Attached files
| file | filename |
|---|---|
| EX-95 - MINE SAFETY DISCLOSURE - Desert Hawk Gold Corp. | f10q0317ex95_deserthawk.htm |
| EX-32.2 - CERTIFICATION - Desert Hawk Gold Corp. | f10q0317ex32-2_deserthawk.htm |
| EX-32.1 - CERTIFICATION - Desert Hawk Gold Corp. | f10q0317ex32-1_deserthawk.htm |
| EX-31.2 - CERTIFICATION - Desert Hawk Gold Corp. | f10q0317ex31-2_deserthawk.htm |
| EX-31.1 - CERTIFICATION - Desert Hawk Gold Corp. | f10q0317ex31-1_deserthawk.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017.
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________to___________________________
Commission File Number: 333-169701
| Desert Hawk Gold Corp. |
| (Exact name of registrant as specified in its charter) |
| Nevada | 82-0230997 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) | |
| 1290 Holcomb Ave. Reno, NV | 89502 | |
| (Address of principal executive offices) | (Zip Code) | |
| (775) 337-8057 | ||
| (Registrant’s telephone number, including area code) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting Company | ☒ |
| 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of the issuer’s common stock, as of July 31, 2018: 20,581,603.
DESERT HAWK GOLD CORP.
Form 10-Q
March 31, 2017
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | 1 |
| Item 1. Financial Statements | 1 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 20 |
| Item 4. Controls and Procedures | 20 |
| PART II – OTHER INFORMATION | 21 |
| Item 3. Defaults Upon Senior Securities | 21 |
| Item 4. Mine Safety Disclosures | 21 |
| Item 6. Exhibits | 21 |
| SIGNATURES | 22 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
DESERT HAWK GOLD CORP
BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| ASSETS | (unaudited) | |||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 153,328 | $ | 657,944 | ||||
| Inventories, current portion (Note 4) | 135,278 | 142,921 | ||||||
| Prepaid expenses and other current assets | 96,304 | 132,747 | ||||||
| Total Current Assets | 384,910 | 933,612 | ||||||
| INVENTORIES, non-current (Note 4) | 3,012,839 | 2,951,011 | ||||||
| PROPERTY AND EQUIPMENT, net (Note 5) | 3,955,793 | 4,039,887 | ||||||
| MINERAL PROPERTIES AND INTERESTS, net (Note 6) | 1,114,675 | 1,096,482 | ||||||
| RECLAMATION BONDS (Note 6) | 752,766 | 752,754 | ||||||
| TOTAL ASSETS | $ | 9,220,983 | $ | 9,773,746 | ||||
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 600,730 | $ | 744,943 | ||||
| Accrued liabilities-officer and other wages (Note 12) | 539,577 | 495,808 | ||||||
| Interest payable - related parties (Note 7) | 221,506 | 192,842 | ||||||
| Interest payable - related party (Note 10) | 7,787,190 | 7,239,610 | ||||||
| Convertible debt - related parties (Note 7) | 850,000 | 850,000 | ||||||
| Obligation under capital lease - related party, current portion (Note 8) | 96,066 | 120,461 | ||||||
| Short-term note payable - related parties (Notes 7 and 12) | - | 34,500 | ||||||
| Notes payable - equipment, current portion (Note 9) | 477,470 | 813,818 | ||||||
| Notes payable - related party (Note 10) | 15,110,492 | 14,610,492 | ||||||
| Total Current Liabilities | 25,683,031 | 25,102,474 | ||||||
| LONG-TERM LIABILITIES | ||||||||
| Asset retirement obligation (Note 11) | 992,237 | 974,109 | ||||||
| Obligation under capital lease - related party (Note 8) | 26,339 | 51,714 | ||||||
| Notes payable - equipment (Note 9) | 296,591 | 453,276 | ||||||
| 1,315,167 | 1,479,099 | |||||||
| TOTAL LIABILITIES | 26,998,198 | 26,581,573 | ||||||
| COMMITMENTS AND CONTINGENCIES (Notes 11, 12, 13 and 14) | ||||||||
| STOCKHOLDERS' (DEFICIT) (Note 3) | ||||||||
| Preferred Stock, $0.001 par value, 10,000,000 shares authorized | ||||||||
| Series A: 958,033 shares issued and outstanding | 958 | 958 | ||||||
| Series A-1: No shares issued and outstanding | - | - | ||||||
| Series A-2: 180,000 shares issued and outstanding | 180 | 180 | ||||||
| Series B: 444,530 shares issued and outstanding | 444 | 444 | ||||||
| Common stock, $0.001 par value, 100,000,000 shares authorized; 13,656,603 and 13,656,603 shares issued and outstanding | 13,528 | 13,528 | ||||||
| Additional paid-in capital | 9,131,718 | 9,131,718 | ||||||
| Accumulated deficit | (26,924,043 | ) | (25,954,655 | ) | ||||
| Total Stockholders' (Deficit) | (17,777,215 | ) | (16,807,827 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) | $ | 9,220,983 | $ | 9,773,746 | ||||
The accompanying notes are an integral part of these financial statements.
| 1 |
DESERT HAWK GOLD CORP
STATEMENTS OF OPERATIONS (unaudited)
| Three Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2017 | 2016 | |||||||
| REVENUE: | ||||||||
| Concentrate sales | $ | 11,575 | $ | 291,693 | ||||
| EXPENSES | ||||||||
| General project costs | 141,820 | 387,631 | ||||||
| Exploration expense | - | 7,000 | ||||||
| Officers and directors fees | 64,537 | 45,000 | ||||||
| Legal and professional | 8,092 | 25,383 | ||||||
| General and administrative | 52,282 | 65,069 | ||||||
| Depreciation and amortization | 96,579 | 147,019 | ||||||
| 363,310 | 677,102 | |||||||
| OPERATING LOSS | (351,735 | ) | (385,409 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest and other income | 12 | 477 | ||||||
| Interest and financing expense | (27,542 | ) | (47,887 | ) | ||||
| Interest expense - related parties | (590,123 | ) | (502,067 | ) | ||||
| (617,653 | ) | (549,477 | ) | |||||
| LOSS BEFORE INCOME TAXES | (969,388 | ) | (934,886 | ) | ||||
| INCOME TAXES | - | - | ||||||
| NET LOSS | $ | (969,388 | ) | $ | (934,886 | ) | ||
| BASIC AND DILUTED NET LOSS PER SHARE | $ | (0.07 | ) | $ | (0.07 | ) | ||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED | 13,656,603 | 13,656,603 | ||||||
The accompanying notes are an integral part of these financial statements.
