) | $ | 304,845 | $ | - | ||||
| Note payable to ICM Solutions, LLC, collateralized by 3 grasshopper leg conveyor systems, due in 12 monthly installments of $4,365, beginning April 2020, including interest at 9%, with a balloon payment of $41,696 due in April 2021.(1) | 69,230 | - | ||||||
| Note payable to Epiroc, collateralized by a used Epiroc drill, due in 6 monthly installments of $22,235, beginning October 2019, the balloon amount of $488,317 was refinanced in April 2020, with a new loan in that amount, due in 36 monthly payments of $14,679 including interest at 5.2%. | 386,268 | 563,368 | ||||||
| Note payable to Wheeler Machinery, collateralized by a used CAT 740 Haul truck, originally due in 11 monthly installments of $14,475, beginning May 2019, including interest at 9%, with a balloon payment due in April 2020 of $168,873.(1) (2) (3) | 86,807 | 206,682 | ||||||
| Note payable to Wheeler Machinery, collateralized by a used D8T dozer, originally due in 11 monthly installments of $19,125, beginning August 2019, including interest at 10%, with a balloon payment due in July 2020 of $350,281.(1) (2) (4) | 349,761 | 441,989 | ||||||
| Note payable to Komatsu Equipment, collateralized by a used PC490 Excavator, due in 11 monthly payments of $10,320, beginning July 2019, including interest at 9%, the balloon amount of $71,372 was refinanced in May 2020 with 1 payment of $28,823 and 12 monthly payments of $1,903 including interest at 4.6%. | 11,275 | 90,200 | ||||||
| 1,208,186 | 1,302,239 | |||||||
| Current portion | (981,759 | ) | (1,302,239 | ) | ||||
| Long term portion | $ | 226,427 | $ | - | ||||
| Principal payments due are as follows for the twelve months ended: | ||||||||
| December 31, 2021 | $ | 981,759 | ||||||
| December 31, 2022 | 168,345 | |||||||
| December 31, 2023 | 58,082 | |||||||
| $ | 1,208,186 | |||||||
Arrangements have been made with Wheeler CAT and ICM Solutions, LLC to accelerate the payment schedule for the first few months of 2021, with no additional penalties other than interest, thereby allowing for the account to become current by May 2021.
| (1) | The Company was between 1 and 3 payments delinquent in its obligation on this note at December 31, 2020. |
| (2) | Due to the difficulty in obtaining long-term equipment financing, Wheeler CAT has extended the terms of this 12-month amortization, allowing for continued monthly payments of the same amount until other financing becomes available or until the balance has been paid in full, whichever comes first. |
| (3) | In February 2021, Wheeler CAT requested the return of this equipment because the Company was 5 payments delinquent in its obligation on this note payable. This truck was then purchased from Wheeler CAT by a related party who in February began renting the truck to the Company on a month-to-month rental. This arrangement relieved the Company of any other financial obligation on this note. |
| (4) | The balance due at December 31, 2020 includes an increase for a major repair invoice along with additional interest charges, which increased the note balance by $34,970. |
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NOTE 12 - NOTE PAYABLE – CARES ACT LOAN
In April 2020, the Company received a loan of $463,497 pursuant to the SBA’s Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was enacted March 27, 2020. The loan, which was in the form of a Note dated April 16, 2020 issued by the Company, matures on April 9, 2025 and bears interest at a rate of 1% per annum, payable monthly commencing on August 15, 2021. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. Qualifying expenses include payroll costs, costs used to continue group health care benefits, mortgage payments, rent, and utilities. As of December 31, 2020, the Company has used funds from the loan to pay qualifying expenses. The Company received forgiveness of the Note on November 24, 2020 and $463,497 was recognized as income during the year ended December 31, 2020.
NOTE 13 – ASSET RETIREMENT OBLIGATION
Changes in the asset retirement obligation for the years ended December 31, 2020 and 2019 are as follows:
| December 31, 2020 | December 31, 2019 | |||||||
| Asset retirement obligation, beginning of period | $ | 826,637 | $ | 792,747 | ||||
| Reduction in liability due to transfer of Cactus Mill property | - | (40,802 | ) | |||||
| Obligation incurred: | ||||||||
| Kiewit properties | 283,347 | - | ||||||
| JJS property | 31,016 | - | ||||||
| Accretion expense | 92,514 | 74,692 | ||||||
| Asset retirement obligation, end of period | $ | 1,233,514 | $ | 826,637 | ||||
In early 2020, the Company updated the asset retirement obligation to reflect a plan for reclamation and closure of the Kiewit and JJS properties at the end of their lives which resulted in an increase of estimated undiscounted costs of $198,365. The asset retirement asset and obligation increased by $125,363 as a result of a change in the estimated timing of costs and the impact of discounting the costs to present value. The estimated reclamation costs were discounted using credit adjusted, risk-free interest rate of 10% from the time the Company incurred the obligation to the time the Company expect to pay the retirement obligation.