| 2 |
DESERT HAWK GOLD CORP
STATEMENTS OF CASH FLOWS (unaudited)
| Three Months Ended | ||||||||
| March 31, | March 31, | |||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (969,388 | ) | $ | (934,886 | ) | ||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
| Depreciation and amortization | 96,579 | 163,974 | ||||||
| Accretion of asset retirement obligation | 18,128 | 18,128 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | - | (89,834 | ) | |||||
| Inventories | (54,185 | ) | (112,632 | ) | ||||
| Prepaid expenses and other current assets | 36,443 | 8,105 | ||||||
| Accounts payable and accrued expenses | (174,891 | ) | (2,885 | ) | ||||
| Accrued liabilities - officer wages | 43,769 | 45,000 | ||||||
| Interest payable - related parties | 28,664 | 22,500 | ||||||
| Interest payable - related party | 547,580 | 502,067 | ||||||
| Net cash used by operating activities | (427,301 | ) | (380,463 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Additions to property and equipment | - | (157,370 | ) | |||||
| Increase in reclamation bonds | (12 | ) | (477 | ) | ||||
| Net cash used by investing activities | (12 | ) | (157,847 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from note payable - related party | 500,000 | 550,000 | ||||||
| Payment of obligation under capital lease - related party | (49,770 | ) | - | |||||
| Payment of note payable - equipment | (493,033 | ) | (102,689 | ) | ||||
| Payment of short term note payable - related parties | (34,500 | ) | - | |||||
| Net cash provided (used) by financing activities | (77,303 | ) | 447,311 | |||||
| NET INCREASE (DECREASE) IN CASH | (504,616 | ) | (90,999 | ) | ||||
| CASH, BEGINNING OF PERIOD | 657,944 | 132,509 | ||||||
| CASH, END OF PERIOD | $ | 153,328 | $ | 41,510 | ||||
| NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||
| Equipment acquired with note payable - equipment | $ | - | $ | 28,992 | ||||
| Equipment acquired with accounts payable - equipment | $ | 30,678 | $ | - | ||||
The accompanying notes are an integral part of these financial statements.
| 3 |
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Desert Hawk Gold Corp. (the “Company”) was incorporated on November 5, 1957, in the State of Idaho as Lucky Joe Mining Company. On July 17, 2008, the Company merged with its wholly-owned subsidiary, Lucky Joe Mining Company, a Nevada corporation, for the sole purpose of effecting a change in domicile from the State of Idaho to the State of Nevada. Lucky Joe Mining Company (Nevada) was the continuing and surviving corporation and each outstanding share of Lucky Joe Mining Company (Idaho) was converted into one outstanding share of Lucky Joe Mining Company (Nevada). On April 3, 2009, the Company filed a Certificate of Amendment with the State of Nevada changing the name of the Company to Desert Hawk Gold Corp. On June 30, 2014, the Company dissolved its sole subsidiary, Blue Fin Capital, Inc. As a result, the Company has no subsidiaries.
The Company never successfully generated any revenue and eventually abandoned the mining business, remaining dormant until it recommenced its 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, 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 managed by Platinum Partners’ Credit Fund (PPCO), 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 Kiewit heap leach operation began in October 2014 with the first sales of gold and silver.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying unaudited interim balance sheets and statements of operations and cash flows contain all adjustments, consisting of normal recurring items, necessary to present fairly, in all material respects, the financial position of the Company as of March 31, 2017, and the results of its operations and its cash flows for the three months ended March 31, 2017 and 2016. The operating and financial results for the Company for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017.
These unaudited interim financial statements have been prepared by management in accordance with generally accepted accounting principles used in the United States of America (“U.S. GAAP”) and are presented in U.S. dollars. These unaudited interim financial statements do not include all note disclosures required by U.S. GAAP on an annual basis, and therefore should be read in conjunction with the annual audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on June 29, 2018.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall. The new ASU establishes a new five step principles-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 deferred the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017. We are in the process of evaluating the impact of this guidance and our method of adoption.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential impact of implementing this update on the financial statements.
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this guidance and our method of adoption.
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this guidance and our method of adoption.
| 4 |
In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company will apply the provisions of the update to potential future acquisitions occurring after the effective date.
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.
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, ore in carbon column in process and gold doré, 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; depreciation and amortization of property, equipment, and mineral properties; and mine administrative expenses. Revenue from the sale of silver is accounted for as by-product and is deducted from production costs. 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 March 31, 2017, the Company had a limited operating history and actual results only over that short period of time. Due to this, estimates of recoverable gold are based primarily on initial tests and only limited refinements.
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 12-18 months.
Revenue Recognition
Revenue is recognized when title and risk of ownership of metals or metal bearing concentrate have passed and collection is reasonably assured. Revenue from the sale of metals may be subject to adjustment upon final settlement of estimated metal prices, weights and assays, and are recorded as adjustments to revenue in the period of final settlement of prices, weights and assays; such adjustments are typically not material in relation to the initial invoice amounts.
Earnings (loss) Per Share
Basic earnings (loss) 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 (loss) per share reflect the potential dilution of securities that could share in the earnings of the Company. At March 31, 2017 and 2016, common stock equivalents outstanding are as follows:
| March 31, 2017 | March 31, 2016 | |||||||
| Convertible debt | 2,203,158 | 1,028,574 | ||||||
| Convertible preferred stock | 47,211,002 | 47,211,002 | ||||||
| Total | 49,414,160 | 48,239,576 | ||||||
However, the diluted earnings (loss) per share are not presented because its effect would be anti-dilutive due to the Company’s recurring losses.
| 5 |
Going Concern
As shown in the accompanying financial statements, the Company has an accumulated deficit and negative working capital through March 31, 2017, 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.
The Company will need significant funding to continue operations and increase development through the next fiscal year. This funding is expected to come via sales revenues and loan funds, but the timing and amount of capital requirements will depend on a number of factors, including demand for products and services, metals pricing and the availability of opportunities for expansion through affiliations and other business relationships.
If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used.
NOTE 3 – CAPITAL STOCK
Common Stock
2017 Activity
No shares of common stock were issued during the first three months of 2017.
2016 Activity
No shares of common stock were issued during the first three months of 2016.
Preferred Stock
2017 Activity
No shares of preferred stock were issued during the first three months of 2017. See Note 14 – Subsequent Events, regarding the return of DMRJ Group’s equity shares as part of a reorganization with court appointed trustees.
2016 Activity
No shares of preferred stock were issued during the first three months of 2016.
NOTE 4 – INVENTORIES
The following table provides the components of inventories:
| March 31, 2017 | December 31, 2016 | |||||||
| Ore on leach pad | $ | 3,116,252 | $ | 3,051,766 | ||||
| Carbon column in process | 31,865 | 31,214 | ||||||
| Dore finished goods | -0- | 10,952 | ||||||
| Total | 3,148,117 | 3,093,932 | ||||||
| Less: current portion | (135,278 | ) | (142,921 | ) | ||||
| Non-current inventories | $ | 3,012,839 | $ | 2,951,011 | ||||
Inventories are valued at the lower of cost or net realizable value which at March 31, 2017 is cost.
| 6 |
NOTE 5 - PROPERTY AND EQUIPMENT
The following is a summary of property, equipment, and accumulated depreciation at March 31, 2017 and December 31, 2016:
| March 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Equipment | $ | 3,077,482 | $ | 3,046,803 | ||||
| Furniture and fixtures, temporary housing | 6,981 | 6,981 | ||||||
| Electronic and computerized equipment | 52,874 | 52,874 | ||||||
| Vehicles | 67,115 | 67,115 | ||||||
| 3,204,452 | 3,173,773 | |||||||
| Less accumulated depreciation | (1,258,880 | ) | (1,144,108 | ) | ||||
| 1,945,572 | 2,029,665 | |||||||
| Kiewit property facilities | 2,497,435 | 2,497,436 | ||||||
| Less accumulated amortization | (487,214 | ) | (487,214 | ) | ||||
| 2,010,221 | 2,010,222 | |||||||
| Total | $ | 3,955,793 | $ | 4,039,887 | ||||
In November 2016, five pieces of mining equipment financed by CAT Financial were returned to CAT. See Note 9.
NOTE 6 – MINERAL PROPERTIES AND RECLAMATION BONDS
Mineral properties and interests as of March 31, 2017 and December 31, 2016 are as follows:
| March 31, 2017 | December 31, 2016 | |||||||
| Initial lease fee | ||||||||
| Kiewit, Cactus Mill and all other sites | $ | 600,000 | $ | 600,000 | ||||
| Asset retirement obligation | ||||||||
| Kiewit Site | 789,026 | 789,026 | ||||||
| Kiewit Exploration | 10,780 | 10,780 | ||||||
| Cactus Mill | 16,133 | 16,133 | ||||||
| Total | 815,939 | 815,939 | ||||||
| Accumulated amortization | (301,264 | ) | (319,457 | ) | ||||
| 514,675 | 496,482 | |||||||
| Total | $ | 1,114,675 | $ | 1,096,482 | ||||
The Company holds operating interests within the Gold Hill Mining District in Tooele County, Utah, consisting of 247 unpatented claims, including the unpatented mill site claim, and two Utah state mineral leases located on state trust lands. Annual claims fees are currently $155 per claim plus administrative fees.
On January 6, 2014, we obtained the final permit necessary to commence construction of the heap leach pad and process facility. On February 20, 2014, the Kiewit reclamation bond in the amount of $1,348,000 was posted with the State of Utah, Division of Oil, Gas and Mining. The bond amount includes bonding for the Yellow Hammer Small Mine and the Yellow Hammer Exploration sites along with the Herat Exploration site. Funds of $92,705 were received in April 2014 by the Company for these refunded reclamation bonds.
On July 7, 2016, the Company replaced the $1,348,000 cash reclamation bond with a surety bond in the same amount. A condition of the surety bond was the deposit of 50% of the bond amount into an escrow account with the bonding company. An escrow account was established with the bonding company and $674,000 (50% of the original cash bond) was deposited by the Company. The surety bond carries an annual bonding fee of $40,400. Total reclamation bonds posted are $752,766 and $752,754 at March 31, 2017 and December 31, 2016, respectively.
On September 12, 2016, the Yellow Hammer mineral property was returned to the lessor, Moeller Family Trust, and the Company recognized a loss on abandonment in the amount of $175,000 less the accumulated amortization of $37,234, for a net loss of $137,766.
| 7 |
NOTE 7 – CONVERTIBLE DEBT
On November 18, 2009, the Company issued convertible promissory notes, to two of its minority shareholders, for a total of $600,000. The notes bear interest at 15% per annum. Interest-only is payable in equal monthly installments of $7,500. The notes are convertible at a rate of $0.70 per share. On July 5, 2011, the Company entered into an agreement with the two holders of the convertible debt to begin paying their monthly interest in stock rather than cash.
The Company failed to repay the loan in full on the November 30, 2012, 2013, 2014, 2015 and 2016 maturity dates, so the Company was required to issue an additional 300,000 shares of common stock to these debt holders in each of those years. In 2014, 2015 and 2016, the stock was valued at an estimated $0.04 (total $12,000) and was accounted for as financing expense. As part of this agreement, the due date of the notes was extended each year and has now been extended to November 30, 2018. Interest was paid with shares of common stock through November 30, 2014 and is to be paid in cash thereafter. Interest has not been paid since November 2014 and accrued interest payable on these notes at March 31, 2017 and December 31, 2016 is $210,000 and $187,500 respectively. Per the terms of these notes, interest is not convertible to common stock.
On October 14, 2016, the Company issued convertible promissory notes, convertible at $.25 per share, to its two convertible debt holders in the amount of $125,000 each (Senior Note), at 10% interest, due in full on September 30, 2018. Interest is payable on September 30, 2017 and is payable quarterly thereafter. Accrued interest payable on these notes at March 31, 2017 and December 31, 2016 is $11,506 and $5,342, respectively. Interest on these notes is convertible to common stock. As a part of this note, DMRJ Group and its related entity, Platinum Partners (Note 10), have agreed to subordinate to these debtholders DMRJ’s collateral interest in the Senior Note, the principal and accrued but unpaid interest on the existing convertible debt and the amounts due to the convertible debtholders under the provisions of the gold loan redemption program.
On November 15, 2016, a short-term loan in the amount of $25,000 was obtained from West C Street, one of the Company’s convertible debt holders. Funds were used for operating capital. This amount was repaid to West C Street on January 18, 2017 along with accrued interest of $438.
NOTE 8 – OBLIGATION UNDER CAPITAL LEASE - RELATED PARTY
A capital lease was entered into on June 20, 2016 with RMH Overhead, LLC for the purchase of mining and crushing equipment. RMH Overhead, LLC is an entity owned by the Company’s President, Rick Havenstrite. For the periods ended March 31, 2017 and December 31, 2016, equipment includes assets under capital lease amounting to $165,730 and $172,360, respectively. The lease is being amortized over the estimated useful life of the equipment. Accumulated amortization at March 31, 2017 and December 31, 2016 was $19,888 and $13,258. At March 31, 2017, the estimated future minimum lease payments under the capital lease was as follows:
| Year ending March 31, | ||||
| 2018 | $ | 108,000 | ||
| 2019 | 27,000 | |||
| Total | 135,000 | |||
| Less: Implied interest | (12,595 | ) | ||
| Net present value | 122,405 | |||
| Less: Capital lease obligation-current portion | (96,066 | ) | ||
| Long-term capital lease obligation | $ | 26,339 | ||
| 8 |
NOTE 9 – NOTES PAYABLE – EQUIPMENT
The following is a summary of the equipment notes payable:
| March 31, 2017 | December 31, 2016 | |||||||
| Note payable to Komatsu Financial, collateralized by a Komatsu Telehandler lift, due in 48 monthly installments of $2,441 including interest at 4.99%. | $ | 66,728 | $ | 73,203 | ||||
| Note payable to Komatsu Financial, uncollateralized, due in 12 monthly installments of $3,223, beginning in April 2016, including interest at 1.16%. | -0- | 9,668 | ||||||
| Note payable to CAT Financial, collateralized by five pieces of used mining equipment due in 36 monthly installments of varying amounts including interest at 4.68%. The equipment has since been returned to CAT. See note below. | 440,473 | 881,894 | ||||||
| Note payable to Komatsu Financial, collateralized by a Komatsu D275 dozer, due in one monthly installment of $21,000 and 47 monthly installments of $11,674 including interest at 2.99%. | 249,670 | 282,675 | ||||||
| Note payable to Star Capital, LLC, collateralized by a 2009 Multiquip generator, due in 24 monthly installments of $1,412, beginning in March 2016, including interest at 11.4%. | 17,190 | 19,654 | ||||||
| 774,061 | 1,267,094 | |||||||
| Current portion | (477,470 | ) | (813,818 | ) | ||||
| Long term portion | $ | 296,591 | $ | 453,276 | ||||
| Principal payments are as follows for the twelve months ended March 31, | ||||||||
| 2018 | $ | 477,470 | ||||||
| 2019 | 286,924 | |||||||
| 2020 | 9,667 | |||||||
| Total | $ | 774,061 | ||||||
In November 2016, five pieces of mining equipment financed by CAT Financial were returned to CAT. The equipment had an original cost of $1,500,888 and accumulated depreciation of $372,129, for a net carrying value of $1,128,759. The note payable due to CAT at the time of disposition was $960,585. The CAT contract did not legally release the Company from liability in the case of a repossession thus an extinguishment has not occurred and the debt and assets were not derecognized. On July 31, 2017, a new agreement was made as disclosed in Note 14 – Subsequent Events.