In late 2020, the Company received notification regarding an increase in its reclamation bond which resulted in a re-assessment of its original reclamation cost estimate. As a result of this reassessment, the asset retirement asset and asset retirement obligation balances were increased by $189,000. The estimated reclamation costs were discounted using credit adjusted, risk-free interest rate of 10% from the time the Company incurred the obligation to the time the Company expect to pay the retirement obligation.
During the year ended December 31, 2019, the Cactus Mill property was returned to Clifton as part of the terms of the Amended Lease (Note 7). The net asset retirement cost of $17,120 and obligation of $40,802 relating to the Cactus Mill property were eliminated resulting in a gain on settlement of asset retirement obligation of $20,451 recognized in general and administrative expense in the statement of operations.
NOTE 14 – SETTLEMENT OF CONSULTING CONTRACT
On March 29, 2018, the Company entered into a five-year Agency Agreement (the “Agency Agreement”) with H&H Metals Corp., a New York corporation (“H&H”). Under the terms of the Agency Agreement, H&H agreed to provide certain advisory services in regard to natural resources activities and to assist in securing purchasers for minerals produced from its mining properties.
On January 16, 2019, as a condition for entering into the Purchase Agreement (Note 3), the Company negotiated a termination of the Agency Agreement (the “Termination Agreement”) with H&H. Under the terms of the Termination Agreement, the Company paid H&H $600,000 in cash and agreed to pay an additional $200,000 within 18 months. The Company also issued 250,000 shares of its common stock with a fair value of $100,000 to H&H. In addition, Phillip H. Holme, a principal of H&H, became a director of the Company. In April 2020, Mr. Holme passed away unexpectedly. No decision has been made at this time about a replacement to fill the vacancy on the Board of Directors caused by Mr. Holme’s death.
The Company recognized a loss on settlement of consulting contract of $900,000 during the year ended December 31, 2019. The balance of $200,000 was due in July 2020, under the terms of the settlement agreement. This payment has not yet been paid.
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NOTE 15 - 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.
2020 Activity
During the year ended December 31, 2020, the Company commenced a private placement offering of its common stock on June 22, 2020. One new shareholder purchased 200,000 shares at a price of $1.00 per share and a total of $200,000 was raised through this offering. The offering did not include warrants.
2019 Activity
During the year ended December 31, 2019, the Company had the following transactions relating to common stock. All shares issued were valued at $0.40 per share based on the most recent sale of common stock for cash:
| ● | Issued 5,500,000 shares of common stock to Clifton in connection with the Amended Lease (Note 7). The fair value of these shares was $2,200,000. |
| ● | Issued 250,000 shares of common stock to H&H in connection with settlement of a consulting contract (Note 14). The fair value of these shares was $100,000. |
| ● | In connection with the settlement of stock redeemable with gold proceeds issued in 2012, the Company allowed investors to retain 130,000 shares of common stock that had been issued in connection with a financing in 2012. The fair value of these shares was $52,000. |
Preferred Stock
The Company's Articles of Incorporation authorized 10,000,000 shares of $0.001 par value Preferred Stock available for issuance with such rights and preferences, including liquidation, dividend, conversion, and voting rights, as the Board of Directors may determine.
NOTE 16 – INCOME TAXES
The components of the Company’s net deferred tax assets are as follows:
| 2020 | 2019 | |||||||
| Deferred tax asset: | ||||||||
| Net operating loss carryforward | $ | 2,818,000 | $ | 1,784,000 | ||||
| Exploration costs | 30,000 | 58,000 | ||||||
| Stock based compensation | 96,000 | 96,000 | ||||||
| Equipment impairment | 37,000 | 37,000 | ||||||
| Asset retirement obligation | 73,000 | 54,000 | ||||||
| Total deferred tax assets | 3,054,000 | 2,029,000 | ||||||
| Valuation allowance | (2,915,000 | ) | (2,029,000 | ) | ||||
| 139,000 | - | |||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment | (139,000 | ) | - | |||||
| Total deferred tax liabilities | (139,000 | ) | - | |||||
| Net deferred tax assets | $ | - | $ | - | ||||
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Deferred income taxes arise from timing differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. A deferred tax asset valuation allowance is recorded when it is more likely than not that deferred tax assets will not be realized. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax assets, a valuation allowance equal to 100% of the deferred tax assets has been recorded at December 31, 2020 and 2019.