NOTE 10 – NOTE PAYABLE - RELATED PARTY
DMRJ Group beneficially owns approximately 75% of the Company (on a fully-diluted basis) with Series A, A-2 and B preferred shares convertible to 47,211,002 shares of common stock (See Note 3). They are considered a related party. In July 2010, the Company entered into an Investment Agreement with DMRJ Group. The Agreement has been modified numerous times and at March 31, 2017 operated under the Fourteenth Amendment to the Investment Agreement dated December 22, 2016. The Amendments have provided for extensions of payment dates, increased funding capacity and other modifications to the debt agreement.
The total due to DMRJ Group at March 31, 2017 and December 31, 2016 is as follows:
| March 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Principal, due within one year | $ | 15,110,492 | $ | 14,610,492 | ||||
| Interest payable, current | 7,787,190 | 7,239,610 | ||||||
| $ | 22,897,682 | $ | 21,850,102 | |||||
The Investment Agreement contains certain negative covenants which prohibit us from the following actions or activities:
| · | Incurring any indebtedness except in limited circumstances; |
| · | Creating any significant liens on any of our properties or assets; |
| · | Enter into any sale and lease-back transaction involving any of our properties; |
| · | Make any investments in or loans or advances to other parties; |
| · | Engage in any merger, consolidation, sale of assets or acquisition transaction, except for the purchase or sale of inventory or certain limited investments; |
| · | Declare or pay any dividends, except for dividends to DMRJ Group; |
| · | Engage in any business transactions with affiliates; |
| · | Make capital expenditures except as permitted in the agreement pertaining to our current mining business; |
| 9 |
| · | Create any lease obligations; |
| · | Amend, supplement or modify any existing indebtedness; |
| · | Enter into any swap, forward, future or derivative transaction; |
| · | Make any change in our accounting policies or reporting practices; |
| · | Form additional subsidiaries; or |
| · | Modify or grant a waiver or release under or terminate any principal lease agreement or other material contract. |
At March 31, 2017, the Company has failed to pay certain obligations in violation of these covenants. DMRJ Group has been informed of the default and has indicated it has no present intent to declare an event of default under the Investment Agreement, as amended.
2017 Activity
At March 31, 2017, DMRJ continued to operate through the direction of its court appointed trustees (see 2016 Activity below). Funds in the amount of $500,000 were drawn from the trustees during the quarter ending March 31, 2017 to help fund ongoing expenses.
See Note 14.
2016 Activity
At December 31, 2016, the Company has failed to pay certain obligations in violation of these covenants. DMRJ Group has been informed of the default and has indicated it has no present intent to declare an event of default under the Investment Agreement, as amended.
Several term loan advances were received from DMRJ Group by the Company between February 9, 2016 and December 29, 2016 totaling $2,470,000. A loan payment of $900,000 was made to DMRJ on July 8, 2016. The advances bear interest at 15% per annum and become due on October 31, 2016 with the remainder of the note due to DMRJ Group. These funds were used for working capital and equipment debt repayment.
A Fourteenth Amendment to the Investment Agreement was entered into on December 22, 2016 which allowed for additional funding in the amount of up to $600,000 from DMRJ Group and its affiliated fund managers. This $600,000 was drawn on December 29, 2016 which brought the total funds drawn from DMRJ Group and its affiliates for 2016 to $2,470,000.
In the third quarter of 2016, control of the management of DMRJ Group, (a Platinum Partners related entity), was given to court appointed trustees of the two major funds of Platinum Partners. On December 19th, 2016, the Securities and Exchange Commission (“SEC”) filed a Complaint (the “Complaint”) against Defendants Platinum Management, LLC (“Platinum Management”), Platinum Credit Management, L.P. (“Platinum Credit”), and management of the DMRJ Group, charging Defendants with a complex, multi-pronged, fraudulent scheme to inflate returns to investors, and cover up massive losses and liquidity problems. DMRJ Group effectively owns 75% of stock of the Company (on a fully diluted basis). See Note 14 – Subsequent Events.
NOTE 11 – REMEDIATION LIABILITY AND ASSET RETIREMENT OBLIGATION
Remediation, reclamation and mine closure costs are based principally on legal and regulatory requirements. Management estimates costs associated with reclamation of mining properties as well as remediation costs for inactive properties. The Company uses assumptions about future costs, capital costs and reclamation costs. Such assumptions are based on the Company’s current mining plan and the best available information for making such estimates. In calculating the present value of the asset retirement obligation the Company used a credit adjusted risk free interest rate of 8% to 10% and projected mine lives of five to 12 years, depending on the site. On an ongoing basis, management evaluates its estimates and assumptions; however, actual amounts could differ from those based on such estimates and assumptions.
Changes in the reclamation liability for the periods ended March 31, 2017 and December 31, 2016 are as follows:
| Three months ended March 31, 2017 | Year ended December 31, 2016 | |||||||
| Reclamation and remediation liability, beginning of period | $ | 974,109 | $ | 901,597 | ||||
| Obligation incurred | - | - | ||||||
| Accretion expense | 18,128 | 72,512 | ||||||
| Reclamation and remediation liability, end of period | $ | 992,237 | $ | 974,109 | ||||
| 10 |
NOTE 12 – RELATED PARTY TRANSACTIONS
In addition to transactions disclosed in Notes 7, 8 and 10, the Company had the following related party transactions.
The Company recognized rent expense for rental of office space of $3,000 for the three months ended March 31, 2017 and 2016, respectively, paid to RMH Overhead, LLC, a company owned by Rick Havenstrite, the Company’s President and a director. Of the amounts recognized as expense, RMH Overhead, LLC was paid $3,000 during the three months ended March 31, 2017 and 2016, respectively, leaving a total of $13,750 and $17,750 remaining in accounts payable at March 31, 2017 and December 31, 2016, respectively, which represents amounts due from prior years.
In addition, a short-term loan totaling $9,500, also for working capital, was obtained from our President, Rick Havenstrite, with draws on multiple dates in November and December 2016. This loan was repaid in full on January 3, 2017 with no interest paid.
As of March 31, 2017 and December 31, 2016, accrued compensation of $539,577 and $486,577 were due to directors and officers. Of the amounts accrued at March 31, 2017 and December 31, 2016, accrued compensation of $402,692 and $372,692 respectively, is due to Rick Havenstrite.
During the three months ended March 31, 2017 and 2016, the Company recognized general project cost expense of $0 and $6,667, respectively, for geological services provided by Stuart Havenstrite, the father of Rick Havenstrite. $39,367 remains unpaid to Mr. Havenstrite at both March 31, 2017 and December 31, 2016. These amounts are included in accounts payable at those dates.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Mineral property payments
During the year ended December 31, 2009, the Company entered into a Joint Venture Agreement with the Clifton Mining Company and the Woodman Mining Company for the lease of their property interests in the Gold Hill Mining District of Utah. Under the terms of the Joint Venture Agreement, the Company is required to pay a 4% net smelter royalty on base metals in all other areas except for production from the Kiewit gold property and a net smelter royalty on gold and silver, except for production from the Kiewit gold property, based on a sliding scale of between 2% and 15% based on the price of gold or silver, as applicable. The Company is also required to pay a 6% net smelter return on any production from the Kiewit gold property. Additionally, if the Company does not place the Kiewit property, the Clifton Shears-Smelter Tunnel property, and the Cane Springs property into commercial production within a three year period, it will be required to make annual penalty payments to Clifton Mining in the amount of $50,000 per location. In 2014, the Company had not begun commercial production and the payments due on July 24, 2014 were paid and accepted by Clifton Mining for the Clifton Shears and Kiewit properties. The Cane Springs property penalty payment was not made in 2013 and this claim was released back to Clifton Mining at that time. Production at the Kiewit property has since begun. Royalty expense of $702 and $17,160 was recognized during the three months ended March 31, 2017 and 2016, respectively, with these amounts fully paid at March 31, 2017. See Note 14.
A letter of default on the Clifton Shears properties dated September 19, 2016 was received by the Company with a 30 day period for curing the default. On October 17, 2016, past due royalties and the $50,000 penalty payments for each of 2015 and 2016 were paid to Clifton Mining, who then acknowledged the cure of default.
Mining severance tax in the amount of $92, based on production, was accrued at March 31, 2017.
Personal property tax due to Tooele County, Utah in the amount of $155,232 including interest and penalties, was accrued and past due at March 31, 2017. This amount due has not yet been paid.
Employment Agreements
In September 2010, the Company entered into an employment agreement with Mr. Havenstrite as President of the Company, which is ongoing. The agreement 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 $120,000 plus certain performance compensation upon fulfillment of established goals. The agreement allows the Board to terminate Mr. Havenstrite’s employment at any time, providing for a severance payment upon termination without cause.
As of March 31, 2017, and December 31, 2016, accrued compensation of $534,577 and $486,577, were due to officers. Of the amounts accrued at March 31, 2017 and December 31, 2016, accrued compensation of $402,692 and $372,692 is due to Rick Havenstrite and $131,884 and $113,884 is due to Marianne Havenstrite, Treasurer and Principle Financial Officer. In addition, $5,000 and $-0- was due to directors at March 31, 2017 and December 31, 2016, respectively.
11
NOTE 14 – SUBSEQUENT EVENTS
Note payable – CAT equipment
In November 2016, five pieces of mining equipment financed by CAT Financial were repossessed by CAT. The equipment had an original cost of $1,500,888 and accumulated depreciation of $339,487, for a net carrying value of $1,161,402. The note payable due to CAT at the time of disposition was $960,585. On July 31, 2017, a new agreement was made with Wheeler Machinery and CAT financial for the return of four pieces of this equipment. While the equipment will temporarily remain in the possession of Wheeler Machinery, a new payment schedule was agreed upon which requires 10 equal payments of $39,934 beginning in October 2017. As of July 10, 2018, six of those payments have been made. The loss on impairment of equipment in the amount of $147,214 was recognized in the 4th quarter of 2016. In the event the terms of the new agreement are not met, freight and interest penalties may be assessed and there could be a payment due to CAT for these fees and for the deficit on the return of the equipment. Management has not made an estimate of this additional loss, if any.
Note payable – Wheeler Machinery
In November 2015, a rental agreement for crushing equipment was entered into with Wheeler Machinery. Effective June 6, 2018, an agreement to convert the rental equipment to a purchase contract in the amount of $273,067 was finalized and the first of 7 equal monthly payments of $39,009 were to be made. As of July 24, 2018, three of the seven monthly payments had been made. At the conclusion of the seven payments, the crushing equipment will be owned by the Company.
Convertible debt
The Company failed to make interest payments required under the convertible notes (see Note 7) for all quarters beginning April 2016 through the current date. As a result, the Company was in default of the convertible notes. As per the terms of the Investment Agreement (Note 10), DMRJ Group was informed of this default and it stated that it had no intent to declare an event of default under the Investment Agreement, as amended. In addition, as per the terms of the notes, 300,000 penalty shares for both 2017 and 2016 were issued to the convertible debt holders for failure to pay the convertible notes in November of 2017 and 2016.
On February 28, 2018, the terms were changed for the 15% convertible promissory notes, convertible at $.70 per share, to two of the Company’s minority shareholders. The notes, for a total due of $600,000 were amended changing the interest rate from 15% to 10% effective March 1, 2018 and allowing for accrued interest to be payable in full on May 31, 2019. The amendment further waives the default provision in the notes for past due interest.
On August 7, 2017, the convertible debt holders agreed to fund an additional aggregate of $500,000 under similar terms. These funds were to be 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.
On July 3, 2018, a short term loan of $100,000 was received from one of the two convertible debt holders. Terms are 10% interest and a 2% loan initiation fee. This loan has not yet been paid.
Note payable – related party
In the third quarter of 2016, control of the management of DMRJ Group, (a Platinum Partner’s related entity), was given to
court appointed trustees of the two major funds of Platinum Partners. The Company was working towards a reorganization and recapitalization
with the trustees of the two major funds and finalized an agreement which closed on March 8, 2018. This agreement discharged all
of the debt owed by the Company to DMRJ Group (Note 10) and its related affiliates and returned all of their equity to the Company
in exchange for $625,000. The debt and equity were retired and cancelled by the Company. The owners of the convertible debt agreed
to fund this payment in full, and to agree to certain concessions on their outstanding notes with the Company, in exchange for
4,500,000 shares of the Company’s Common Stock. All signatures from the court appointed trustees, and funding by the Company,
were received and the agreement was finalized on March 8, 2018.
Revenue
On July 6, 2018, the Company negotiated an arrangement for a one time sale of gold and silver byproduct to H & H Metals. On July 6, 2018, proceeds of $68,785 were received which represents an advance against a future sale of metals, estimated at 90% of the value of the gold, and silver byproduct.
Stock Offering
On February 28, 2018, the Company entered into a Stock Purchase Agreement with each of the two convertible debt holders pursuant to which the Company received $312,500 from each holder in exchange for the issuance to each of the convertible debt holders 2,250,000 shares of the Company's Common Stock and various loan concessions on existing convertible debt.
A stock offering was initiated on February 23, 2018 for sale of common stock shares at $0.40 per share, to raise up to $1,600,000. The offering expired on June 30, 20 I 8. At June 30, 2018 a total of 2,125,000 shares of stock have been issued and funds of $850,000 have been raised through this offering, with proceeds used for working capital in a limited re-opening of the mining operations.
Stock plan
Effective February 23, 2018, the Board approved and adopted the 2018 Stock Incentive Plan (the “2018 Plan”) pursuant to which 2,400,000 shares of the Company’s Common Stock were authorized. Shares issued under this plan will fully vest upon issuance. The aggregate Fair Market Value of the Common stock becoming exercisable for the first time during any calendar year shall not exceed $100,000 per optionee.
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 expire 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. |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 and with the unaudited consolidated financial statements and related notes thereto presented in this Quarterly Report on Form 10-Q.
Forward-looking statements
The statements contained in this report that are not historical facts are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, need for financing, competitive position, potential growth opportunities, potential operating performance improvements, ability to retain and recruit personnel, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believes,” “intends,” “may,” “should,” “anticipates,” “expects,” “could,” “plans,” or comparable terminology or by discussions of strategy or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such forward-looking statements.
Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this quarterly report. While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to, the following:
| ● | default of outstanding secured obligations; | |
| ● | maintaining necessary mining permits; | |
| ● | a decline in metal prices; | |
| ● | environmental hazards; | |
| ● | metallurgical and other processing problems; | |
| ● | unusual or unexpected geological formations; | |
| ● | global economic and political conditions; | |
| ● | disruptions in credit and financial markets; | |
| ● | global productive capacity; | |
| ● | changes in product costing; and | |
| ● | competitive technology positions and operating interruptions (including, but not limited to, labor disputes, leaks, fires, flooding, landslides, power outages, explosions, unscheduled downtime, transportation interruptions, war and terrorist activities). |
Mining operations are subject to a variety of existing laws and regulations relating to exploration, permitting procedures, safety precautions, property reclamation, employee health and safety, air and water quality standards, pollution and other environmental protection controls, all of which are subject to change and are becoming more stringent and costly to comply with. Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.
These risk factors could cause our results to differ materially from those expressed in forward-looking statements.
Overview
Desert Hawk Gold Corp., a Nevada corporation (the “Company”), is engaged in the search for mineral deposits or reserves which could be economically and legally extracted or produced. In addition, we are currently producing gold and silver at the Kiewit property and had our first sales from the property in October 2014. None of our mining properties has any known reserves and our proposed programs on these properties are exploratory in nature. Our projects are located in the Gold Hill Mining District in Tooele County, Utah.
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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 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.
On January 6, 2014, we obtained the final permit necessary to commence construction and development of the Kiewit property. The reclamation bond was posted in February 2014 in the amount of $1,348,000. Development of the project was essentially completed in 2014 using funding provided by DMRJ Group I, LLC, a Delaware limited liability company (“DMRJ Group”). DMRJ Group is a Platinum Partners’ related entity managed by the Platinum Partners’ Credit Fund (“PPCO”). The property is located in a historical mining district that has existing disturbances and mine wastes and is in a very arid, desolate area. The property is also adjacent to, and uphill from, the Dugway Proving Grounds and Air Force Gunnery Range that is deemed an environmentally insensitive area, with low water quality. Management believes that through our leased patented claims we have adequate private land for process facilities. There is no material access from any metropolitan area or community.
On July 7, 2016, the Company replaced the $1,348,000 cash reclamation bond with a surety bond in the same amount. A condition of the surety bond was the deposit of 50% of the bond amount ($674,000) into an escrow account with the bonding company. The surety bond carries an annual bonding fee of $40,400.
On July 24, 2009, we entered into a Joint Venture Agreement with the Clifton Mining Company and Woodman Mining Company under which Clifton Mining granted to us exclusive possession of certain patented and unpatented mining claims and an unpatented mill site claim and certain Utah state mineral leases covering lands in the Gold Hill Mining District located in Tooele County, Utah, for exploration, development and mining, and the right to occupy the properties and to explore, develop and mine the properties for minerals. Woodman Mining also granted us the same rights in certain of these patented mining claims owned jointly with Clifton Mining. Also, on July 24, 2009, we entered into a Joint Venture Agreement with the Jeneane C. Moeller Family Trust under which the trust granted to us exclusive possession of four patented mining claims covering lands in the Gold Hill Mining District located in Tooele County, Utah, for exploration, development and mining, and the right to occupy the properties and to explore, develop and mine the properties for minerals. These claims are known as the Yellow Hammer property. As part of this agreement, if we did not place the Yellow Hammer property into commercial production within a three-year period from the date of the agreement, we would be required to make annual payments to the Moeller Family Trust of $50,000 to retain our rights to this property.
In September of 2016 we received a notice of default regarding the $50,000 annual penalty payment on these claims. The Yellow Hammer agreement was terminated at that time with no payment made and we no longer have rights to any of the claims on the Yellow Hammer property.
Prior to July 1, 2010, we notified Clifton Mining that we would surrender certain of the mining claims and leases originally obtained in our lease agreement with it. Also, in 2010 and in 2012, certain amendments were made to the lease agreements. As part of these agreements, if we did not place the Kiewit property, the Clifton Shears-Smelter Tunnel property, and the Cane Springs property into commercial production within a three-year period from the date of the agreement, we would be required to make annual payments to Clifton Mining of $50,000 per property to retain our rights to those properties.
The Cane Springs property was released back to Clifton Mining in 2013.
We currently hold leasehold interests within the Gold Hill Mining District consisting of 247 unpatented mining claims, including an unpatented mill site claim, and two Utah state mineral leases located on state trust lands, all covering approximately 10 square miles. We intend to concentrate our activities on the Kiewit project. Mineral extraction activities on the property currently are open-pit.
| 14 |
In July 2010, we entered into an Investment Agreement with DMRJ Group. DMRJ Group is a Platinum Partners’ related entity managed by the PPCO. The agreement has been modified numerous times and currently operates under the Fourteenth Amendment to the Investment Agreement. The Amendments have provided for extensions of payment dates, increased funding and other modifications to the agreement.
On February 19, 2014, we agreed to the terms of a Tenth Amendment to the Investment Agreement with DMRJ Group. The Tenth Amendment provided for funding of construction of the heap leach pad and process facility, mining development, and operations through a series of monthly term loan advances totaling a maximum of $5,700,000 over five months. A total of $5,500,000 of this allotment was eventually loaned to us. As a part of this amendment, on February 19, 2014, we issued to DMRJ Group 249,603 shares of Series B Preferred Stock. The conversion rate of the Series B Preferred Stock is 100 shares of common stock for each share of Series B Preferred Stock. During 2014, financing expense in the amount of $998,412 was recorded in association with this share issuance, using an estimated fair value of the equivalent common shares of $0.04.
As a result of this issuance, DMRJ beneficially owned approximately 67% of the Company (on a fully-diluted basis) with shares convertible into 27,718,333 shares of common stock.
In connection with the Tenth Amendment, we also amended the Certificates of Designation for the Series A Preferred Stock and the Series A-1 and A-2 Preferred Stock to eliminate the mandatory dividends payable to the holders of the Series A Preferred Stock and to exclude the issuances of certain securities from triggering adjustments.
An Eleventh Amendment to the Investment Agreement was entered into on March 17, 2015 which established new minimum principal and interest payment dates which were then revised with the Twelfth, Thirteenth and Fourteenth Amendments to the Investment Agreement.
The Twelfth Amendment to the Investment Agreement was entered into on June 5, 2015 and allowed for additional funding in the amount of $850,000 for the purpose of additional working capital, financing of the expansion into the east extension of the current pit boundary and to provide for crushing equipment to allow crushing to be done in-house.
The Thirteenth Amendment to the Investment Agreement was entered into on August 31, 2015 and allowed for additional funding of up to $525,000 for operating capital and to provide the ability for crushing operations to be performed in-house. This funding was used for working capital and to prepare for a drilling program within the existing boundary of the Kiewit Exploration Permit.
As part of this amendment, we issued to DMRJ Group 185,194 shares of Series B Preferred Stock. The conversion rate of the Series B Preferred Stock is 100 shares of common stock for each share of Series B Preferred Stock. As a result of this issuance, DMRJ Group owned approximately 77% of our Company (on a fully-diluted basis) with shares convertible into 47,211,002 of common stock. DMRJ Group is considered a related party.