The income tax provision (benefit) for the years ended December 31, 2020 and 2019 differ from the statutory rate of 21% as follows:
| December 31, 2020 | December 31, 2019 | |||||||||||||||
| Amount computed using the statutory rate | $ | (387,000 | ) | (21 | %) | $ | (793,000 | ) | (21 | %) | ||||||
| Change in estimate | (417,000 | ) | (23 | %) | - | - | ||||||||||
| Non-taxable item – SBA loan forgiven | (97,000 | ) | (5 | %) | - | - | ||||||||||
| Other | 15,000 | 1 | % | (1,000 | ) | - | ||||||||||
| Change in valuation allowance | 886,000 | 48 | % | 794,000 | 21 | % | ||||||||||
| Total income tax provision (benefit) | $ | - | -% | $ | - | -% | ||||||||||
At December 31, 2020 the Company had federal net operating loss carry forwards of approximately $13.4 million, $6.6 million of which expire between 2029 through 2039. The remaining balance of $6.8 million will never expire but its utilization is limited to 80% of taxable income in any future year.
During the years ended December 31, 2020 and 2019, there were no material uncertain tax positions taken by the Company. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the periods presented. The Company had no accruals for interest and penalties at December 31, 2020 and 2019. The Company’s federal income tax returns for fiscal years 2016 through 2020 remain open because they have not yet been filed and are subject to examination.
NOTE 17 – RELATED PARTY TRANSACTIONS
In addition to transactions disclosed in Notes 8, 9, 10 and 19 and 21, the Company had the following related party transactions.
The Company has a month-to-month lease agreement for its office space with RMH Overhead, LLC, a company owned by Rick Havenstrite, the Company’s President and a director. The Company recognized rent expense of $17,000 and $12,000 for the years ended December 31, 2020 and 2019, respectively, under this lease. At December 31, 2020 and 2019, amounts due to RMH Overhead, LLC of $3,000 and nil, respectively, are included in accounts payable and accrued expenses on the balance sheet.
The Company compensates directors for their contributions to the management of the Company, with one director receiving $6,000 per month and the other director receiving $5,000 per quarter. At December 31, 2020 and December 31, 2019, $34,000 and nil, respectively, was due to directors. At December 31, 2020 and 2019, $37,697 and nil were due to officers for accrued wages.
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NOTE 18 – REVENUE
Product sales for the years ended December 31, 2020 and 2019 are shown below. At December 31, 2020 and December 31, 2019, the Company did not have a gold sales receivable balance.
| Year ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Concentrate sales: | ||||||||
| Gold | $ | 6,811,841 | $ | 1,010,080 | ||||
| Silver | 68,810 | 11,928 | ||||||
| 6,880,651 | 1,022,008 | |||||||
| Less: Royalties | (265,212 | ) | (40,880 | ) | ||||
| Upside participation | (987,277 | ) | (84,711 | ) | ||||
| Outside processing charges | (286,165 | ) | (44,756 | ) | ||||
| (1,538,654 | ) | (170,347 | ) | |||||
| Net concentrate sales | 5,341,997 | 851,661 | ||||||
| Processing income | 132,110 | - | ||||||
| Total revenue | $ | 5,474,107 | $ | 851,661 | ||||
For the year ended December 31, 2020, all revenue was from concentrate sales, and processing income from the third party for which the Company processed ore and it was sold to Asahi Refining. For the year ended December 31, 2019, all revenue was from concentrate sales to Asahi Refining.
NOTE 19 - STOCK OPTIONS
The Company has reserved 2,400,000 shares under its 2018 Stock Incentive Plan (the “Plan”). The Plan was adopted by the board of directors on March 28, 2018, retroactive to February 23, 2018, as a vehicle for the recruitment and retention of qualified employees, officers, directors, consultants, and other service providers. The Plan is administered by the Board of Directors. The Company may issue, to eligible persons, restricted common stock, incentive and non-statutory options, stock appreciation rights and restricted stock units. The terms and conditions of awards under the Plan will be determined by the Board of Directors.
On February 23, 2018, the Board approved the grant of an aggregate of 2,400,000 non-statutory options under the 2018 Plan exercisable at $0.40 per share which expire February 23, 2023 in the amounts and to the following:
| ● | Rick Havenstrite, President and CEO – 1,000,000 options | |
| ● | Howard Crosby, Director – 1,000,000 options | |
| ● | John Ryan, Director – 200,000 options | |
| ● | Linde Havenstrite, Project Engineer – 200,000 options |
The options were fully vested on the date of grant.