The total due to DMRJ at March 31, 2017 and December 31, 2016 is as follows:
| March 31, | December 31, | |||||||
| 2017 | 2016 | |||||||
| Principal | ||||||||
| Current | $ | 15,110,492 | $ | 14,610,492 | ||||
| Long-term | - | - | ||||||
| Total | 15,110,492 | 14,610,492 | ||||||
| Interest payable | ||||||||
| Current | 7,787,190 | 7,239,610 | ||||||
| Long-Term | - | - | ||||||
| $ | 22,897,682 | $ | 21,850,102 | |||||
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The Investment Agreement contains certain negative covenants which prohibit us from the following actions or activities:
| ● | Incurring any indebtedness except in limited circumstances; | |
| ● | Creating any significant liens on any of our properties or assets; | |
| ● | Enter into any sale and lease-back transaction involving any of our properties; | |
| ● | Make any investments in or loans or advances to other parties; | |
| ● | Engage in any merger, consolidation, sale of assets or acquisition transaction, except for the purchase or sale of inventory or certain limited investments; | |
| ● | Declare or pay any dividends, except for dividends to DMRJ Group; | |
| ● | Engage in any business transactions with affiliates; | |
| ● | Make capital expenditures except as permitted in the agreement pertaining to our current mining business; | |
| ● | Create any lease obligations; | |
| ● | Amend, supplement or modify any existing indebtedness; | |
| ● | Enter into any swap, forward, future or derivative transaction; | |
| ● | Make any change in our accounting policies or reporting practices; | |
| ● | Form additional subsidiaries; or | |
| ● | Modify or grant a waiver or release under or terminate any principal lease agreement or other material contract. |
At March 31, 2017, we have failed to pay certain obligations in violation of these covenants. DMRJ Group has been informed of the defaults and has indicated it has no present intent to declare an event of default under the Investment Agreement.
The Thirteenth Amendment also established new minimum principal and interest payment dates beginning in June 2016 as follows:
| June 30, 2016 | $ | 500,000 | ||
| September 30, 2016 | 800,000 | |||
| December 31, 2016 | 600,000 | |||
| February 28, 2017 | 500,000 | |||
| May 31, 2017 | 2,250,000 | |||
| August 31, 2017 | 2,250,000 | |||
| Total | $ | 6,900,000 |
We failed to make the minimum payments due June 30, 2016 and September 30, 2016.
The Fourteenth Amendment to the Investment Agreement with DMRJ Group was entered into on December 22, 2016 and allowed for December 2016 Term Loan Advances in an amount up to $600,000. The advance was drawn in full.
In the third quarter of 2016, control of the management of DMRJ Group, (a Platinum Partners related entity), was given to court appointed trustees of the two major funds of Platinum Partners. On December 19th, 2016, the Securities and Exchange Commission (“SEC”) filed a Complaint (the “Complaint”) against Defendants Platinum Management, LLC (“Platinum Management”), Platinum Credit Management, L.P. (“Platinum Credit”), and management of the DMRJ Group, charging Defendants with a complex, multi-pronged, fraudulent scheme to inflate returns to investors, and cover up massive losses and liquidity problems. DMRJ Group effectively owned 75% of stock of the Company (on a fully diluted basis). Funds in the amount of $944,060 were drawn from the receivers during the first two quarters of 2017 to help fund ongoing expenses.
For most of 2017 and, until an agreement was finalized in 2018, we were working towards a reorganization and recapitalization with the trustees of the two funds and finalized the Assignment and Assumption Agreement dated February 13, 2018. This agreement discharged all of the debt owed by us to DMRJ Group and its related affiliates and returned all of their equity to us in exchange for $625,000. The debt and equity were retired and cancelled by us. The owners of the convertible debt agreed to fund this payment in full, and they also agreed to certain concessions on their outstanding notes with us, in exchange for 4,500,000 shares of our Common Stock. All signatures from the court appointed trustees, and funding by us, have been received and the agreement was closed on March 8, 2018. Due to this development, our mining operations have been temporarily shut down since third quarter of 2017 but, if financing is successfully secured, we plan on commencing full mining operations in 2018.
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On February 28, 2018, the terms were changed for the 15% convertible promissory notes, convertible at $0.70 per share, to two of the Company’s minority shareholders. The notes, for a total due of $600,000 were amended changing the interest rate from 15% to 10% effective March 1, 2018 and allowing for accrued interest to be payable in full on May 31, 2019. The amendment further waives the default provision in the notes for past due interest.
The Company issued to one of the convertible debt holders two short-term loans which were subsequently repaid. On September 29, 2016, $50,000 was loaned at no interest and was repaid to the debtholder on October 14, 2016. On November 5, 2016, an additional $25,000 was loaned to the Company at 10% interest and was repaid including interest of $438 on January 18, 2017. These loan funds were used for operating capital. A third short term loan in the amount of $100,000 with 10% interest and a loan initiation fee of 2% was issued to one of the convertible debt holders on July 3, 2018. This loan has not yet been paid.
On October 14, 2016, the Company issued convertible promissory notes, convertible at $0.25 per share, to its two convertible debt holders in the amount of $125,000 each (Senior Notes), at 10% interest, due in full on September 30, 2018. Interest is payable on September 30, 2017 and is payable quarterly thereafter.
On August 7, 2017, the convertible debt 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.
An equity financing was initiated in September 2012 for the sale of up to 1,150,000 shares of our common stock. This offering closed December 31, 2012 with proceeds of $130,000 raised through sales of 130,000 shares of our common stock. Under the terms of this offering, stock can be converted to cash generated from the sale of gold, for a period of 12 months after commencement of operations at the Kiewit project. Proceeds from 5% of the gold produced during the first year of production will be allocated to fund this option. Each investor received the right to convert a minimum of one-half and up to all of his shares (on a pro rata basis) into the value of the number of ounces represented by the total investment, determined using a base price of $1,000 per ounce. At March 31, 2017, conversion proceeds due to shareholders are $151,406 for all 130,000 conversion shares. Due to the redemption feature of these shares, management has concluded that the proceeds from these stock sales should be recorded as a liability and not as equity. Payment of these funds due to investors has not yet begun, due to limited cash flow, and is included in accounts payable and liabilities. The amount owed to the shareholders in excess of $1,000 per ounce for redemptions through March 31, 2017 is $21,406. This amount has been recorded as an administrative expense.
On June 20, 2016, we entered into an agreement with a related party, RMH Overhead, LLC, to lease certain mining and crushing equipment, some of which was previously owned by us. We have recorded this liability as a capital lease and the liability is reflected on the balance sheet as ‘obligation under capital lease – related party’. The terms of the lease are 24 monthly payments of $9,212 which include interest at 15%. At any time during the lease term, the equipment may be purchased by us for the balance due. 16 of the 24 payments have been made as of July 19, 2018.
In November 2016, five pieces of mining equipment financed by CAT Financial were repossessed by CAT. The equipment had an original cost of $1,500,888 and accumulated depreciation of $339,487, for an adjusted balance of $1,161,402. The note payable due to CAT at the time of disposition was $960,585. On July 31, 2017, a new agreement was made with Wheeler Machinery and CAT financial for the return of four pieces of this equipment. While the equipment will temporarily remain in the possession of Wheeler Machinery, a new payment schedule was agreed upon which requires 10 equal payments of $39,934 beginning in October 2017. As of July 10, 2018, six of those payments have been made. These financial statements as of March 31, 2017, reflect the loss on impairment of equipment in the amount of $147,214 which was recognized in 2016, and the terms of the agreement finalized on July 31, 2017. In the event the terms of the new agreement are not met, freight and interest penalties may be assessed and there could be a payment due to CAT for these fees and for the deficit on the return of the equipment. Management has not made an estimate of this additional loss, if any.
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In November 2015, a rental agreement for crushing equipment was entered into with Wheeler Machinery. Effective June 6, 2018, an agreement to convert the rental equipment to a purchase contract was arrived at and the first of seven monthly payments of $39,009 was made. As of July 10, 2018, two of those payments have been made. At the conclusion of the seven payments, the crushing equipment will be owned by the Company.
On February 28, 2018, the Company entered into a Stock Purchase Agreement with each of the two convertible debt holders pursuant to which the Company received $312,500 from each holder in exchange for the issuance to each of the convertible debt holders 2,250,000 shares of the Company’s Common Stock and various loan concessions on existing convertible debt.
A stock offering was initiated on February 23, 2018 for sale of common stock shares at $0.40 per share, to raise up to $1,600,000. The offering expired on June 30, 2018. At June 30, 2018 a total of 2,125,000 shares of stock have been issued and funds of $850,000 have been raised through this offering, with proceeds used for working capital in a limited re-opening of the mining operations.
On July 6, 2018, the Company negotiated an arrangement for a one-time sale of gold and silver byproduct to H and H Metals. On July 6, 2018, proceeds of $68,785 were received which represents an advance against a future sale of metals, estimated at 90% of the value of the gold and silver byproduct.
Effective February 23, 2018, the Board approved and adopted the 2018 Stock Incentive Plan (the “2018 Plan”) pursuant to which 2,400,000 shares of the Company’s Common Stock were authorized. 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. |
Historically, we have incurred net losses for the years ended December 31, 2016 and 2015 and have also incurred a loss for the three months ended March 31, 2017.
Our financial statements were prepared assuming that we would continue as a going concern. Our significant cumulative losses from operations as of March 31, 2017 raise substantial doubt about our ability to continue as a going concern. If the going-concern assumption was not appropriate for our financial statements, then adjustments would be necessary to the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. During 2017, we continued to experience losses from operations. We will require additional funding to complete much of our planned mining exploration and operations. Except for potential proceeds from the sale of equity in offerings by us, the issuance of debt, and revenue from existing operations, which has been minimal, we have no other source for additional funding. Our continued net operating losses and stockholders’ deficiency increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.
Results of Operations for the Three Months Ended March 31, 2017 and 2016.
The operating loss of $351,735 for the three months ended March 31, 2017 as compared to the operating loss of $385,409 for the three months ended March 31, 2016 represents a decreased loss in the amount of $33,674. Other expense for the three months ended March 31, 2017 was $617,653 which consisted of interest and financing expense, increased by $68,176 as compared to the other expense amount of $549,477 for the three months ended March 31, 2016, due to increased interest on related party debt. The net overall increase in net loss for the three months ended March 31, 2017 compared to March 31, 2016 was $34,502.
Liquidity and Cash Flow
Net cash used by operating activities was $427,301 during the three-month period ended March 31, 2017, compared with cash used by operating activities of $380,463 during the three-month period ended March 31, 2016. This $46,838 increase in the amount of cash used in operating activities is primarily attributable to restrictions caused by insufficient working capital and reduced production.
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Net cash used by investing activities was $12 during the three-month period ended March 31, 2017, compared to $157,847 cash used by investing activities during the three month-period ended March 31, 2016. This decrease in cash used by investing activities is due to the reduced investment in property and equipment.
Net cash used by financing activities was $77,303 during the three-month period ended March 31, 2017, compared with $447,311 cash provided by financing activities during the three-month period ended March 31, 2016. The decrease of $524,614 in cash provided by financing activities during the three-month period ended March 31, 2017 was due to payments made on equipment purchase notes.
As a result of the above, cash decreased by $504,616 during the three-month period ended March 31, 2017, leaving us with a cash balance of $153,328 as of March 31, 2017.
Critical Accounting Policies
The selection and application of accounting policies is an important process that has developed as our business activities have evolved and as the accounting rules have changed. Accounting rules generally do not involve a selection among alternatives, but involve an implementation and interpretation of existing rules, and the use of judgment, to the specific set of circumstances existing in our business. Discussed below are the accounting policies that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. See Note 2, “Summary of Significant Accounting Policies,” in our attached unaudited consolidated financial statements for a discussion of those policies.
Revenue Recognition
Sales of all metals products are recorded as revenues when title and risk of loss transfer to the purchaser. Sales to the purchaser are recorded at gross sales price, with charges for treatment, refining, smelting and other charges included as part of general project costs.
Mineral Exploration and Development Costs
We account for mineral exploration costs in accordance with ASC 932 Extractive Activities. All exploration expenditures are expensed as incurred, previously capitalized costs are expensed in the period the property is abandoned. Expenditures to explore new mines, to define further mineralization in existing bodies of mineralized material, and to expand the capacity of operating mines, are capitalized and amortized on a units-of-production basis over proven and probable reserves.
Inventories
Inventories consist of estimated gold on the heap leach pad and in the carbon process system and are valued at the lower of production cost or market value. Gold on the heap leach pad is estimated to be 80% complete for cost purposes and gold in the process system is estimated at 95% complete.
Mineral Properties
We account for mineral properties in accordance with ASC 930 Extractive Activities-Mining. Costs of acquiring mineral properties are capitalized by project area upon purchase of the associated claims. Mineral properties are periodically assessed for impairment of value and any diminution in value.
Reclamation and Remediation
Remediation, reclamation and mine closure costs are based principally on legal and regulatory requirements. Management estimates costs associated with reclamation of mining properties as well as remediation costs for inactive properties. We use assumptions about future costs, capital costs and reclamation costs. Such assumptions are based on our current mining plan and the best available information for making such estimates.
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For non-operating properties, we accrue costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable. Such costs are based on management’s estimate of amounts expected to be incurred when the remediation work is performed.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, result of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we have elected not to provide the disclosure required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Control and Procedures
Our Chief Executive Officer, who serves as our principal executive officer; and our Treasurer, who serves as our principal financial and accounting officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were effective to provide assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. However, due to financial considerations, we were unable to timely file this Quarterly Report on Form 10-Q and, thus, our disclosure controls and procedures were not effective to provide assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
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 March 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II – OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
As has been disclosed above, we are currently in default of the Investment Agreement, as amended and the Note with DMRJ Group.
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 quarterly report.
Item 6. Exhibits
| Exhibit No. | Description | |
| 31.1 | Rule 15d-14(a) Certification by Principal Executive Officer | |
| 31.2 | Rule 15d-14(a) Certification by Principal Financial Officer | |
| 32.1 | Section 1350 Certification of Principal Executive Officer | |
| 32.2 | Section 1350 Certification of Principal Financial Officer | |
| 95 | Mine Safety Disclosure | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Desert Hawk Gold Corp. | ||
| Date: August 3, 2018 | By: | /s/ Rick Havenstrite |
| Rick Havenstrite, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 3, 2018 | By: | /s/ Marianne Havenstrite |
| Marianne Havenstrite, Chief Financial Officer | ||
| (Principal Accounting and Financial Officer) | ||
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