Outstanding options at December 31, 2020 were 2,400,000, have a remaining life of 2.15 years, and had no intrinsic value. No options were granted, expired, or were exercised during the year ended December 31, 2020.
NOTE 20 – COMMITMENTS AND CONTINGENCIES
In addition to commitments disclosed in Notes 3 and 7, the Company had the following commitments and contingencies.
Personal property tax and other accrued liabilities
Personal property tax for Tooele County, Utah, is billed and becomes due on November 30 of each year. At December 31, 2020 and 2019, the amount due to Tooele County is $35,568 and nil, respectively.
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Employment Agreements
The Company has an employment agreement with Mr. Havenstrite as President of the Company, which is ongoing. The agreement, as amended, requires Mr. Havenstrite to meet certain time requirements and limits the number of other board member obligations in which he can participate. The agreement allows for a base annual salary of $144,000 plus certain performance compensation upon fulfillment of established goals. The agreement allows the board of directors to terminate Mr. Havenstrite’s employment at any time, providing for a severance payment upon termination without cause.
At December 31, 2020 and December 31, 2019, accrued compensation of $37,697 and nil, were due to officers of the Company. Of the amounts accrued at December 31, 2020 and December 31, 2019, accrued compensation of $26,620 and nil is due to Rick Havenstrite and $11,077 and nil is due to Marianne Havenstrite, Treasurer and Principal Financial Officer.
Finder’s Agreement
On May 11, 2018, the Company entered into an agreement with Mount Royal Consultants (Mount Royal) to assist in finding prospective investors. Mount Royal would receive a finder’s fee of 7% for a connection with a company that resulted in a qualified investment consisting of equity securities or a fee of 3% for a connection with a company that resulted in a purchase of debt securities. On March 7, 2019, the Company closed a Purchase Agreement (Note 3) to a buyer for the purchase of gold produced from the Company's mining property. This agreement was deemed to be subject to the finder’s fee and resulted in a payment to Mount Royal of $318,000, 3% of the $10,600,000 beneficially received by the Company in accordance with the terms of the Purchase Agreement. On November 1, 2019, an additional payment of 3% of the Tranche 2 payment received by the Company resulted in a payment of $48,000 to Mount Royal and a third payment of $42,000 was issued after receipt of the Tranche 3 payment on December 27, 2019. Future amounts to be received from investors could also be subject to this agreement. During the years ended December 31, 2020 and 2019, the Company recognized nil and $408,000, respectively, as consulting expense relating to this agreement.
Mining Leases
Annual claims fees are currently $155 per claim plus administrative and school trust land fees. Total paid for claims fees and other land trust fees in 2020 was $29,739.
NOTE 21 - SUBSEQUENT EVENTS
On February 1, 2021, RMH Overhead, LLC. (“RMH”) an entity owned by Rick Havenstrite, President of the Company, purchased a CAT 740B Articulated Haul Truck from Wheeler CAT. This truck had previously been owned by the Company with an associated note payable to Wheeler CAT. At the time, the Company owed Wheeler CAT five monthly payments along with a major repair billing. RMH paid Wheeler CAT the five past due payments plus an amount to complete the purchase of the truck. As of February 1, 2021, the Company has no liability to Wheeler CAT in regard to this piece of equipment. Beginning February 1, 2021, the Company began renting this truck from RMH at a rate of $10,000 per month on a month-to-month rental.
On December 1, 2020, the Company notified PDK that it would not be able to make the December delivery of gold and elected to use one of the delivery postponement options under the Amended Agreement. This provision permits the Company to delay delivery by up to 30 days by delivering the amount of gold due on the previous month’s due date, plus interest calculated at the default interest rate. At the end of this 30-day extension period the Company was unable to deliver the December payment. The Company has also failed to make the gold deliveries for January, February and March of 2021. In February and March 2021, the Company received invoices from PDK for $448,000 each month for the missed deliveries in February and March 2021, respectively. Although invoices for the payments due in February and March 2021 have been received, notice of default has not been received from the Buyer. The failure to make gold deliveries under the Amended Agreement provides PDK with certain remedies, including termination of the agreement, demand for early payment of the entire delivery obligations, and enforcement of foreclosure rights against the assets pledged as security under the agreement. Management is involved in ongoing discussions with representatives of PDK in an attempt to resolve these late payments and to renegotiate the terms of the gold delivery agreement.
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